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Dublin: 5 °C Wednesday 11 December, 2019
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Four year plan includes tax hikes, VAT increase and huge spending cuts

The four year plan is here – and it’s not going to be pretty. Social welfare will be savaged, with big income tax hikes.

THE GOVERNMENT HAS unveiled its four year budgetary strategy, announcing a series of aggressive tax hikes and significant spending cuts to be introduced in the next four Budgets coming up to 2014.

Income tax will be increased significantly to earn €1.25bn in new income for the government next year alone, while VAT will also be increased in the coming years and social welfare will be slashed by almost €3bn in the four years to come.

Launching the plan this afternoon, Taoiseach Brian Cowen said the strategy hoped “to bring certainty for our people, to ensure that they have hope for the future, and to let them know that we can, and we will, pull through”.

Other countries had experienced budget crises similar to the current Irish issue but all had emerged and performed strongly afterward, Cowen said; this would be the case in Ireland too.

The plan – which projects average annual growth in the economy of 2.75% for the next four years – hoped to equalise the tax burden, with Cowen saying that “those who have the most will make the most contribution; and those who have the least will be protected as much as they possibly can”.

Green Party leader John Gormley added that the the plan hoped to give Irish people greater hope “in the future of this great country”, while Brian Lenihan said the strategy would plot a course of sustainable growth”.

It would also help to dispel uncertainty among employers, consumers, the countries Ireland traded with, and those it borrowed from.

The long-term focus of the plan, he added, would help taxpayers to make advance plans for how their pay would be affected in the coming years, and to adjust their own budgeting accordingly.

Income taxes to face massive hike next year

The plan outlines an aggressive programme to increase the state’s income tax by almost €2bn, while further savings will be made by reducing the tax deductibility of other major expenditures.

Specifically outlining that the income tax system is “unsustainable” if 45% of tax units did not pay income tax – as is currently the case – the programme outlined the requirement of all taxpayers to contribute to government income.

Read the government’s National Recovery Plan 2011-2014 in full >

Much of the detail of how income tax would be handled will not be outlined until the Budget is issued on December 7, though it was revealed that next year’s income tax measures will seek to earn an extra €1.25 billion on top of this year’s tax take.

The report says that the overall tax burden will be more widely distributed, however, as opposed to the current system whereby “8% (earning €75,000 or more) will pay 60% of all income tax”.

Such moves will have an impact on the lowest-paid, however – especially given the news that the minimum wage will be cut by €1 an hour, down to €7.65.

Tax relief on pension contributions are to be capped at 20%, in a move that will save €865m over the term of the programme. A new Site Value Tax, essentially a property tax, will be introduced from 2012 earning about €175m each year.

Income tax relief based on trade union memberships and rental payments, however, will be withdrawn. The income tax exemption for artists will be capped at €40,000.

The standard rate of VAT, currently at 21%, will be increased by 1% in 2013 and another 1% in 2014 to rise to 23%. These changes would yield €620m each year.

Poll: Will Ireland be better off after the Four Year Plan? >

Perhaps crucially, however, the plan commits that there will be no increase to the corporation tax rate of 12.5% – a point of alleged contention over the discussion on whether Ireland will receive its bailout from the IMF and European Central Bank.

Of equal significance is the fact that the Croke Park agreement remains intact, guaranteeing the status of most public service workers – though the public service will still lose 24,750 staff in the coming four years.

Among those will be:

  • 2,750 from the Civil Service
  • 6,050 staff from the Health services
  • 2,050 in Education
  • 1,650 from the Department of Justice (including 1,500 Gardaí)
  • 2,200 staff from the country’s local authorities

Property tax to be phased in from 2012

The plan proposes a new “Site Value Tax”, which appears to be a property tax by another name. The plan predicts this tax will yield €530m by the end of 2014, beginning with a €180m intake in 2012.

