IRELAND: REPORT PREVIEWS HOW THE IRISH GOVERNMENT

C O N F I D E N T I A L SECTION 01 OF 02 DUBLIN 000360 SIPDIS TREASURY FOR VIMAL ATUKORALA E.O. 12958: DECL: 08/17/2019 TAGS: ECON PREL PGOV EFIN EI SUBJECT: IRELAND: REPORT PREVIEWS HOW THE IRISH GOVERNMENT WILL RAISE TAXES REF: DUBLIN 271 DUBLIN 00000360 001.2 OF 002 Classified By: PEO Chief Dwight Nystrom. Reasons 1.4(b/d). ¶1. (C) Summary: On September 6, the Commission on Taxation issued its report with suggestions for changing the Irish tax system. The main recommendations are the introduction of a property tax, a carbon tax, a water tax, and a tax on child benefit payments. The intent of the recommendations is for the government to rely less on cyclical taxes. Our contacts predicted that a property tax this budget cycle was unlikely and noted that spending cuts will still be an important part of the government's December budget. With both spending (reftel) and tax recommendations now out, the opposition will try to peel off government backbenchers in order to force an early general election. The government is gambling that the electorate will have absorbed the impact of the likely spending and tax changes, so that the introduction of the December budget is as uncontroversial as possible. End Summary. ¶2. (U) The Commission on Taxation published a report filled with recommendations designed to overhaul the Irish government's tax system. The Commission was established in February 2008 by then-Finance Minister (now Prime Minister) Brian Cowen and was tasked with helping to establish a new revenue-raising structure. The main recommendations are: -- An annual tax on residential property; -- The taxation of child benefit payments; -- A carbon tax on fuels; and, -- The introduction of water charges. There are many other tax changes included, most of which are designed to move the Irish tax code away from one that is heavily reliant on taxes that raise more revenue in good economic times and less in bad (cyclical system). ¶3. (U) With the construction boom and ever-rising personal incomes, the Irish government could safely rely on a growing tax take from VAT, stamp duty (Note: this is a tax on the sale of real estate; there is no property tax as in the U.S. End Note.),and a handful of other cyclical taxes. This all changed in 2008 when consumers stopped spending and the housing market fell through the floor. As a result, the government's finances deteriorated because government spending continued to increase. This will result in a double �0A;digit budget deficit as a percentage of GDP in 2009. The government set up another body to make recommendations on the spending side, the McCarthy Group (reftel). The Commission's report and the McCarthy report will form the basis of the government's multi-year plan to close this gaping deficit. ¶4. (C) On September 9, Econoff spoke with Gary Tobin, chief of the Department of Finance's international tax division, who said that not everything in the report will make it into the government's December 2009 budget. However, he indicated that the recommendations will clearly make up "the bulk of the revenue-raising measures" contained in the budget. Tobin said that, because of the difficulties of introducing the system, the proposal to institute a property tax may be put off. He added that moving away from consumption- and employment-based taxes is crucial for the long-term health of the government fiscal stance. Alan Barrett, an economist at the Economic and Social Research Institute (ESRI),echoed Tobin's assessment of the need to move to a tax system that "smoothed out" the tax take through the business cycle. ¶5. (C) Barrett noted that even with the recommended tax changes the government will have to make significant spending cuts in the December budget. He said that in order to come up with the Euro 4 billion that the government needs to trim from the deficit next year public sector pay and entitlements must be tackled. He expects about Euro 1 billion to come from the property tax and another Euro 500 million to come from a carbon tax, leaving about Euro 2.5 billion to come from the spending side. These cuts will have to come from decreased social welfare payments or further cutting public sector take-home pay. ¶6. (C) Comment: With both the Commission (tax) and McCarthy (spending) reports out, the contours of the December budget submission become clearer. As promised, the government will focus heavily on tax increases but, if Barrett is right about the amount of revenue these will raise, spending cuts will still loom large. This is where the politics comes in. Fianna Fail (FF - the larger party in the governing coalition) backbenchers will begin to feel some heat from DUBLIN 00000360 002.2 OF 002 constituents as the inevitable social welfare cuts are put forward. The opposition will try to peel them off -- and possibly the Greens, FF's junior partner in government -- in the hope that they can force an early general election. For its part, the government hopes that the electorate will have absorbed and reconciled themselves to the tax and spending recommendations by the time the budget is rolled out. End Comment. FAUCHER