Identifier
Created
Classification
Origin
04DUBLIN1753
2004-12-06 14:24:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Dublin
Cable title:  

IRELAND'S 2005 GOVERNMENT BUDGET

Tags:  ECON EFIN SOCI 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 DUBLIN 001753 

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN SOCI
SUBJECT: IRELAND'S 2005 GOVERNMENT BUDGET

REF: Dublin 1704

UNCLAS SECTION 01 OF 03 DUBLIN 001753

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN SOCI
SUBJECT: IRELAND'S 2005 GOVERNMENT BUDGET

REF: Dublin 1704


1. (SBU) Summary: Tax relief and social welfare spending
increases are the marquis features of the 2005 Irish
Government Budget, a reflection of the Government's newly
embraced "caring" image. The Budget provides for a 9
percent increase in government spending over 2004,
slightly above the increase projected in the November 18
Budget Estimates. Tax relief will take minimum-wage
earners out of the tax net and will widen income tax
bands to allow more workers to pay tax at the 20 percent
rather than 45 percent rate. Regarding social welfare,
the Government will increase pension, unemployment, and
child support payments and launch a multi-year funding
program for the disabled. Opposition political parties
characterized the Budget as a populist attempt to undo
the social "damage" done by former Finance Minister
Charlie McCreevy. A propitious economic environment will
position Cowen in subsequent budgets to strengthen the
Government's "caring" image as well as his own
credentials to succeed Prime Minister Ahern as party
leader over the longer term. End summary.

--------------
Overview
--------------


2. (U) On December 1, Finance Minister Brian Cowen
presented to Parliament a Government Budget for 2005 that
most prominently featured tax relief and social welfare
spending increases. The Budget provides for nearly euro
45 billion in public spending, euro 3.7 billion (9
percent) more than 2004. This increase is above the 6-7
percent spending jump forecast by Cowen in the November
18 Budget Estimates (reftel). Budgetary targets for 2005
include: a government deficit of 0.8 percent of GDP: an
exchequer borrowing requirement of just under euro 3
billion, or 2 percent of GDP; and, a debt ratio of 30
percent of GDP. Cowen, who was appointed Minister in
September, noted that the 2005 Budget would be his first
installment in a three-year effort to strengthen public
services (ahead of the 2007 general elections). He also
said that budgetary measures on tax relief and social
welfare "gave the lie to those who claim that this
Government is indifferent to the needs of some of the
most vulnerable members of our society" (a response to
criticism that the ruling Fianna Fail party's uncaring
attitude toward social issues accounted for its poor
showing in local and European Parliament elections last

June).

--------------
Social Welfare
--------------


3. (U) The first pillar of the 2005 budget is a record
euro 12.3 billon package for social welfare. Cowen had
announced a euro 300 million increase for social welfare
in the November 18 Budget Estimates, and he added another
euro 874 million to the final welfare package, for a
total increase of euro 1.1 billion, or 8 percent, over

2004. Social and Family Affairs Minister Seamus Brennan
said that funding increases would benefit 970,000 people,
a quarter of the population, who claim regular social
welfare payments. Key components of the package are: a
euro 12 per week increase in state pensions; a euro 14
per week jump in unemployment and non-pension welfare
benefits; and, a monthly euro 10-12 per child increase in
child benefits. The 2005 budget also includes increased
funding for maternity benefits, non-child-related family
income supplements, and respite care grants. The total
welfare package reverses roughly half of the social
spending cuts introduced in the 2004 Budget.


4. (U) A centerpiece of the budget's social agenda is a
euro 900 million package for disability services covering
2006-2009 -- the first time that the Government has taken
a multi-year approach to the sector. The package comes
in addition to a euro 2.8 billon planned expenditure on
disability for 2005, an increase of euro 290 million, or
11 percent, over 2004. Total funding over the next four
years will: provide more than 4,500 respite centers for
the disabled; transfer roughly 600 people with mental
disabilities out of psychiatric hospitals; establish 400
community-based mental health facilities; and, provide
1.2 million extra hours of home support and personal
assistance. Cowen noted that disability services had
previously "been at the end of the queue" for government
resources, but would feature prominently in future budget
allocations. Disability support groups welcomed the
funding increases, but warned that the Disability Bill,
published in October, could undermine the budget package
in restricting the definition of "disabled" and failing
to provide rights to disability services.

--------------
Tax Relief
--------------


5. (U) The second pillar of the 2005 Budget is broad-
based tax relief, estimated to cost euro 682 million.
The central components of this pillar are:

a) Personal Taxation: The standard rate tax band (with a
personal tax rate of 20 percent) was increased by euro
1,400 for a single person to euro 29,400 and by euro
2,800 to euro 58,800 for a dual-income married couple.
This widening of the standard rate tax band, the first in
three years, means that over 52,000 workers will no
longer have to pay tax at the higher 42 percent rate.
(Modest wage inflation, however, could push many of these
back into the higher tax band in the coming years.) In
addition, those earning the minimum wage, euro 7 per
hour, will fall outside the tax net.
b) Stamp Duty: The threshold at which stamp duty is
charged to first-time buyers of second-hand houses was
increased from euro 190,500 to euro 317,500. Second-hand
homes sold for between euro 317,501 and euro 381,000 will
have stamp duty charged at 3 percent (down from 4.5
percent),and a 6 percent rate will apply to houses sold
for between euro 381,001 and euro 635,000 (down from 7.5
percent). (This form of tax relief targets young urban
professionals who have had difficulty in recent years
affording a first home.)

c) Excise Duty: No changes were made to the main VAT
(Value Added Tax) and excise rates in the 2005 Budget.
Minister Cowen said he decided against excise duty
increases on cigarettes because of hardships that the new
smoking ban in enclosed public places had imposed on
smokers (cigarettes sales fell by 17.6 percent in the
first 10 months of 2004, and tobacco excise collections
will be euro 128 million below forecast). Cowen also
argued that an increase in duties for cigarettes and
alcohol would have created inflationary pressures.