The Site Value Tax will be introduced on a “phased basis” as follows:

  • An interim Site Value Tax will be introduced in 2012, applicable to all land other than agricultural land and land subject to commercial rates
  • The interim period includes a fixed local service contribution of €100 per annum (€2 per week) which will raise €180m
  • The final Site Value Tax will be introduced in 2013 when valuations have been completed
  • That tax is estimated to apply to 1.8m households and zoned lands that would equate to an estimated further 700,000 houses
  • For full implementation of the tax, commercial rates will be moved to a site value basis also
  • This income will mean a lower contribution from the Exchequer and motor tax revenues to local authorities

In terms of commercial property, the plan also outlines proposals to review commercial rents, saying the OPW “will lead a coordinated effort to reduce office rents by up to 15%”.

It also says proposals for legislation to “overhaul and streamline the property revaluation process” will be brought to government.

The document says that governments seeking to raise tax revenues, but which are not willing to raise corporate tax rates, must “consider increasing all other types of tax” including property tax.

Welfare budget to be slashed

Approximately €2.8 billion will be cut from the social protection budget over the next four years. The details of the cuts will only be outlined in the budget, on 7 December, however it is believed that the old-age pension will not be touched.

The largest reform to the welfare payment system will come through the means of a new, “single social assistance payment to replace the different means-tested working age payments” – likely to supercede the payment of unemployment benefit, and perhaps also other benefits like child benefit.

This new plan will, the plan says, “minimise existing benefit traps and address the lack of incentive to move back to work or move from part-time to full-time employment.”

What’s changing, and when?

Minimum wage: The minimum wage will be cut by one euro an hour, from €8.65 to €7.65.

Jobs: There will be an effective freeze in public sector pay up to 2014 in order to reduce the public sector pay bill by about €1.2 billion.

There will be an introduction of a reformed pension scheme for new entrants to the public service, and their pay will be reduced by 10 per cent.

Third level Education: The third level registration fee will be replaced with a flat rate contribution of €2,000 per year for third-level – or €200 per year for PLC students.

Welfare: There will be €3 billion worth of cuts to social welfare expenditure by 2014, compared to the opening position in 2010.

School Funding: There will be a 5 per cent reduction in all capitation grants, including grants for adult literacy and community education.

There will also be “operational efficiencies” and other “savings measures” in the school transport scheme.

Justice and Law Reform: There will be fees and structural changes made to criminal legal aid fees, and a better targeting of resources within the probation service.

Savings on accommodation costs for asylum seekers will also be found.

Tourism, Culture & Sport: A total of €50 million will be reduced in funding to sporting bodies and grants to local sports organisations – as well as to the Arts Council and funding for other cultural activities.

Transport: Savings of up to €139 million will be make through changes in the transport sector, achieved by further reductions in road maintenance expenditure.

Health: An 8 per cent reduction in the health budget will be applied over four years. There will be removal of PRSI and Health Levy relief on pension contributions in 2011.

Competitiveness: “Rigorous efficiency targets” will continue to be imposed on the ESB, Bord Gáis and Eirgrid to drive efficiencies in the energy sector.

A National Energy Efficiency Action Plan will be implemented, which will aim to achieve a national energy saving of 20 per cent by 2020 including measures to assist SMEs to lower electricity costs.

Fraud prevention: A Public Service Card will be introduced from early 2011, which will help fraud detection. An increased use of e-technology will also be used to data match and detect fraud.

Pension: The age at which people qualify for the state pension will be increased to 66 years in 2014; 67 years in 2021; and 68 in 2028. The introduction of the new supplementary pension scheme in 2014 will depend on economic conditions.

The funding for the old-age pension TV licence and free travel schemes will be frozen at 2010 levels.

Larger long-term expenditure, like the Metro North and DART Underground Interconnector, remain on the government agenda with no apparent cut to their funding.

Reporting by Susan Ryan, Jennifer Wade and Gavan Reilly

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Gavan Reilly

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