SERVICES

Tuesday November 30, 2010

Government Publishes Four-Year Economic Recovery Plan

Taoiseach and Fianna Fail leader Brian Cowen unveiling the government's Four-Year National Recovery Plan to reduce the national debt (Photocall)

The Irish government has published its plan to get Ireland's economic affairs back in order over the next four years - by increasing taxes and cutting spending.

Between now and the end of 2014, taxes will increase by €5 billion, while €10 billion euro will be cut from government spending.

A large portion of the measures - €6 billion worth - will be frontloaded into the budget for next year, due to be announced next week.

The plan includes a controversial cut in the minimum wage, increases in VAT and income tax, the abolition of a range of tax reliefs and the introduction of property and water charges.

Taoiseach Brian Cowen said the plan was the only basis for real recovery and growth, and told the Irish public it was necessary to take a few steps back in order to go forward again.

Finance Minister Brian Lenihan said the document had to be the basis for any sensible proposals put forward in the upcoming general election.

"Anything else is nonsense," he said.

But within hours of the publication of the 140-page document, both Fine Gael leader Enda Kenny and Labour leader Eamon Gilmore said they would not be bound by it in any future government.

The idea of drawing up a four year plan came about some months ago following discussions with the European Commission.

It was hoped such a plan would reassure financial markets that Ireland was serious about getting its debt burden under control.

Now, the plan is being described as "the cornerstone" of the agreement with the IMF and EU for a bailout loan to cover Ireland's running costs over the next few years.

The four year plan does not include any figures for bailing out the banks - interest repayments on any bank bailout loans are likely to mean further austerity measures are necessary.

The markets did not react in any favourable way following the publication of the plan - some market insiders described it as "staggeringly austere".

One commentator said it was unrealistic to base the plan on an expectation that the economy would grow despite the stringent fiscal measures.

"That's highly unlikely," he said.

So where will the Irish government's axe fall, how do they plan to bring in more money?

MINIMUM WAGE

The minimum wage is to be reduced by one euro an hour to €7.65, and registered employment agreements in different sectors will also be reviewed. The government believes reducing the minimum wage will make it easier for employers to hire new staff, and make Ireland more competitive.

TAXES

The entry point for paying tax is to be reduced by three thousand euro to €15,300. This will bring thousands of lower paid workers into the tax net for the first time. The government will decide at each budget if there should be a change to the standard tax rates. The health and income levies, introduced as temporary measures over the past few years, are to be merged with PRSI into one universal social charge.
When taken together the tax changes will see a single person earning €55,000, taking home €1,860 less in a year - a drop of 4.8% in real terms.
There will be no change to the corporation tax rate of 12.5% - it's viewed as being key to attracting foreign direct investment and creating employment. There will be a phased reduction in tax breaks for those high earners who invest in pension products, which will raise €700m over the four years. However, there are fears it could lead to fewer pension contributions being made, which will mean that more people will be dependent on the State pension in the long term.
A number of other tax breaks and reliefs are to be scrapped in the coming years, including one which had exempted employer-provided childcare from being counted as "benefit-in-kind".
The artist's exemption from taxes will be restricted to earnings of €40,000. VAT will not change for the next two years, but the standard rate will rise to 23% by 2014, and the government also plans to raise €110m extra from excise duties next year, so expect a rise in the cost of so-called "old reliable" (petrol, cigarettes and alcohol).
A new property tax will be introduced in 2012, affecting 1.8 million households, and the carbon tax will double over the four years.
Water charges will also be introduced.

PUBLIC SERVICE

The government believes it can save €7 billion in current expenditure by 2014.
All new public service workers will start on a salary 10% lower than the current entry level wage.
Public service staff numbers will be reduced by a further 13,000, on top of the 12,000 already cut since the end of 2008.
There will be no pay cuts for public sector workers, but the Croke Park agreement will be implemented, changing work practices and arrangements and generating extra savints.

HEALTH

Health cuts of €1.4bn were announced in the plan.
Professional fees paid by the State to doctors, dentists and other health professionals are to be cut. The government also expects to make savings by reducing spending on drugs and medical equipment. HSE staff numbers will be reduced by 1,500 each year.
Charges for private hospital beds will be increased, which in turn will push up the cost of health insurance. There will be changes to the range of dental services available under community schemes. Older people will face a means-tested charge for community health support services like home help, home care and day care services.

EDUCATION

The plan includes cuts in school funding, teacher numbers and student support schemes. The third level student registration fee is to be increased by 33% from €1,500 to €2,000. There will also be cuts to a range of support services like translators or special needs assistants. Total savings in education spending amount to €690m.

SOCIAL WELFARE

Details of the exact cuts in social welfare have yet to be announced, but cuts of €2.8 billion are envisaged. €860m of these cuts will be in the upcoming budgets. Unemployment benefits and child support payments are likely to be reduced. There will also be new measures aimed at getting people back to work.

LOCAL AUTHORITIES

One of the biggest single cuts made in the plan, with local authorities receiving €62 million less next year from the exchequer. By 2014, all central funding from government to local authorities will be withdrawn and the money instead will come from water charges and other new local charges.

TOURISM, CULTURE AND ARTS

On top of payroll savings, there will be cuts in the grants awarded to cultural and sporting bodies, like the Arts Council. Tourism spending is to be prioritised.

TRANSPORT

There will be cuts to public transport companies like Bus Eireann, Irish Rail and Dublin Bus amounting to €10m next year, and €9m less will be spent on road maintenance.

CAPITAL INVESTMENT

The government has already announced one billion euro cuts in capital spending, and this plan includes another €800m reduction in 2011. The government says the State is now getting better value for money in infrastructure projects, so the impact of the reduced spending can be minimised. What money is spent will be focussed on areas which generate employment. The Dublin Metro North, linking Dublin Airport to the city centre by rail for the first time, is to go ahead but several other high profile construction projects have been postponed.