| BUDGET 2009 #2 CORI Justice ANALYSIS AND CRITIQUE |
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Budget lacks vision as banks escape and children are targeted Download Pdf This Budget lacks a guiding vision. This in turn gives rise to some very serious problems. The Budget allows many of those who created the present series of crises, particularly the banks, to escape. At the same time the vulnerable, particularly children, are targeted to pay for the misbehaviour and fraud of others. Government made a sensible decision to change its borrowing parameters. However, it showed a profound lack of understanding of the social crisis that Ireland is currently facing. Social Crisis In its description of the social crisis Government identified only the issue of unemployment. While this is a critically important issue there are major problems also concerning children, older people, people with disabilities or those who are ill - all of whom have seen their services reduced over the past year. Failure to acknowledge this fact in the Budget statement when it outlined the social crisis is of serious concern. It suggests a Government that does not appreciate the serious nature of recent developments in these areas.
In defining the social crisis in terms of unemployment only it fails to appreciate the huge negative impact that cuts in services are having and the impact that the failure to address the social infrastructure deficits today will have in years to come. The banks The banks will see their toxic debt being removed and they will be free to continue as before. On the other hand the taxpayer will underpin a new National Asset Management Agency which will take on assets potentially as high as €90bn but which will be “transferred at an appropriate discount” which has not been decided. The first principle of action to tackle toxic debt should be that the exposure of the taxpayer is minimised. Substantial changes would be required before this proposal could be accepted as a fair way of addressing Ireland’s banking crisis. (cf. p 3) Good initiatives on tax and distribution marred by lack of transparency
Children In stark contrast to the way banks are dealt with in the Budget children are targeted. The Early Childcare Supplement is being halved now and will be abolished at the end of the year. It is proposed that Child Benefit is to be taxed or means-tested in Budget 2010. An Early Childhood Care and Education scheme is to be introduced but with a much lower expenditure level than what will be saved by ending the Early Childhood Supplement. Ireland has high levels of child poverty and low levels of support for childcare. While the ECCE scheme is welcome the combined impact of these proposals will see supports for children reduced at the very time when families’ incomes are under serious threat. (cf. p.3) Taxation Building a fairer tax system and increasing the tax-take are critically important if Ireland’s public policy is to be able to address the challenges of the years ahead. In this Budget Government has taken a number of positive steps to do both. It has also signalled that it will continue this process in the coming years. These are very welcome developments and we trust that Government will take advantage of the many potential reforms which need to be introduced in the coming years. We welcome the fact that Government did not reduce the income levy exemption threshold to zero. However we note that more than 30% of households at risk of poverty are headed by a person with a job. Consequently, we urge Government that as resources become available it should restore the policy of keeping the minimum wage outside the tax net. (cf. p. 7) It is crucial that Budgets in the years immediately ahead focus on achieving the common good in action as well as rhetorically. Distribution impact of this Budget In this Analysis and Critique we provide details of the distribution impact of this Budget and the cumulative impact of the series of initiatives Government has taken since last October (cf. pp 10-11). The impact of the tax changes in this Budget are progressive. Those who have more will pay more while those who have less will pay less. This is also the situation when we analyse the cumulative impact of all Government initiatives in this area for 2009. In this analysis we also show the different impacts of Government initiatives on employees in the public and private sectors. The changes introduced in the public sector’s Pension Related Deduction are progressive and welcome. Lack of Transparency The Government’s lack of transparency in the Budget documentation is a serious cause for concern. Without the full details of expenditure on issues such as social housing it is not possible to fully evaluate the impact of a Budget. Borrowing Parameter The Government’s decision to change its borrowing parameter for the Budget was welcome and its new borrowing requirement of 10.75% is about right. ODA The reduction in Overseas Development Aid to 0.48% of GNP is an attack on the world’s poorest people. As such it is totally unacceptable and should be reversed. Social Housing We have noted the lack of transparency in the Budget documentation. In the social housing area it appears from the very limited data information provided that there will be a substantial reduction in capital expenditure. This would be a very