IRELAND'S 2009 BUDGET: PUNTING THE PROBLEM DOWN

C O N F I D E N T I A L SECTION 01 OF 03 DUBLIN 000571

SIPDIS

E.O. 12958: DECL: 10/15/2018
TAGS: ECON EFIN PREL PGOV EI
SUBJECT: IRELAND'S 2009 BUDGET: PUNTING THE PROBLEM DOWN
THE ROAD

REF: DUBLIN 556

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Classified By: CDA Robert J. Faucher. Reasons 1.4 (b/d).

Summary
--------------


1. (C) Against the backdrop of a steadily worsening fiscal
balance, the Irish government delivered its 2009 budget on
October 14. In his budget speech Minister of Finance Brian
Lenihan emphasized that this budget required shared sacrifice
from all Irish citizens. The government expects a 6.5
percent government deficit through a combination of a slowing
rate of spending growth and a tax increase of about Euro 2
billion. Current spending will rise by 6.5 percent, mostly
as a result of spending increases on social welfare programs,
education, and health care. Capital spending will fall
slightly but is still high relative to other EU countries.
The increase in taxes will come from a combination of
increases in VAT and a special income levy expected to raise
Euro 800 million, among other measures. Private sector
commentators were disappointed with the modest cut in the
deficit and some were critical of what they saw as overly
optimistic economic growth assumptions. Thrust into the job
amidst a collapsing economy, Lenihan's first budget was
expected to be austere -- and it was. However, it made no
mention of the potential need to bail out its ailing banks
(Reftel). If it has to inject capital into the financial
system, the budget will need to go back to the drawing board.
Ireland's economic plight has added another distraction (on
top of the failed Lisbon Treaty referendum) for the
government to deal with, which may result in less focus on
issues that matter to the U.S. End Summary.

Lenihan Delivers Austere Budget
--------------


2. (U) On October 14, Finance Minister Brian Lenihan
delivered his 2009 budget speech to the Irish parliament.
This was his first such speech as Minister and comes during
Ireland's worst economic crisis in a generation. In it, he
said that Ireland finds itself in "one of the most difficult
and uncertain times in living memory" and called for shared
sacrifice. He emphasized that the most vulnerable in society
will be protected and took steps designed to assure the
global business community that Ireland will remain a good
place to do business. Lenihan forecasted that the government
deficit will be 6.5 percent of GDP in 2009 (it stood at a
surplus of 0.5 percent in 2007) and that current spending
will rise by 6.5 percent in 2009, while tax revenue will rise
by Euro 2 billion. He based these projections on the
assumptions that GDP will fall by 0.8 percent in 2009 and
that inflation will be 2.5 percent.

Key Revenue Measures
--------------


3. (U) The key revenue measures in the 2009 Irish Budget are
as follows:

-- A one percent levy on income up to Euro 100,000 and two
percent over Euro 100,000.
-- Value-added Tax (VAT) to increase from 20 to 21.5 percent.
-- Capital gains tax to increase from 20 to 22 percent.
-- The maximum rate of stamp duty on non-residential property
reduced from nine to six percent.
-- Medical cards for people over 70 will be means tested and
anyone not qualifying will receive a cash grant.
-- Automatic entitlement to child benefit to be reviewed.
-- Mortgage interest relief to be extended for first time
buyers but reduced for non-first time buyers.
-- Sin taxes increased: 50 cents more for a pack of
cigarettes and a bottle of wine.
-- Increases in motor vehicle taxes (by four to five percent
depending on type of car) and gas tax (eight cents per liter).
-- Air travel tax of Euro 10 per passenger for journeys of
over 300 kilometers.

Key Expenditure Measures
--------------


4. (U) The key expenditure measures in the 2009 Irish Budget
are as follows:

-- The number of state agencies to be reduced by 41.
-- Euro 70 million cut in transport infrastructure
expenditures.
-- Increased spending on social welfare (up 8.4 percent),
education and science (up Euro 308 million),and health (up
Euro 385 million).

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-- Child benefit age limit reduced to 17 years of age from 18
beginning in 2010.
-- State pension to rise by Euro 7 per week.

