IRELAND'S 2008 BUDGET -- NOT AS DRACONIAN AS

C O N F I D E N T I A L SECTION 01 OF 02 DUBLIN 000886

SIPDIS

SIPDIS

E.O. 12958: DECL: 12/06/2017
TAGS: ECON EFIN EI
SUBJECT: IRELAND'S 2008 BUDGET -- NOT AS DRACONIAN AS
EXPECTED

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Classified By: POL/ECON Chief Ted Pierce. Reasons 1.4 (b/d).


1. (U) Summary. On December 5, Finance Minister Brian Cowen
presented the government's 2008 budget to a packed Irish
Parliament. Budget pundits had predicted a fairly austere
budget, given the Irish economic slowdown -- they were wrong
in their predictions. On the broad macro numbers, Cowen
predicted that the economy will grow by around 3 percent in
2008 and that the government's finances will swing into a
deficit position from its surplus in 2007. He surprised many
by decreasing the stamp duty on housing and will tax more
heavily vehicles that produce higher carbon emissions.
Personal marginal tax rates remain unchanged but the
enhancement or introduction of various tax credits means that
low- and middle-income households benefit most. The
government will allocate EURO 2.7 billion to upgrade the
creaking transport infrastructure, with the bulk going to fix
the country's roads. The government's spending on health
care will increase -- notably for improved cancer services --
but so will fees to the users of the country's hospitals and
physicians. End Summary.

The Government Finances
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2. (U) Cowen forecasted economic growth to run at about 3
percent in 2008, down from 4.75 percent in 2007. In
addition, the government will need to borrow EURO 1.85
billion in order to finance expenditures, a deficit of 0.9
percent of GDP. This compares to a surplus in 2007 of EURO
900 million (0.5 percent of GDP). As a result of the
deficit, the national debt will rise from 25 to 26 percent of
GDP. Cowen indicated that the "move into deficit must
involve productive borrowing, borrowing which will strengthen
our economy for the long term."


3. (SBU) Comment: While slower, the forecasted growth rate is
still healthy when compared to Ireland's peers in the EU.
The deficit and debt numbers, too, appear manageable. The
obvious big downside worry, and the one hinted at by Cowen,
is the risk of a sharper than expected global slowdown. End
Comment.

Stamp Tax Surprise
--------------


4. (U) Following much public pressure, Cowen relented and
agreed to simplify and make less onerous the stamp duty on
residential property (the tax paid by home buyers upon
purchase of a house and levied in lieu of property taxes).
The first EURO 125,000 of the purchase price of the home will
now be exempt from the tax with the rest of the price up to
EURO 1 million taxed at 7 percent. Above this, the tax rate
climbs to 9 percent.


5. (SBU) Comment: Over the past two years construction has
taken over from exports as Ireland's economic growth engine.
In recent months housing starts are down and house prices
have leveled off and are beginning to fall. Given that real
estate is a significant store of wealth for many Irish, Cowen
came under considerable pressure to do something to turn the
housing market around. The stamp duty reform combined with
an increase in relief for mortgage interest for first time
buyers is his effort to do just that. End Comment.

Low- and Middle-Income Earners Benefit
--------------


6. (U) The government will increase the personal tax credit,
employee tax credit, and standard rate tax bands by about
four percent in order to keep up with wage inflation. In
addition, there will be an increase in other credits,
including the child benefit payment and the home-care
payment. As well, people who receive welfare payments will
see them rise by six to seven percent. As described in the
press, "single income married couples who earn about EURO
45,000, qualify for first-time buyer mortgage interest relief
and the home carer's tax credit" will be the households that
benefit most from this budget.


7. (C) Comment: With a slowdown in the economy and the high
cost of living in Ireland, Cowen was under pressure to
deliver some relief to the "man on the street" -- or at least
not give out "favors" to the rich. He appears to have done
enough for enough people to prevent any serious political
repercussions to his party (Fianna Fail) or himself (he is
thought to be the leading contender to become the next Prime
Minister). End Comment.

Going Green

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8. (U) While a carbon tax was not included in the budget,
Cowen said that the government would put together a body to
examine the issue and that it would be introduced "in the
lifetime of this government." However, beginning in July
2008, the government will calculate the vehicle registration
tax based on the carbon dioxide emissions of the car rather
than engine size. Also, the motor tax rate on cars with
engines bigger than 2.5 liters will be higher than on cars
will smaller engines.


9. (C) Comment: The fact that there are two Green Party
Ministers in the government for the first time and that
Ireland is far from meeting its Kyoto commitments almost
guaranteed that there would be some green-friendly measures
in the budget. Of course, many NGOs are complaining that
this budget does not go far enough to lower emissions. They
may or may not be right, but the commitment to enact a carbon
tax in the next several years will undoubtedly hearten many.
End Comment.

Funding Transport Infrastructure
--------------


10. (U) Cowen's budget allocates EURO 2.7 billion to upgrade
the country's transportation infrastructure, with EURO 1.7
billion going to roads. The Minister said that the road
money would enable Ireland to build high-class roads "which
are absolutely integral to economic activity and long-term
economic and social prosperity." Another EURO 1 billion will
be spent on public transport projects, including new rail
routes between Irish population centers.


11. (C) Comment: Ireland's rapid economic development over
the last decade has not been matched by the development of
the transport infrastructure (as anyone who's been stuck in
Dublin traffic can plainly see). The government must improve
this sector of the economy in order to cement the gains made
elsewhere. Given the funds committed this year, it looks as
if Cowen and his colleagues at the Ministry of Finance
recognize this reality. That said, fixing the problem is a
multi-year project. End Comment.

Health: More for Cancer Services
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12. (U) The total health budget will be EURO 16.1 billion,
about EURO 400 million over what was discussed in earlier
estimates. Some of that extra funding will go to improve
cancer services by focusing on eight "centers of excellence."
However, the cost of semi-private and private beds in public
hospitals will rise by 10 percent, among other cost increases.


13. (C) Comment: The increase in funding for cancer services
drew the most media attention in the health portion of the
budget. Minister for Health Mary Harney has been under fire
due to the misdiagnosis of several women who were originally
told they tested negative for breast cancer but were later
told they had the disease. It is too soon to tell whether
the extra funding will have an impact on the ability of the
opposition to continue attacking Harney on the matter. End
Comment.
FOLEY