Spending cuts and taxes to hit €3.8bn

THE GOVERNMENT is to seek €3.8 billion in budgetary adjustments in next month’s budget, some €200 million more than had originally been intended, Minister for Finance Michael Noonan confirmed yesterday.

Some €1.6 billion, or 42 per cent, of next year’s €3.8 billion adjustment will come from tax increases, with the remainder – €2.2 billion – achieved through spending cuts.

Of the €1.6 billion to be raised through taxation, €600 million has been carried over from last year, leaving €1 billion to be raised. The Minister indicated this €1 billion would be generated without touching income tax, though the Government’s full statement says it does not intend to make “any further substantial changes in income tax” in the budget.

Changes to the VAT rate, property charges, including the €100 household charge, and carbon charges were possible areas for taxation, the Minister said yesterday.

On the spending side, the €2.2 billion in expenditure cuts will consist of €1.45 billion in current expenditure cuts and €750 million in capital expenditure cuts. Mr Noonan declined to give details of the expenditure cuts to be announced on budget day on December 6th, but said they would be implemented in a “fair and equitable manner”.

The decision to increase the budgetary adjustment by €200 million to €3.8 billion was due to a downward adjustment of Ireland’s economic growth targets for next year, Mr Noonan said.

GDP is now projected to grow by 1.6 per cent in 2012 rather than 2.5 per cent as forecast in April, due to the deterioration in the global economy in recent months. “This has a big effect on revenue flow into the exchequer,” the Minister said. As a result, Ireland needs to make an extra €200 million in savings in order to meet the 2012 budget deficit target of 8.6 per cent of GDP set down by the Ecofin council in December.

The publication of the medium-term fiscal statement yesterday also outlined the country’s budgetary plans for the next four years. Adjustment measures totalling €12.4 billion are to be undertaken over the four-year period from 2012 to 2015.

Under the EU-IMF programme Ireland is required to gradually decrease the size of its budget deficit over the next four years, to reach a deficit of below 3 per cent of GDP by 2015. Currently that budget deficit stands at about 10.3 per cent.

Of the total €12.4 billion in savings to be made over the next four years, €7.75 billion will be through expenditure cuts, and €4.65 through taxation and revenue-raising measures.

“This mix reflects the analysis of international evidence by organisations like the European Commission, IMF and OECD which suggests that fiscal consolidations tend to be more successful when they rely more on spending cuts than tax increases,” the Government said.

The medium-term fiscal statement also outlines forecasts for economic growth for the next four years. As well as downgrading the 2012 outlook for economic growth to 1.6 per cent, the Government is projecting average GDP growth of 2.8 per cent over the following three years. This is lower than the average of 3 per cent growth forecast for 2013, 2014 and 2015 in the Department of Finance’s April update.

Mr Noonan described the latest forecasts as “reasonable, middle of the road assumptions based on the forecasts and data available to us”, although he stressed the volatility of the global economic situation which is changing “on a daily basis”.

Mr Noonan said he expects the debt to GDP ratio to peak at 118 per cent in 2013.

The publication yesterday of the medium-term fiscal statement marks the first in a series of updates that will be delivered by the Department of Finance ahead of budget day.