The Government "Flunked"
--------------


5. (C) The main opposition party, Fine Gael, joined in the
chorus of criticism of the government's budget plan. Andrew
McDowell, economic advisor to the party, told Econoff that
the government "flunked the challenge of reducing borrowing
and day-to-day spending and instead focused on maintaining
capital spending." He continued to say that the budget will
make a bad situation worse and that the government missed an
opportunity to engage in real public sector reform. Like
others we spoke to, he believes that the government's
forecasts for less borrowing in 2010 and 2011 are based on
"unrealistic projections and assumptions." In October 14
comments, Richard Bruton, Fine Gael's finance spokesperson,
said, "today's Euro 2.0 billion in tax hikes and another Euro
2.0 billion in cutbacks in vital infrastructure programs
threaten to turn the current Irish recession into a sustained
depression."

Economists Disappointed Too
--------------


6. (C) Local private-sector economists were disappointed with
the government's budget-balancing effort. Econoff spoke to
Jim Power, chief economist at Friends First, who described
the budget as "savage." He felt that the bulk of the
adjustment should have come from paring current spending
rather than through tax increases. He worries that the
income levy will exacerbate the downward pressure on
disposable incomes, which will inhibit consumer spending and
lead to a further contraction of the economy. Like other
local economists, Power believes the growth forecasts the
government is using are "overly optimistic" and that, under
his assumptions, a 10 percent (vice 6.5 percent) deficit is
possible next year. He thinks the government may have to
resort to a "mini-budget" early next year to revise spending
and revenue plans if its assumptions turn out to be wrong.


7. (C) Power worried that the government ignored two looming
problems: the decade-long run-up in public sector pay and the
possibility that the government may need to inject funds into
the ailing Irish banking system. On the latter, he is
skeptical of the government's official line that they do not
foresee a need to "re-capitalize" the banking system. Power
thinks such a move is "a real possibility." On public sector
pay, he believes the government just postponed the inevitable
by not making a serious effort at cutting government staff
levels. This will need to be addressed next year or the year
after, he predicted. Power lamented the fact that the
government had not controlled spending over the last seven
years. If it had, he said, then they would now be able to
pursue an expansionary fiscal policy (more spending),which
would help lift the economy out of recession.

The "Social Partners" View
--------------


8. (C) Business and labor representatives note that the
government will have to walk a fine line in order to put its
fiscal house in order but not tip the economy further into
recession. Danny McCoy, Director of Policy at the Irish
Business and Employers Confederation, said that the budget
situation is "not as bad as it seems" but that the trick for
government is how best to "ride the wave" back to the top of
the economic cycle. He said that as the Irish economy stalls
the government's fiscal stance should be expansionary (more
spending). However, this is not possible given the already
large budget deficit. John Sweeney, economic advisor to the
trade union ICTU, added that members in his union were most
concerned about the tax increases (VAT and the income levy)
for those "who can least afford them."

The Viewpoint Outside Dublin
--------------


9. (C) At the local and county level, senior officials are
preparing for a round of belt-tightening. Although generally
enthusiastic about the economic prospects for his county,
Conn Murray, Louth County Manager, said that less spending at
the national level will adversely affect Louth. In
particular, he foresees potentially cutbacks in "soft"
infrastructure like community centers and social programs for
poorer segments of society. Michael Walsh, Waterford City
Manager, repeated these concerns and added that cutbacks in
capital infrastructure projects will do the most damage in

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his constituency. Unlike Louth which is situated between
Dublin and Belfast, Waterford is in a part of Ireland that
has "probably benefited the least from the strong economic
growth" over the past two decades. New roads are needed to
provide better connections with Dublin and, he hopes, renewed
prospects for growth.

Comment
--------------


10. (C) This was indeed a tough budget. The criticism from
the political opposition is predictable. After all, Fine
Gael has been trying to pin the blame for "losing the
economy" on Prime Minister (and former Finance Minister)
Brian Cowen since the Irish economy began unraveling. What
is telling, though, is the almost unanimous disappointment
from other people we spoke to and from commentators in the
media. Some jokingly -- we hope -- asked us how they could
get U.S green cards. The main complaint is that the
government focused far too heavily on the revenue side at a
time when the Irish economy can ill-afford a slowdown in
private-sector consumption. To be fair, the government is
not in a position to stimulate the economy. However, some
here worry that not only is the government shying away from
making hard choices on public sector reform but that it
underappreciates the woes facing the Irish banking system.
If the government has to inject capital into the financial
system to save the banks, then the numbers announced
yesterday will need to be recast. In addition, Ireland's
economic plight has added another distraction (on top of the
failed Lisbon Treaty referendum) for the government to deal
with, which may result in less focus on issues that matter to
the U.S.
FAUCHER