retrograde step. The importance of the social housing budget cannot be over-estimated. The number of households on waiting lists has been growing. Investment in social housing at this time would be good for these households. It would also be good for the economy as it is employment-intensive. Finally, at this time it is also possible to get very good value for money in this area. We ask Government to ensure that information on this and similar issues is included in the Budget documentation in future. Conclusion Ireland is at a crossroads. It is facing a wide range of challenges. The roots of the current economic crisis lie in policy decisions taken in previous years. It is crucial that similar mistakes are not made again. Budgets are not just about economics. They are also about values and vision - the values and the vision that Ireland’s people wish to see guiding their future. In his Budget speech the Minister for Finance, Brian Lenihan, TD, made several references to the common good. The Budget, however, does not measure up to the rhetoric. It is crucial that Budgets in the years immediately ahead focus on achieving the common good in action as well as rhetorically. In this way it would be possible to build a country of which we could all be proud. Banks Escape There are serious questions that have not been answered in the proposals Government has made to tackle the toxic debt held by Ireland’s banks. These proposals envisage the establishment of the National Asset Management Agency (NAMA) under the governance of the National Treasury Management Agency. The Budget documentation states that this agency would potentially have €80bn to €90bn in assets based on the current book value of these toxic debts held by banks and financial institutions. However Government envisages that these debts would be transferred to NAMA at an appropriate discount. Any profits made by NAMA will accrue to the State. If there is a shortfall “the Government intends that a levy will be applied to recoup it”. There are a number of problems with this proposal:
Substantial changes would be required before this proposal could be accepted as a fair way of addressing the banking crisis Ireland currently faces. Children Pay While banks are likely to escape as a result of the decisions contained in the second Budget for 2009, children have been targeted in a variety of ways.
Government has not been transparent in its second Budget for 2009. On a number of fronts it has not provided the information required to provide a comprehensive and detailed analysis of what it proposes to do in the coming months. A glaring example of this is in the area of social housing where almost no detail has been provided of what Government proposes to do. The documentation shows there will be a reduction of €200m in the allocation for social housing and water services infrastructure but provides no detail of how much comes from which Budget. This is a growing tendency in Government publications which is completely unacceptable. It is particularly lamentable where Budget documentation is concerned. Full details should be provided on Budget day. Parameter Changes The Government’s decision to change the parameters of its second Budget for 2009 is most welcome. Last week’s Exchequer Returns indicated that we were on path of a deficit of 12.75% this year without further corrective action. Following the changes announced by the Minister for Finance the budget deficit target for this year is now set to be 10.75%. CORI Justice believes this is about right. Having urged Government for some time to move away from the target it had set itself in January of this year we welcome this move. Government’s decision to have no increases in social expenditure other than dictated by demographic or unemployment changes is storing up problems that will have to be addressed in the future. Budget 2009 - Summary of the Key Numbers To accompany the Budget speech the Department of Finance has published a series of documents detailing the changes announced in the Budget. Through this Analysis and Critique document we examine various aspects of these changes. The table below brings together the key figures from the published Budget documents. It presents the Department of Finance’s expectations of National Income (GDP and GNP) next year, and for the next three years. It outlines the projected exchequer budgetary position over that period. Expectations of future changes to employment, unemployment and inflation are detailed. The table also includes details on the taxation system following the implementation of the Budgetary changes. Finally, the table outlines the Department of Finance’s calculations regarding the full year cost of the tax and social welfare changes announced in the Budget.  Budget 2009 #2 in Context The tables and charts on page 5 offer an insight into the rapid decline in the national finances that set the context for Budget 2009 #2. The GDP graph illustrates the speed at which the economic turn-around occurred. As the construction industry collapsed the size of the Irish economy began to decline in 2007 (see also the housing table). This speeded up as the international banking crisis hit and the economy moved into recession. The Budget projects growth will return from 2011. The central table illustrates the rapid decrease in tax revenues between those projected in October 2008 and those in the supplementary Budget. In six months, expected revenues for 2009 have declined by over €8 billion. Finally, the outlook for inflation (CPI), unemployment, employment growth and the government borrowing requirement are illustrated. Unemployment is expected to peak in 2010 and a slow return to new employment creation will occur from 2012 onwards.  Source: OECD Factbook 2008, CSO and Department of Finance Budgetary Document; figures for 2009 onwards are projections 
