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Noonan Unveils Irish Fiscal Plans

by Jason Gorringe,, London

08 November 2011

No further substantive changes will be made to income tax in Ireland over the coming year, but this will mean that other taxes will have to rise for the government to deliver the revenue increases necessary to help drive down the budgetary deficit.

After months of speculation, Finance Minister Michael Noonan's Medium-Term Fiscal Statement, described as the first stage in a sequence of budget-related announcements that will lead in to Budget Day on December 6, is a major plank in the government's strategy to return the public finances to a sound position. In addition, while Noonan believes that considerable progress has been made toward stabilising the public finances, he admitted that progress has come at the price of spending cuts and tax rises.

The statement also makes it clear that significant challenges remain for Ireland. A large gap exists between government spending and revenue, which must be closed. The government argues that it is no longer viable to run big deficits and fund them through large scale borrowing - it believes that to do so would result in an unsustainable stock of debt and long-term loss of sovereignty.

In 2011, the Irish general government deficit is expected to be 10.3% of GDP, lower than the 10.6% target set as part of Ireland's bailout terms. Under the EU/IMF Programme of Financial Support, the deficit must fall still further, to less than 3% by 2015. To do so, the government must introduce adjustment measures amounting to a total of EUR12.4bn over the four-year period 2012-2015. In turn, this is projected to arrest the rise in the debt/GDP ratio and bring about a 5% reduction between 2013 and 2015.

Of the overall EUR12.4bn consolidation, EUR7.74bn will consist of spending cuts, and EUR4.65bn in revenue raising measures. Ireland is currently experiencing underlying weaknesses in some taxes, most notably VAT, which the statement recognises. As a result, notwithstanding the additional revenues collected from the recently introduced pension levy, there is a downside risk to the Budget day tax revenue target of EUR34.9bn. This means an overall shortfall of some EUR450m is being worked into the estimated end-year budgetary position.

As the statement notes, the Programme for Government, drawn up at the start of the coalition, pledges that, as part of the government’s fiscal strategy, the current rates of income tax, together with bands and credits, will be maintained. It is therefore outlined that the government intends not to make any further substantial changes in income tax in Budget 2012. With income tax accounting for 40% of Exchequer tax receipts, the statement stresses that maintaining the government's commitment will be dependent on making progress on expenditure reductions and tax changes in other tax areas to ensure that the overall budgetary targets for the period are met.

As a result, proposals in the area of VAT, excise duties and carbon tax are being examined to see how indirect taxes can assist the government in meeting commitments under the EU/IMF Programme. The government is committed to the pledge that any increase in VAT will limit the standard rate of VAT to 23%. The nature of the revenue measures that are to be implemented over the coming years will be outlined in full in December.

Noonan concluded by stressing the "urgency of designing and implementing reforms that will enhance the economy’s potential growth rate and its capacity to generate employment. The government is committed to ensuring that the measures taken are as jobs-friendly as possible."

TAGS: tax | economics | value added tax (VAT) | Ireland | fiscal policy | gross domestic product (GDP) | budget | excise duty | carbon tax | individual income tax

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