A FURTHER €3 billion package of spending cuts and tax increases will have to be delivered next year as part of the Government’s plan for economic recovery, Minister for Finance Brian Lenihan said last night.
The Minister told the Institute of Taxation annual dinner that there was little or no scope to increase marginal tax rates but he repeated his commitment to introduce a new universal social contribution at a low rate on a wide base.
Mr Lenihan said that the Government would stick to its commitment to deliver a further €3 billion adjustment for 2011. With a €1 billion cut in capital spending already provided for, the other €2 billion would be found through cutting the cost of public services and reforming the tax system.
Mr Lenihan said public service payroll costs would have to be contained and certain current expenditure programmes scaled back or eliminated.
On taxation he said the tax base needed to be broadened, as nearly half of income earners would pay no income tax this year, but he emphasised that there was little or no scope for increases in marginal tax rates.
He said a new universal social contribution would be paid at a low rate on a wide base, replacing the current employee PRSI, health levy and income levy. Water charges or local service charges could also be part of the package.
Speaking on the theme Returning to Economic Growth: The Next Steps, Mr Lenihan said the Government would continue to implement the plan for economic recovery.
That involved restoring order to the public finances, repairing the banking system and regaining competitiveness, and investing to create new jobs. He also said the public should start believing that things will get better and stressed the need to replicate the confidence other countries had expressed in Ireland’s ability to recover.
The Minister defended the Government’s decision to establish Nama and said that nationalising the banks would have dried up funding for the banks as had happened in Iceland.
He defended the State guarantee to stabilise funding for the banks and the establishment of Nama to clean up the banks’ balance sheets rather than investing in a stimulus package.
“Many seemed to think that a stimulus package was more appropriate but it is clear through the experience of other European countries that various stimulus packages have not worked and left many countries with a bigger debt burden to surmount at this stage of a recession.”
He added that recapitalisation of the banks and the reform of the regulatory system were also vital components of the plan.
“The extent of State ownership of the banks will depend on Nama discounts, regulatory capital requirements and the amount of new private capital. The Government has never ruled out increased State ownership,” he said.
The Minister’s remarks last night came as the European Commission approved the Nama project, a development that clears the way for the “bad bank” to start acquiring up to €54 billion in loans next month.
The agency will buy €17 billion in loans from the 10 largest borrowers in March, and Mr Lenihan said yesterday that he had been advised by Nama that the transfer process remained on target for completion by the final quarter of the year.
Mr Lenihan said it was important to get credit flowing in the economy again and not to generate another property bubble or further problems in the banking sector. “Until these assets are put off their balance sheets they won’t be in a position to lend,” he said. “It is absolutely essential we get on with this as fast as possible.”
