C O N F I D E N T I A L SECTION 01 OF 03 DUBLIN 001517

SIPDIS

SIPDIS

E.O. 12958: DECL: 01/31/2015
TAGS: ECON EFIN EINV PREL EI
SUBJECT: BIG HELP FOR WORKING FAMILIES: IRELAND'S 2006
GOVERNMENT BUDGET


Classified By: Ambassador James C. Kenny; Reasons 1.4 (B) and (D).


1. (SBU) Summary: On December 7, Finance Minister Brian
Cowen unveiled the 2006 Government budget, a televised event
that annually serves as Ireland's financial
state-of-the-union address and a window on the governing
Fianna Fail party's political strategy. With a robust
economy and a euro four billion government surplus from 2005,
Cowen was well positioned ahead of the 2007 general elections
to focus the budget's chief benefits on Fianna Fail's core
constituency, middle-class families. The budget provides
generous childcare subsidies and lowers taxes for families
earning average wages, as part of a package that targets
other middle-class concerns, such as the elderly, education,
and health. In areas of USG interest, the budget includes a
minuscule spending increase for defense and a large jump for
the Department of Foreign Affairs, which mostly reflects the
Government's attempt to increase overseas aid from 0.4
percent to 0.7 percent of GNP by 2012. While the budget
received a mostly favorable public reaction, the U.S.
business community opposed the budget's proposal to eliminate
tax breaks for foreign executives. The Ambassador is engaged
on this proposal with Minister Cowen's personal advisor, who
believes that the proposal can be modified. Overall, the
budget's structure reflects Fianna Fail's bid to protect its
lead in the polls ahead of the 2007 general elections, while
being careful not to over-stimulate an already robust
economy. End summary.

Background: Spending Increases in a Strong Economy
-------------- --------------


2. (U) On December 7, Finance Minister Brian Cowen unveiled
the 2006 Government budget to the Irish Parliament, a
televised event that annually serves as Ireland's financial
state-of-the-union address and a window on the ruling Fianna
Fail party's political strategy. Under the 2006 budget,

total government expenditures will increase 11 percent over
2005 to reach euro 50.6 billion, the first time a budget has
passed the euro 50 billion threshold. Cowen highlighted the
positive macroeconomic backdrop to the budget, as 2005 saw
real GDP growth of 4.6 percent and the creation of roughly
96,000 new jobs. For 2006, he projected a government deficit
at 0.6 percent of GDP, with public debt at 28 percent of GDP,
one of the lowest debt ratios in the EU. (The government
deficit he predicted for 2005 turned into a euro 4 billion
surplus, thanks mainly to strong revenues from capital gains
taxes and stamp duties targeting Ireland's vibrant housing
market.)

The Big Winners: Couples with Children
--------------


3. (U) Whereas the 2005 budget showcased benefits for
society's least advantaged, the chief beneficiaries of the
2006 budget will be working households with childcare
expenses. The budget features a five-year euro 2.65 billion
strategy to address the supply and cost of childcare,
including a yearly euro 1,000 supplement for every child up
to the age of six. There will also be funding to train
17,000 more childcare personnel by 2010, as well as
investment in childcare facilities to accommodate 50,000 more
children. To reduce childcare expenses in a child's first
year, the Government will extend both paid and unpaid
maternity leave to a combined 56 weeks, with Government
funding to defray attendant costs for business.


4. (U) Tax relief under the 2006 budget will also primarily
benefit middle-class families. Most notably, the Government
will raise the income threshold at which a standard 42
percent personal tax liability applies, effectively pushing
90,000 people down into the 20 percent tax bracket. Cowen
explained that this step would ensure that workers earning
the average industrial wage would pay tax at the lower rate.
A range of tax benefits will similarly push 52,000 people
below the 20 percent tax bracket, out of the tax net. In
response to public complaints about millionaires who pay no
tax, Cowen also pledged to cap by 2007 the level of tax
relief available to those earning over euro 250,000.

Other Categories of Note
--------------


5. (U) Other budgetary categories of interest are:

A) Education. The budget allocates euro 1.2 billion to help
universities build/upgrade their infrastructure and to
produce more Ph.D. students through a new Strategic
Innovation Fund. (This outlay probably means that university
tuition for Irish students will not be reintroduced this
decade.)
B) The elderly. Besides providing for weekly increases in
state pensions, the budget includes euro 150 million to
support the care of elderly at home and nursing facilities.
There is also a euro 400 million carve-out to compensate
those elderly who have been wrongly charged over two decades
for stays in public nursing homes.

C) Health. Nearly one-quarter of total public expenditures,
or euro 12.2 billion, will go to the health sector, which
remains characterized by hospital queues and other
inefficiencies despite significant increases in spending over
the past decade.

D) Defense. The budget raises defense spending (exclusive of
army pensions) by 2.5 percent to roughly euro 731 million,
continuing a trend of relatively minor increases in defense
expenditures over recent years. (The Irish military will
probably enjoy cost savings over the next three years as it
brings home 400 troops participating in the UN Liberia
mission.)

E) Foreign Affairs and Aid. Spending on the Department of
Foreign Affairs (DFA) will jump 8 percent after a paltry 1.4
percent increase in 2005. The spending ramp-up reflects a 26
percent increase in official development assistance (ODA),
following on Prime Minister Bertie Ahern's pledge at the
September UN High Level Event to increase ODA from 0.4
percent of GNP to 0.7 percent by 2012.