Taxation Changes - Summary CHANGES TO INCOME LEVY, HEALTH LEVY AND PRSI Income Levy – from 1 May The income levy rates will be doubled to 2%, 4% and 6%. 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. Health Levy – from 1 May The health levy rates will double to 4% and 5%. The entry point to the higher rate will be €75,036. PRSI – from 1 May The PRSI ceiling will be increased from €52,000 to €75,036. INCOME TAX Mortgage Interest Relief Mortgage interest relief will be discontinued for any mortgage over 7 years from 1 May. Restriction in Interest Relief Rented Residential Property The level at which interest re-payments can be claimed against tax for residential rental properties is being reduced from the existing 100% to 75%. This measure will apply to both new and existing mortgages. Commercial properties are not affected. TAXATION ON SAVINGS Deposit Interest Retention Tax and Taxes on Life Assurance Policies and Investment Funds The rates of retention tax that apply to deposit interest, together with the rates of tax that apply to life assurance policies and investment funds, are being increased by 2% in each case and will now be 25% and 28% respectively. The increased rates will apply to payments, including deemed payments, made from midnight on 7 April 2009. STAMP DUTY Life Assurance Policies A new levy on life assurance is being introduced at the rate of 1% on premiums. This new levy will apply to premiums received by an insurer on or after 1 June 2009. Non-Life Insurance Policies - Change in Rate of Tax The non-life insurance levy of 2% is being increased by 1%. The new rate of 3% will apply to renewals and offers of insurance issued by an insurer on and from midnight on 7 April 2009 Stamp Duty “Trade-in” scheme Establishment of a Stamp Duty “trade-in” scheme, under which no stamp duty is payable by a person who accepts a traded-in property in exchange or part exchange for a new house/apartment. Stamp Duty will apply when the person subsequently sells on the ‘swapped’/traded-in house. Full details will appear in the Finance Bill. CAPITAL GAINS TAX Rate The capital gains tax rate is being increased from 22% to 25% in respect of disposals made from midnight on 7 April 2009. CAPITAL ACQUISITIONS TAX Rate The capital acquisitions tax rate is being increased from 22% to 25% in respect of gifts or inheritances made from midnight on 7 April 2009. Threshold The current thresholds of €542,544 (Group A: parents to child), €54,254 (Group B: between related persons), and €27,127 (Group C: between non-related persons) are being reduced by 20% to €434,000, €43,400 and €21,700 respectively. This reduction applies in respect of gifts or inheritances taken from midnight on 7 April 2009. CAPITAL GAINS TAX, INCOME TAX AND CORPORATION TAX Income and losses from dealing in residential development land The special 20% rate applied to the trading profits from dealing in or developing residential development land is being abolished. The income will be charged at the person’s relevant marginal rates of income tax or the 25% rate of corporation tax. This change will apply as regards Income Tax for the year of assessment 2009 and subsequent years and as regards Corporation Tax for accounting periods ending on or after 1 January 2009 (with accounting periods straddling that date being deemed for this purpose to be separate accounting periods). Where trading losses have been incurred from dealing in or developing residential development land in circumstances where, if trading profits had been made, they would have been eligible to be taxed at 20%, and a claim to use those losses has not been made to and received by the Revenue Commissioners before 7 April 2009, the losses from today will generally only be relievable (on a value basis) up to a maximum of 20%. Where any such loss is a terminal loss, the restriction will be implemented by “ring-fencing” the loss. CAPITAL ALLOWANCES A new tax relief on capital expenditure incurred in the acquisition of Intellectual Property. Termination of Capital Allowances Scheme for Private Hospitals and Nursing homes. Transitional arrangements will be put in place for projects that are at an advanced stage of development. The Finance Bill will contain further details on this measure. EXCISES Increase in Mineral Oil Tax on Auto-diesel The mineral oil tax on auto-diesel will be increased by 5 cent per litre (including VAT) with effect from midnight on 7 April 2009. Tobacco Excise The Excise Duty on a packet of 20 cigarettes will be increased by 25 cent (including VAT) with a pro-rata increase on other tobacco products, with effect from midnight on 7 April 2009. Introduction of VAT Margin Scheme for second-hand cars A Margin Scheme is being introduced whereby, with effect from 1 July 2009, dealers will be taxed on their margin in regard to second-hand cars they acquire and resell after that date. Income Tax Changes CORI Justice welcomes the fact that Government did not reduce the income levy exemption threshold to zero. This would be to have repeated the mistake of Budget 2009 #1 and would have involved collecting taxes off those living below the poverty line.  