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Labour sets out proposals for €2.8bn budget package

Issued : Thursday 2 April, 2009

On this day twelve months ago, around this very time, the Bertie Ahern was announcing his intention to resign as Taoiseach and Leader of Fianna Fail.

Over the following few months Fianna Fail mourned the departure of Bertie Ahern and celebrated the accession of Brian Cowen at the very time when the attention of the government should have been focused on dealing with the deteriorating fiscal and employment situation.

For more than twelve months the Labour Party has been warning of the mounting economic crisis and calling for urgent action. Last June I was the first Leader to raise in the Dail the looming crisis for small and medium sized enterprises as a result of the refusal of banks to provide normal credit facilities.

In September last we published a detailed plan to reboot the economy including a series of measures which, if they had been taken at that time, would have halted the slide and begun the process of recovery. Three times since October last we have brought detailed private members motions setting out proposals to assist businesses and the stem the jobs haemorrhage.

When the situation continued to deteriorate and it became clear that the October budget had a spectacular failure, the Labour Party made it quite clear that it was prepared to engage in constructive process and make specific proposals for measures that might be included in the April 7th budget.

While we were treated with courtesy by officials of the Department of Finance, it became clear that the government was not serious about constructive engagement with us and a wide range of information we sought from government was not provided.

Despite this handicap, we are today publishing detailed proposals setting out the crucial steps we believe must be taken in this budget if the economy is to be turned round.

Fiscal policy must also have regard to the impact that fiscal correction will have on activity and employment. An appropriate balance must be struck between the twin requirements to deal with the deficit in a credible fashion and to sustain activity and jobs. This means that a multi-annual approach is required.

You cannot close the gap between income and expenditure in one year alone. Too much harsh medicine all at once could end up killing the patient. Sending the country further into a downward spiral of job losses, followed by cuts, followed by more jobs losses, followed by more cuts.

Various targets have been floated by the government ranging from the €4.5bn suggested by the Taoiseach to the €6bn mentioned by the Minister for Agriculture, Brendan Smith. We believe that anything of this level will be far too severe and will do further damage to the economy.

In our document we are suggesting a budget package of €2.8bn in net full year terms for next week's budget, made up of a combination of measures of raise revenue and reduce expenditure.

The composition of the adjustment package will be central to its success. The package adopted should have a strong focus on protecting existing jobs and creating new ones. Every job lost costs the exchequer some €20,000 in social welfare payments and taxes forgone. The budget package should include a number of initiatives to promote employment and re-training. Labour is proposing the transfer of the €1bn in fees paid by the banks for the Bank Guarantee to the National Training Fund to fund a range of initiatives over a number of years.

I have a number of concerns about the government's intentions in regard to next week. I am concerned that they will not take any significant measures to address the jobs crisis. I am also concerned that those on low and middle incomes are again going to be the primary target of the government.

Opposition parties have been told that the first business to be taken when the Dail resumes after Easter will be a Social Welfare Bill. Given that there are unlikely to be social welfare increases in the budget this almost certainly means that there will be social welfare cuts. It appears that once again the government is going to dance to the IBEC agenda. While there is certainly scope for significant reform of our social welfare system, the Labour Party will strongly oppose any blanket social welfare cuts.

SUMMARY OF MAIN PROVISIONS ATTACHED - FULL DOCUMENT AVAILABLE IN 'OUR IDEAS' SECTION.

CURRENT ECONOMIC POSITION
- The Irish economy is experiencing an unprecedented contraction in activity and a rapid rise in unemployment. Output may fall by some 6% in 2009. Tax revenues in 2009 are projected to be some 30% lower than in 2007. A fiscal deficit has opened up which is now projected to be at least 11.5% of GDP. This deficit is unsustainable, and a major fiscal correction is required.
- Fiscal policy must also have regard, however, to the impact that a fiscal correction will have on activity and employment. An appropriate balance must be struck between the twin requirements to deal with the deficit in a credible fashion and to sustain activity and jobs. This means that a multi-annual approach is required.
- The appropriate target for policy is the structural deficit - that portion of the deficit that will not be eliminated by a return to economic growth on the back of global recovery
- Following the publication of the February 2009 Exchequer Returns, the Government indicated that it intended to stick to its 9.5% of GDP deficit target. This implies a gross adjustment over the remainder of 2009 of €4.5 - €6 billion. Such an adjustment would constitute an attempt to almost halve the structural deficit in nine months, rather than over twenty-one months, and would constitute a fiscal shock on an unprecedented scale.
- A more appropriate fiscal policy is to target the reduction of the structural deficit by half - or some 4% of GDP - in 2009 and 2010, with further, but less severe reductions in 2011-2013. The first stage in this process would be a budget package of approximately €2.25billion in net full year terms in the April Budget. Given the impact that budget packages have on revenue buoyancy, this implies a gross full year target of €2.8-€3bn
- This should be accompanied by robust Government action to drive down costs in sheltered sectors of the economy, both to enhance competitiveness and to protect family budgets, by a combination of regulation, competition and direct control of selected prices.
- The budget package to be adopted on April 7th should have three key objectives -jobs, fairness and a structural adjustment.

