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

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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
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

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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