6. (U) Responding to public complaints that more than 40
Irish citizens with incomes over euro 500,000 legally
avoided taxes in 2004, Minister Cowen announced that he
would initiate a comprehensive reform of tax incentive
schemes. He has instructed the Department of Finance, in
conjunction with the Revenue Commissioners, to evaluate
the effect of incentive reliefs and exemptions, with the
aim of improving tax system equity.

--------------
Capital Expenditures
--------------


7. (U) The Government will spend euro 36.3 billion on
improving the State's infrastructure in the period 2005 -
2009, a proportion of GDP that is nearly twice the EU
average. Euro 6.3 billion in Exchequer capital will be
made available in 2005, including euro 237 million
carried over by Government Departments from 2004.
Roughly euro 10.2 billion (28 percent) of the 2005-2009
capital envelope will be invested in transport
infrastructure, which the Government regards as key to
economic competitiveness and balanced regional
development. In his Parliament speech, Cowen stated that
he was "extremely conscious of the need to optimize the
value for money from the very significant levels of
capital funding now in place" (a response to criticism
that capital spending in recent years had not yielded
appreciable infrastructure upgrades).

--------------
Defense, Foreign Affairs, ODA
--------------


8. (U) The 2005 Budget provides roughly euro 758 million
for the Irish Department of Defense, or 1.7 of total
government spending. The Department of Foreign Affairs
will receive euro 197 million. The Budget will allocate
euro 60 million for Official Development Assistance
(ODA),a 15 percent increase over 2004. ODA funds will
come out of the euro 535 million set aside for
International Cooperation, a distinct basket from Foreign
Affairs. The Irish Government has also committed to
minimum funding of euro 65 million for ODA in both 2006
and 2007. (With a euro 60 million outlay in 2005, ODA
will reach 0.4 percent of GNP, in contrast to the
Government's Millennium commitment to bring ODA to 0.7 of
GNP by 2005. This shortfall has prompted criticism from
Ireland's international charitable organizations.)

--------------
Reactions
--------------


9. (U) Opposition political parties characterized the
Budget as an attempt to repair the social "damage" done
by Former Finance Minister and EU Commissioner-designate
Charlie McCreevy. (This view holds that McCreevy
emphasized wealth-creation to the neglect of social
spending.) Fine Gael spokesperson on Finance, Richard
Bruton, described the Budget as "pretending to say sorry"
and "designed to bury the McCreevy image." While he
conceded that income tax would fall for most people in
2005, he stressed that this would not make up for
increases in the cost of living in recent years. Joan
Burton, Labour's Finance spokesperson, called the budget
a "populist" rather than "visionary" document, "full of
half-measures." In a reference to Fianna Fail's 2002
election slogan of "a lot done, a lot more to do," she
described the Budget as "some damage undone, a lot more
to do". Echoing these sentiments, Dan Boyle, the Green
party spokesperson on Finance, said it would take half a
dozen such budgets "before you would even begin to repair
the damage the last seven budgets have done".


10. (U) Prominent businesses and social organizations
were generally positive, though cautious, in their
reactions to the Budget. Most Irish firms interviewed by
the press welcomed the Budget's tax cuts and welfare
increases as stimuli for consumer spending, which has
flagged in recent years. Indigenous Irish software firms
and the U.S. Chamber of Commerce, however, expressed
disappointment that the Budget did not target Ireland's
competitiveness by providing incentives for scientific
research and development. Social organizations generally
praised budgetary measures to help the disadvantaged and
disabled, though some criticized the Budget as not going
far enough. The Children's Rights Alliance said that
child benefit increases would not reduce the number of
children living in poverty. The National Women's Council
and labor unions also faulted the Budget for failing to
alleviate high daycare costs for children.

--------------
Comment: Santa Cowen
--------------


11. (SBU) Comment: In the spirit of the season, Irish
newspapers have run political cartoons of Cowen dressed
as Santa Claus, doling out tax breaks and welfare checks
to a disaffected electorate. The cartoons emphasize the
point noted in reftel that the 2005 Budget was framed to
target popular perceptions of ruling Fianna Fail party's
indifference to social concerns. Cowen was fortunate
insofar as a euro 2.3 billion overshoot in 2004 tax
revenues made possible large giveaways in social welfare
spending for 2005, without pushing the projected fiscal
deficit close to the EU Growth and Stability Pact ceiling
of 3 percent of GDP. Cowen also stands to benefit from
Ireland's most propitious macro-economic environment in 4
years, with GDP growth of at least 5 percent predicted
through 2006 and an inflation rate that, after many
years, has converged toward the 2 percent eurozone
average. The Finance Minister is thus positioned to
strengthen the Government's "social" credentials further
in the two budgets that remain before the 2007 general
elections. Those budgets will likely extend benefits
beyond the disadvantaged to more of the middle class,
with possible child daycare subsidies and additional tax
relief for dual-income families. Ireland's positive
budgetary and macro-economic outlook will also improve
Cowen's own credentials as the reported favorite
candidate to succeed Prime Minister Ahern as Fianna Fail
leader over the longer term.


KENNY