by Frank Schnittger
Tue Oct 15th, 2013 at 02:02:11 PM EST
Irish Finance Minister Michael Noonan delivered his 2014 budget to the Dail today - about 2 months earlier than usual to give the European Commission more time to review and approve its provisions. Taoiseach Enda Kenny had announced last weekend that Ireland would exit the bailout programme on December 15th., so this is the last budget to be overseen by the Troika.
The Troika had sought to insist that Noonan take 3.1 Billion (= 1.9% of GDP) out of the economy in tax increases and spending cuts, a call supported by the Economic and Social Research Institute. The Government has restricted this to 2.5 Billion (= 1.5% of GDP) made up of spending reduction (1.6 Billion) and tax increases of (0.9 Billion).
This is planned to reduce the budget deficit from 7.3% in 2013 (Troika target 7.5%) to 4.8% of GDP in 2014 (Troika target 5.1%) and 2.9% in 2015. This should be sufficient to generate a small primary surplus next year and reduce the overall Government debt to GDP ratio to 120 percent at end-2014, 118.4 percent at end-2015 and 114.6 percent at the end of 2016. Despite this contractionary policy, the Government is forecasting 0.2% GDP growth in 2013, rising to 2.0% in 2014.
From a US perspective it is noteworthy that Ireland's national debt and projected annual deficits are much higher than that of the USA and yet no one is panicking. On the positive side, at least we have a functioning budgetary process!
Of more interest to international observers, Mr. Noonan has announced that companies will no longer be able to incorporate in Ireland without also being tax resident here, and so will not be able to use tax avoidance schemes like the double Irish and dutch sandwich to evade the Irish corporation tax rate of 12.5%. Companies like Google, Microsoft and Apple have been in the news recently for utilizing such schemes to move Billion of Euros to tax havens like Bermuda virtually tax free.
The issue of low Irish corporate tax rates is reported to have surfaced in German coalition talks between the CDU and SPD, and so the timing of this change may not be entirely unrelated. Whether he is doing Merkel a favour or seeking to relieve pressure on Ireland to increase it's 12.5% Corporate Tax rate is unclear. The measure is not scheduled to kick in until 1st. Jan, 2015 and so will not effect revenues for 2014. It has not been stated how much additional revenue the Minister expects to collect from this measure in future years, and whether he expects some multinationals to relocate outside Ireland in response to his change.
The spending reductions will impact mainly on pensioners (cancellation of phone allowance) and unemployed young people aged below 25, whose job seekers allowance will be reduced to 100 per week. This is unlikely to help reduce Ireland's youth emigration numbers. Sickness benefits, free medical care for elderly and low income patients, and maternity benefits are also reduced.
The tax increases will impact mainly alcoholic drinks, cigarettes, interest on bank deposits, and private health insurance (generally paid by the better off), and there are also increased levies on banks and pension funds.
On the positive side children under 5 will now receive free primary medical care, and the Minister for Education has secured agreement to hire 1,250 extra teaching staff. Health care staffing numbers will be reduced by 1,000 less than originally planned, and recruitment of Gardai to the police force is to recommence. A temporary VAT reduction to help the tourist industry has been extended and the air travel tax is to be eliminated. Now is a good time to visit Ireland!
The Government is hoping that this will be the last of six austerity budgets and that future budgets will be somewhat more expansionary whilst staying within the EU Stability and Growth Pact pact parameters.
The Government has €25 Billion cash on hand to reduce its dependency on sovereign debt markets and fund the annual €7.5 Billion interest bill on its debt. Nevertheless all the forecasts above are dependent on the EU meeting it's growth targets and the USA not imploding due to a debt default, and the Economic and Social Research Institute gives the Government only a 50% chance of doing so without further retrenchment in future Budgets.