While there are likely to be some difficulties on the margins of the new threshold (and for some low income families) the fact that it is approximately €3,000 above the poverty line for a single adult recognises a need to protect the most vulnerable in society. In the years to come, as resources return, we expect the Government to restore the policy of keeping the minimum wage outside the tax net. Overall, we also acknowledge the fact that the new tax levies are progressive. In the years to come, as resources return, we expect the Government
to restore the policy of keeping the minimum wage outside the tax net. Some Tax Breaks Reformed For some time CORI Justice has highlighted the necessity to address the area of tax expenditures/tax breaks. These schemes, covering areas from property to farming to health, are often unrecorded by the Revenue Commissioners or the Department of Finance. Few details on the costs and benefits of the schemes are available and in most cases the reliefs exist due to lobbying rather than legitimate economic or social reasons. Our submission to the Commission on Taxation has suggested a set of detailed reforms to the system of tax expenditures and we hope it recommends these when it reports in July 2009. There were many better uses for this money than funding tax breaks
Budget 2009 #2 marks a welcome commencement to the reform of these schemes. The restriction or removal of Mortgage Interest Relief, interest relief on rented properties and capital allowances for private hospitals and nursing homes is welcome. The latter have, like the hotel investment scheme of a few years ago, proved to be an unacceptable waste of public funds. It is unfortunate that these obvious and necessary reforms were not carried out a few years ago. There were many better uses for this money than funding tax breaks. We have called on the Commission on Taxation to recommend further reforms when they report and we hope that Budget 2010 (to be delivered in December 2009) will present a more significant reform of the number and structure of these tax reliefs. Future Tax Reform Building a fairer taxation system is an important part of building a fairer Ireland. The Budget documentation signals further needs for tax increases in 2010 and 2011 (see story on page 16) and CORI Justice believes that these future Budgets offer Government the potential to implement a number of changes to the taxation system which will make it fairer. A year ago, in our submission to the Commission on Taxation, we outlined in detail a set of proposals to broaden the tax base. The areas highlighted included:
CORI Justice Submission to Commission on Taxation CORI Justice made a detailed, 81-page, submission to the Commission on Taxation. The document can be downloaded from our website: www.cori.ie/justice Effective Tax Rates after Budget 2009 #2 Central to the ongoing debate on taxation in Ireland are effective tax rates. These rates as calculated by comparing the total amount of income tax a person pays with their pre-tax income. For example, a person earning €50,000 who pays €10,000 in taxation will have an effective tax rate of 20 per cent. Calculating the scale of income taxation in this way provides a more accurate reflection of the burden of income taxation faced by earners. Following Budget 2009 and the supplementary Budget we have calculated effective tax rates for a single person, a single income couple and a couple both earners. Table 8.1 below presents the results of this analysis. Effective tax rates provide a more accurate reflection
of the burden of income taxation faced by earners.
In most cases the supplementary budget increased the effective tax rate. For a single person with an income of €15,000 the effective tax rate will be 0%, rising to 10.3% of an income of €25,000 and 41.1% of an income of €120,000. A single income couple will have an effective tax rate of 0% at an income of €15,000, rising to 5.0% at an income of €25,000, 25.5% at an income of €60,000 and 38.0% at an income of €120,000. In the case of a couple where both are earning and where their combined income is €40,000 their effective tax rate is 11.0%, rising to 22.4% at a combined income of €80,000 and 31.7 % for combined earnings of €120,000. As chart 8.1 below shows these effective tax rates have decreased considerably over the 12 years for all earners. For example, in 1997 a couple with two earners on an income of €60,000 had an effective tax rate of 36.6%. This fell to 19.3% in 2002 and despite increasing after each of the 2009 budgets will be still lower at 17.4% after this budget.  Chart 8.1 : Effective Tax Rates in Ireland, 1997-2009 #2  Unacceptable attack on the world’s poorest One of the major cuts in Budget 2009 #2 is that delivered to the Overseas Development Aid budget. It has been cut by €100 million, adding to a cut in January 2009 of €95 million. In 2009, Ireland will give €696 million in overseas aid; an amount equivalent to 0.48% of GNP. This is a shameful cut; one so embarrassing to the Government that the
