Ireland Braces Itself For Draconian Budget

by Robert Lee, Tax-News.com, London

06 April 2009

Irish leaders, Prime Minister Brian Cowen and Finance Minister Brian Lenihan, have provided insight into measures which may be introduced by Ireland’s April 7 emergency budget. The budget, which will undoubtedly include a progressive income tax hike, is expected to contain tax rises and spending cuts worth EUR4-4.5bn (USD5.4-6bn).

In an announcement at the end of March, Prime Minister Brian Cowen warned Ireland to brace itself for a painful budget, explaining that Ireland would need to be subjected to ‘necessary and fair’ measures in order to boost the country’s ailing tax receipts and finance its borrowing, which is expected to pass 9.5% of GDP this year. Cowen has warned that Irish taxpayers will have to bear the brunt of the push to restore the country’s budget deficit to within 3% of GDP in the next five years. He has further warned that Irish taxpayers’ quality of living could drop by as much as 10% over the next two years.

Lenihan, speaking on April 1, underlined that income tax increases will be necessary in order to bolster government revenues. It is expected that the latest income tax increases will structurally resemble those introduced in Lenihan’s maiden budget in October. It is anticipated that the October levies, which comprised of a 1% hike on incomes up to EUR100,000, a 2% increase on the balance up to EUR250,000, and 3% hike on incomes above EUR250,000, will be doubled under April’s emergency budget, to 2%, 4% and 6%. These additional taxes are likely to be incorporated within the current income tax rates in 2010.

Currently exempted categories - individuals earning EUR18,304 per annum; over 65’s with income of less than EUR20,000; full medical card holders; and those on social welfare payments – are expected to remain exempt.

Speaking to Ireland’s national broadcaster, RTE, Lenihan said:

“The key operation in the budget is that we cannot continue chasing a downward cycle. We have to stabilise Ireland’s finances and show a credible way forward for the country out of its economic difficulties.”

“I cannot announce in advance of the budget exactly what our taxation position will be, but it’s clear that there’s been a very big drop in our tax receipts over the past two years. They have gone from EUR48bn in 2007, to EUR41.5bn last year, a figure we estimate could fall as low as EUR33bn,” noted Lenihan.

Latest projections show that tax revenues are likely to fall by 16% on 2008 figures, whilst 2009 expenditure is projected at EUR55bn.

“When you look at those figures, you can see there has been a very big drop in our tax base that’s not sustainable. So to be credible, and to manage our finance in a credible way, there will have to be an increase in the burden of taxation. But the government has to balance that against the requirements of the economy,” added Lenihan.

An increase in excise duties on alcohol and tobacco is looking increasingly likely. Property taxes and a carbon levy are also likely to be proposed for 2010.

Motorists are likely to be incentivised in the April budget. Lenihan tabled proposals this week in the Irish parliament, which would see motorists offered a scrapping incentive in the form of a one-off payment, to encourage new car purchases. The measure would aim to boost revenue generated by the sector and mitigate job losses in the industry. Under the scheme those investing in a new car would receive EUR2,000 and would also likely be subject to a lower rate of emission-linked Vehicle Registration Tax (VRT).

Lenihan also vowed this week to tighten compliance legislation, undertake initiatives to crack down on tax avoidance, and remove loopholes in the tax system. It is also expected that the phasing out of various tax breaks and incentives will be announced.

Underlining his ethos, and summing up the forthcoming budget, Lenihan said: "Those who have most to pay, must pay most. But everybody must contribute something."

Recommended