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Prime Minister Brian Cowen

Savage cuts as government slashes spending raises taxes

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Prime Minister Brian Cowen

Cuts to social welfare payments, an increase in the basic rate of income tax and new levies on property are included in the Government’s four-year financial plan, published today.

The 140 pages of fiscal adjustments detail the measures required to make €15 billion in savings by 2014.

The adjustments outlined €10 billion in spending cuts and the remaining €5 billion in tax increases. €6 billion of the savings will be included in the 2011 budget.

€2.8 billion of the cuts will be in social welfare, which will mainly affect unemployment benefits and child income supports.

The Government justified the decision to target social welfare with its aim to reform the system so as to “incentivise work and eliminate unemployment traps”.

Although there is no immediate plan to change the current State pension rate, there will be changes in ages people qualify for the pension in future, increasing it to 66 in 2014, 67 in 2021 and 68 in 2028. However, pensions for public sector workers will be reduced.

There will also be a large cut to the capital spending budget, which will be cut by €1.8 billion in 2011. This is almost twice the amount set last July.

To encourage an increase in employment, the minimum wage will be cut to €7.65, a reduction of €1, as the Government said the current rate is too high and is hindering job creation.

The introduction of a property site value tax in 2012 is estimated to produce €180 million that year and a further €175 million in both 2013 and 2014.

The plan also includes the controversial increase in university registration fees from €1,500 to €2,000.

It also proposes to have water meters installed in all homes and businesses by 2014 when a system of water charges will be introduced.

Unspecified income tax changes will raise €1.9 billion, which is expected to see the marginal rate of tax returning to 42 per cent or higher, a reduction in tax credits and the widening of tax bands.

The current figure for income earners outside the income tax net is currently 45%, which is “unsustainable”. The Government proposes a reduction of entry into the tax system for a PAYE worker from €18,300 to €15,300.

The basic rate of VAT will be raised from 21% to 22% in 2013, and to 23% in 2014, which will generate €620 million for the Exchequer.

It has been agreed that the 12.5% rate of corporation tax is to remain unchanged, with hopes that it will continue attracting foreign direct investment into Ireland.

Plans also include job cuts in the public sector, bringing staff levels back to the 2005 figure of 24,750. Public sector pay will also be reduced by €1.2 billion overall during the four-year period.

The Government added that half of this staff reduction has already been achieved and the further reduction will enable the €1.2 billion cut in public sector pay during the four-year period. The job cuts will be by voluntary redundancies.

A further €330 million will be raised through carbon tax charges, which will double to €30 a tonne over the next four years.

Prime Minister Brian Cowen stated that Ireland would have to “take some steps back to go forward again”.

"Those who can pay the most will pay most, but no group can be sheltered," he added.

“Postponing these measures will lead to greater burdens in the future for those who can least bear them, and will jeopardize our prospects of returning to sustainable growth and full employment. It’s a time for us to pull together as a people,” he said at a press briefing in Government Buildings.

Minister for Finance Brian Lenihan said the four-year plan is a sensible and rational route out of “the steep downturn”.

Tax receipts for this year will be 35% lower than in 2007, which reflects “the over-dependence on property and construction-related revenue sources during the boom years”, the Government claimed.

The Government said the plans would be like the tax structure of 2006, and rejected suggestions that it would see tax burdens return to the harsh levels of the 1980s.

The Government stated that the economic plan would see the deficit reduced to 9.1% of GDP in 2011. It is expected that Ireland’s debt to GDP ratio would reach 102% in 2013 and will fall to 100% in 2014.

Yesterday, the European Commission said that the four year fiscal plan was a “cornerstone” of the bailout package under discussion with Europe and the IMF.

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