Overshadowed by a Resignation
--------------


6. (SBU) Although the Government had expected good publicity
for the budget, headlines were partly stolen by the December
8 resignation of Ivor Calley, (Junior) Minister of State for
Transportation and Fianna Fail parliamentarian. The Irish
press reported on December 7 that a construction company had
painted Calley's home for free in the early 1990s, a
disclosure that capped several weeks of reports on Calley's
questionable ethical actions at the Department of Transport.
After his resignation on the morning of December 8, the
national radio station, RTE, interviewed Calley in the slot
that had been reserved for Minister Cowen's budget briefing,
keeping Cowen in the studio wings for a half-hour.
Afterward, Calley inexplicably attended a Parliamentary
session on the budget in his minister's seat. His presence
led opposition leaders to interrupt Prime Minister Ahern
repeatedly to demand a statement about the resignation,
preempting discussion of the budget for most of the session.

Reaction: Mostly Favorable, but U.S. Firms Protest
-------------- --------------


7. (U) Notwithstanding the Calley story, the budget received
a mostly favorable public reaction. Families interviewed by
the press expressed enthusiasm for benefits that would reduce
the cost of care for children and elders. Economists also
generally applauded the budget, though some voiced concern
that the budget's benefits package might lend inflationary
pressure to an already robust economy. In contrast, other
economists noted that higher interest rates, mounting
consumer debt, high fuel costs, and a possible housing market
slowdown could bite into Cowen's predictions for continued
strong economic growth and tax receipts in 2006. As is
customary, the political opposition criticized the budget,
primarily for not being more generous with social welfare
benefits.


8. (SBU) The U.S. business community strongly opposed the
budget's unexpected proposal to eliminate the remittance
basis of personal income taxation for resident foreign
executives. Currently, the tax system allows foreign
executives in Ireland to receive their salary outside
Ireland's jurisdiction and pay tax only on money they
"remit," or bring into, the country to support themselves.
On December 8, the American Chamber of Commerce issued a
statement that the budget proposal would "make Ireland
unattractive as a base for these senior executives" and act
as a disincentive to foreign investment. The Sunday Business
Times also reported that, at a December 8 post-budget brief
for the financial industry, U.S. firms heavily lobbied
Minister for Enterprise, Trade and Employment Micheal Martin
to support the remittance basis for taxation. Business
lobbying will likely continue in the run-up to Parliamentary
debate in early 2006 on the Finance Bill, where the budget
proposal could possibly be inserted.

Cowen's Advisor: U.S. Firms' Input Welcome
--------------

9. (C) On December 12, the Ambassador discussed the 2006
budget with Alan Gray, Chairman of Indecon, a large economic
consultancy, and Minister Cowen's personal advisor on the
budget process. The Ambassador cited U.S. business
opposition to the tax remittance proposal, and Gray expressed
optimism that the proposal could be modified in response to
U.S. firms' input. Gray asked the Ambassador to canvass
executives with key U.S. IT firms and get back to him (which
we plan to do before Christmas). Regarding some economists'
warnings that the budget might be inflationary, Gray argued
that that the benefits package was generous, but not to the
point of inviting price pressures. Even if such pressures
did arise, he said, the Government could respond with
measures to improve market competition, such as the recent
rescission of regulations preventing supermarkets from
selling goods at below-invoice prices. Gray, furthermore,
confirmed that Government leaders were "fuming" at the timing
of Ivor Calley's resignation, which had stepped on a
carefully planned choreography to maximize the budget's
political punch.

Comment: A Finely Tailored Product
--------------


10. (SBU) From a political perspective, the 2006 budget hits
all the right levers, reflecting the governing Fianna Fail
party's bid to lock in its lead position in current polling.
Cowen publicly denied that the budget was drafted with the
2007 general elections in mind, but budgetary benefits
nevertheless target Fianna Fail's core constituency:
middle-class couples with children. In recent press surveys,
rising childcare expenses had consistently ranked atop
parents' concerns, especially with women entering the work
force in droves to help families meet the high cost of
living. The budget's generous childcare benefits and tax
relief measures should thus improve Fianna Fail's support
among working families in the last full year before
elections. The budget also catered to another key political
demographic, the elderly, who will welcome higher pensions,
increased funding for home/hospital care, and compensation
for wrongful charges at public nursing homes. Meanwhile,
continued increases in other social welfare benefits will
enable to Fianna Fail to claim that it remains focused on
society's disadvantaged groups, the theme of the 2005 budget.


11. (U) Economically, the budget is stimulatory, but
prudent. Whereas the benefits package received most
attention, the 11 percent increase in government expenditures
is similar in size to budget increases in recent years. As
one Irish economist observed, the budget benefited everyone,
but not dramatically so. One possible reason that the
Government chose not to risk over-stimulating the economy
with an even more generous budget is the impending maturation
of the Special Savings Incentive Accounts (SSIAs). The SSIAs
are a nationwide personal 5-year savings scheme launched by
the Government in 2001 that will begin in 2006 to put roughly
euro 14 billion back in the hands of the accounts' holders --
another nice benefit for prospective voters.
KENNY