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Irish Budget Announced

by Jason Gorringe,, London

11 December 2009

Finance Minister, Brian Lenihan on December 9 announced ambitious measures to reduce the Irish budget deficit by EUR4bn. The budget tallies largely with expectations, including a carbon tax, a reduction to value-added tax and excise duties to improve competitiveness with the UK, and deep retrenchment in government spending.

The salient features of the bill include:

  • A cut to the VAT rate from 21.5% to 21%, costing EUR167m annually;
  • An extension to the three-year tax exemption scheme for new startups in 2010;
  • A carbon tax, be introduced with immediate effect. This will hike the price of petrol by EUR34.38 per 1,000 litres and on diesel by EUR39.98 per 1,000 litres, generating an additional EUR330m in revenues annually.
  • Cuts in excise duty on all alcohol products with immediate effect. The reductions, when VAT is included, amount to:
    • EUR0.12 on a pint of standard beer and cider;
    • EUR0.08 on a 33cl bottle of beer (4.7% alcohol content);
    • EUR0.60 on a standard 75cl bottle of wine;
    • EUR0.14 on a standard measure of spirit;
    • EUR2.76 on a standard 70cl bottle of spirits (40% alcohol content).
  • A new scrappage scheme to run from January 1, 2010 to December 31, 2010. This scheme provides for Vehicle Registration Tax relief of up to EUR1,500 on registration of a new passenger car with CO2 emissions of not more than 140g/km when another vehicle more than 10 years old is scrapped;
  • Curbs on tax relief available to Ireland’s highest-paid taxpayers so that their effective income tax rate cannot fall below 30%, from 20% previously. According to Lenihan, this represents a significant tightening of the restriction, which will yield approximately EUR55m in a full year. The entry point to the restriction will now occur at adjusted income levels of EUR125,000 with the full restriction applying at EUR400,000;
  • Enhanced accelerated capital allowances for companies purchasing energy-efficient equipment to include 3 new categories of equipment; and
  • An extension of mortgage interest relief on qualifying loans taken out before July 1, 2011, for seven years, as under the current scheme. Transitional measures will also be provided for loans taken out between July 1, 2011 and end-2013. Qualifying loans taken out before July 1, 2011 will continue to get relief for seven years.

The government is also to introduce an ‘Irish domicile levy’ of EUR200,000 on Irish nationals and domiciled individuals whose worldwide income exceeds EUR1m and whose Irish-located capital is greater than EUR5m, regardless of where they are tax resident. The full details are to be set out in the Finance Bill.

A package of measures is also to be drafted to enhance the Irish Revenue's ability to tackle the shadow economy, addressing smuggling and excise frauds, and dealing with tax avoidance schemes.

The majority of savings, however, come from deep spending cuts throughout the Irish public sector.

Every public services sector will see reduced budgets during 2010 with the greatest cuts to be seen in healthcare, a reduction of EUR400m. Other sectors that will see significant cuts in funding are education and science (EUR134m), environmental projects and local governments (EUR78m), and transport (EUR60m). Spending on welfare will be slashed by EUR760m, mainly by reducing pay to those on Job Seekers’ Allowance and those claiming child benefit. In all, these measures will save almost EUR2.1bn annually.

The final segment of the budget bill includes cuts to public sector employees’ remuneration, as follows:

  • Salaries will be cut by 5% on the first EUR30,000;
  • 7.5% on the next EUR40,000 of salary; and
  • 10% on the next EUR55,000 of salary.

Overall this will result in reductions to public sector salaries by between 5% and 8% on salaries up to EUR125,000. Salaries above this level will be adjusted in line with the recommendations of the Review Body on Higher Remuneration in the Public Sector. This will produce reductions of 12% on salaries up to EUR200,000, 15% on salaries of EUR200,000 or more and 20% in the case of the Prime Minister. Professional services’ fees will also be reduced to save at least EUR56m in 2010. Combined, these measures will lead to savings of over EUR1bn annually starting in 2010.

With regards pensions, a single scheme for all new entrants to the public service from 2010 onwards will be introduced – with main provisions as follows:

  • Raising the minimum public service pension age to 66 years initially from 65 at present to bring it into line and link it henceforth with the State Pension age;
  • Setting a maximum retirement age of 70 years – the Public Service Superannuation (Miscellaneous Provisions) Act 2004 removed the retirement age for most new entrants to the public service; for staff recruited before 2004, a maximum retirement age of 65 generally applies; and
  • Pensions are to be based on “career average” earnings rather than final salary as currently applies. A specific "pension accrual rate" will be applied to pensionable pay so that each year public servants will earn or accrue a certain amount of pension payable on retirement.

This measure will provide little in the way of short-term savings due to transitional arrangements, but will reduce actuarial cost of public service pensions from an estimated EUR108bn to EUR87bn.

Legislation to enact the reforms to public sector remuneration will be introduced in early 2010.

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