Minister did not mention it in his speech…it should be reversed immediately This is a shameful cut; one so embarrassing to the Government that the Minister did not mention it in his Budget speech. Indeed, the Budget documentation, while mentioning the cut, failed to address it implications for the committed government target as published in the White Paper on ODA. The impact of this cut will be felt among the poorest people on this planet; those struggling to survive on less than $1 a day in the over 100 countries that Ireland assists. CORI Justice considers this cut a national shame, it should be reversed immediately.  Education budget - small changes Capital expenditure in education has been reduced by €54m while capital expenditure has been reduced by €27m. Additional places An additional 6,910 places will be created for unemployed people in the further and higher education sectors. These places consist of:
Of the €54m reduction in capital spending:
Of the €27m reduction in current spending:
Assessment
Chart 10.3 : Cumulative Impact on the Disposable Income of Public Sector Workers, Budget 2009 #1, Public sector pension levy and Budget 2009 #2
Distribution and Budget 2009 #2 An assessment of the cumulative impact of the October and April
Budget offers a more rounded insight into the distributive impacts Single people who are long-term unemployed are €6.50 a week (€339 a year ) better off in 2009. Those on €25,000 a year will see a reduction of €9.58 a week (€500 a year) in their take home pay while those on €50,000 will be €38.33 a week (€1,790 a year ) worse off in the coming year and those on €75,000 a year will be €70.54 a week (€3,681 a year) worse off in the coming year. Three factors have impacted on the take home pay of public
sector workers; this analysis examines the impact of all three Single people on €25,000 a year will see a reduction of €20.66 a week (€1,078 a year) in their take home pay while those on €50,000 will be €66.75 a week (€3,483 a year ) worse off in the coming year and those on €75,000 a year will be €114.26 a week (€5,962 a year) worse off in the coming year. Expenditure Changes - Summary
PAYROLL SAVINGS (€150m)
Unemployment increase - long-term implications
National Debt to Climb An implication of Ireland’s budgetary position is that the country has been forced to borrow large sums of money to cover fiscal deficits in 2008, this year and for the next number of years. Table 13.2 reflects the scale of this increase and shows how the national debt will rise as a proportion of national income from 2009-2013. it is driven by two factors...the decline in the international
economy and the realisation of a series of national policy failures...
The need to so rapidly increase our debt level is driven by two factors. The decline in the international economy, on which Ireland as a trading nation is highly dependent, and the realisation of a series of national policy failures mainly associated with the recent housing boom and the economically illogical trend of persistent and excessive tax cutting. While the former is likely to resolve itself as the international economy improves, the latter, referred to as Ireland’s structural deficit, requires a more coherent response. As CORI Justice has pointed out on many previous occasions a key element of this reform is the long overdue need to reform and refocus our tax base so that all contribute their fair share to Irish society. Elsewhere in this document (see page 7) we highlight the opportunities to broaden the tax base and build a fairer taxation system. As we continue our fiscal reforms these policies will become central to any credible attempt to solve the problem.
Judging the Budget - 8 Key Thrusts
Judging the Budget - 8 Key Thrusts
Not a Mini Budget’: The Scale of Budget 2009 #2 Budget 2009 #2 may have been labelled a ‘mini budget’ but its scale suggests that it was far from being ‘mini’. In total the Minister for Finance announced changes totalling €3.3 billion during his speech. The chart opposite attempts to put the mini budgets’ scale in some perspective. It compares to the €1.4 billion ‘adjustment’ announced in January via the public sector pension levy and the October 2008 budget which took €1.3 billion out of the economy. The ‘mini’ budget’s €3.3 billion of adjustments divides as follows: 45% on expenditure cuts (€1.5 billion) and 55% on taxation increases (€1.8 billion). Collectively, the announcements contained in the ’mini’ budget reflect some of the largest fiscal policy changes ever announced for Ireland. The Minister has also signalled the scale of future Budget changes. Both Budget 2010 and 2011 will each aim to make an additional €4 billion in adjustments.  The Budget documentation suggests that the 2010 adjustments will be spread across taxation (an additional €1.75 billion), current or day-to-day spending (minus €1.5 billion) and capital expenditure (minus €750 million). These figures suggest that to meet the Budgets’ economic projections, in particular those agreed with the EU, that future Budgets will continue to be very large. CORI Justice asks Government to ensure that any changes proposed are fair and protect the vulnerable. Other CORI Justice Publications The following publications (and many more) may be downloaded for free from our website and are available for purchase from the CORI Justice Office:
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