The Coalition will have difficulty in keeping to its promise not to adjust tax bands and credits in Government and will also need to rely on cuts in social protection to provide the “bulk of savings”, troika officials monitoring Ireland’s bailout programme have determined.
Two separate analyses by the EU Commission and the International Monetary Fund published before Christmas have disclosed details of proposed measures for the 2013 budget, which is unprecedented for Ireland. A total of €3.5 billion in savings are planned; €1.25 billion in new taxes and €2.25 billion in cuts.
The analysis has also criticised aspects of Government policy, including its decision to make larger than expected reductions in the capital budget as well as the lack of punitive sanctions for unemployed people who refuse to seek work.
The main proposals for new taxes outlined by Government negotiators to the troika late last year were: a value-based property tax (to replace the €100 household charge); a further rise in carbon tax; hikes in vehicle and motor taxes as part of a reform to revert from emissions-based charges; further changes in PRSI; reducing the tax-related cost of private pension provision; and increased excises for alcohol and tobacco.
However, while the Government has promised no changes to income tax rates, bands or credits, IMF staff concluded that broadening the tax bases "will likely need to encompass tax bands and credits".
Minister of State for Finance Brian Hayes said yesterday that given the volatility of the global economic outlook, it was "early days" to be too specific about budget 2013. However, he said that advance disclosure of proposals for next December's budget was part of a reform process spearheaded by Minister for Public Expenditure Brendan Howlin since last year.
He said he expected the Government, in a break with tradition, to set out its main budgetary proposals in late summer or early autumn. Mr Hayes said that it would ensure no repeat of the embarrassing leak of proposed tax and VAT increases to the German Bundestag last November.
"There should not be any great secrecy in how we arrive at the €3.5 billion. It should be known in advance. If we are going to do this right, we need a much earlier engagement with committees and the opposition," said Mr Hayes.
Officials from the troika will arrive in Ireland next week for a 10-day mission to evaluate Ireland's compliance with the bailout programme during the last quarter of 2011.
In advance of their arrival, Mr Hayes said he did "not foresee any major difficulties in the Government meeting the [end of December] targets" as set out by the Memorandum of Understanding.
The biggest two areas identified for the €2.25 billion in spending adjustments are for cuts in social protection expenditure and in public sector numbers. The IMF has stated social protection will "contribute the bulk of [Government] savings" (expected to be upwards of €500 million for 2013).
The EU Commission, in an implicit criticism, stressed that "financial sanctions for unco-operative unemployed" was still very rare in Ireland.
The Commission also criticised the frontloading of €755 million in capital cuts in the 2012 budget, saying it "raised questions on the quality of the adjustment and the Government's preference for taking politically easier measures".
The disposal of State assets has led to ongoing disagreement between the troika and Government and will play a major part in this month's discussions. The Government has committed to divesting only €2 billion in State assets while the IMF has suggested €5 billion. The Government may agree to a higher figure this month, but only if a portion of the proceeds are used for jobs stimulus rather than debt reduction.