Income Levys Doubled In Emergency Budget

Finance Minister Brian Lenihan T.D., presented his supplemental budget on Tuesday, which included sharp hikes on income taxes and extensive spending cuts that he hopes will improve domestic and international confidence in the struggling Irish economy.

Reacting to the news that Irish GDP has declined by 3% last year (and is predicted to decline by 8% by the end of this year) and the predicted reduction of incomes by 4.25% in 2009, Mr Lenihan announced measures to cut €3.25 billion ($4.65 billion) from the deficit this year (see story on page 6) and an additional €2.7 billion in 2010.

The government has targeted Irish taxpayers to help with these ambitious aims, Lenihan admitting that most of the reductions this yearwould be paid by increasing income taxes, putting off many of the necessary cuts in spending until 2010 or 2011.

Announcing that tax revenues this year were expected not to exceed €34 billion this year, after reaching €47.8 billion in 2007, he confirmed that he was doubling the flat-rate income levy rates to 2%, 4% and 6% and cutting the thresholds at which they kick in.

The exemption threshold will be €15,028. The 4% rate will apply to income in excess of €75,036 and the 6% rate to income in excess of €174,980, changes expected to raise an additional €1.8 billion ($2.44 billion) this year.

"Those who have most must pay the most," he explained.

The Minister also announced a reduction in the level of tax relief that investors can claim on the interest for mortgages and loans on residential rental properties to 75% of the interest. This reduction comes into effect immediately.

Ireland's low corporation tax rate of 12.5% remains unchanged.

The PRSI ceiling will also be raised to €1,443 per week or €75,036 per annum.

Cigarette prices will rise by 25 cent per pack of 20, while diesel rises by five cent a litre. All increases are VAT inclusive.

Petrol and alcohol duties were not increased due to the threat of lost revenue if people travelled to the North to buy them.

Lenihan also outlined changes to expenses paid to members of the upper and lower houses, which follows on from the decision taken by Taoiseach Brian Cowen earlier this week to cut the number of government junior ministers from 20 to 15.

There will be a 10% reduction in all expenses apart from mileage rates where a 25% reduction has already been announced.

Overall reductions in capital spending will amount to €1.3 billion in 2010 and €2.4 billion in 2011.

Lenihan also announced that there would be no social welfare increases over the next few years and, in addition, the Christmas bonus for welfare recipients would not be paid in 2009 while those under 20 would have their jobless benefits halved.

The commission on taxation would decide on how to raise further money from taxing or means testing child benefit, he said.

Early childcare supplement would be halved from May 1 and scrapped next year. A year's free pre-school education would be provided for the under-5s instead.

Stating that "bold and radical action" was needed to restore Ireland's financial sector, Lenihan announced an initiative to remove toxic loans from the banks by create a so-called "bad bank" - the National Asset Management Agency - a measure that he hopes will remove at least €80 billion ($110 billion) in defaulting property loans from the books of Ireland's top financial institutions.

He did admit that the initiative would impose "a very significant increase in gross national debt," and that many details were still being worked out.

But he said the cost to taxpayers would be much less than €80 billion, because the agency would take ownership of loan-defaulting property at discounted rates from the banks, seek to sell those properties at current depressed prices, and keep pursuing defaulting developers for outstanding debts.

Lenihan said people in Ireland must lower their incomes and living standards to revive domestic banking and foreign investor confidence.

"We must restore our reputation abroad. We have been badly damaged by the actions of some in our financial sector. We must show the world that our financial system is soundly based and governed by the highest standards of regulation," Lenihan said.

Fine Gael finance spokesman Richard Bruton said the government was asking the people to "rescue a failing government through the budget."

A huge structural deficit of €13.8 billion has accrued through bad management of the public finances, Bruton said.

"The cruel choices to be faced today are not the product of bad luck, they are the product of bad choices.

"The tax payer is being asked to bail out the government.

"The banks bailed out the builders and now the taxpayer is bailing out the banks. But who will bail out the taxpayer?" he asked.