JOB CREATION/ SKILLS
- In order to fund jobs and skills initiatives, and for pre-school education, the fees paid by the Banks for the Guarantee scheme, which will total €1billion , which is currently being held in a 'suspense' account in the Central Bank, should be transferred to the National Training Fund

- A new National Development Plan should be drawn up with immediate priority being given to programmes with the greatest impact on job protection or job creation. These would include school buildings and critical infrastructure such as broadband
- A PRSI exemption scheme should be put in place that would exempt employers from paying employer's PRSI for 18 months, where they employ a person who has been unemployed for more than 6 months, and where they demonstrate clearly that they are creating a new job.
- The Back to Work Enterprise Allowance should be revised so that unemployed people can avail of the scheme after three months of losing their job (currently 2 years)

- Private sector employers should be incentivised to offer career breaks to facilitate parents and carers and to improve job opportunities for other workers.

- A Graduate Placement Scheme should be put in place which would allow new graduates to retain social welfare benefits while working in approved job placements.

- A 'tax-back' scheme for people who have lost their jobs and wish to return to third level should be introduced.

- The cap on Further Education Places should be raised, the number of place son VTOS expanded, and eligibility for the Back to Education Allowance should be extended.

PUBLIC EXPENDITURE: DOING MORE WITH LESS

- Labour has argued for many years that far greater value-for-money can and should be obtained from public spending, and we have advanced numerous proposals on how this could be achieved. Reform in this area can no longer be delayed.

- The Government has already announced its decision not to pay the 2009 and 2010 instalments of the T16 pay awards. This will yield approximately €990m in 2010 and €1200m in 2011.

- Given the huge gap that has developed in earning levels in the public service, an earnings cap of €200,000 in the public sector, and the suspension of the system of performance related pay for higher civil servants.

- There must be greater mobility of staff within the public sector, so that key posts can be filled by transferring staff from low to high priority areas. The Government should introduce a scheme that encourages public servants to take career breaks or work part time, by limiting the loss of pension entitlements that would result to the individual.

- Non Wage Spending

- The decentralisation programme should be abandoned.

- Government should review its rent payments, and seek downward revision in rents paid by all public sector bodies, including schools. Rent payments under social welfare schemes should be reviewed, and a retention tax should be applied where direct payment is made to landlords.

- The Houses of the Oireachtas and the holders of Public Office must give a lead in this drive to do 'more with less'. The number of civil servants working on constituency matters in the offices of Ministers and Ministers of State should be reduced to 2 per Minister. The number of Junior Ministers should be limited to fifteen, however allocated, and the number of Oireachtas committees should be similarly reduced Payment to Oireachtas members for acting as Chairs, Vice-Chairs and Convenors of Committees should be abolished. Ministerial pensions should not be payable to sitting TDs or Senators.

- As part of the drive to achieve 'more with less', the number of Dail sitting days should be increased by 50 per cent. Oireachtas expenses should be vouched. Payments made to independent Deputies and Senators under the Leader's Allowance must be accounted for in the same manner as for political parties.

REORGANISING CAPITAL EXPENDITURE

- Falling tender prices in the construction and civil engineering sector should be used to reduce the cost of projects. An initial target of €1000 million should be set for such cost reductions in 2010 and is readily achievable.

- A fundamental overhaul of the capital programme is required. This should include a new framework document or National Development Plan. It should be accompanied by greatly improved management, of the programme itself and of individual projects.

- To remove uncertainty, and to retain profit from public infrastructure delivery within the public sphere, the Labour Party proposes the establishment of a National Development Bank (NDB) to fund and deliver infrastructure projects. Such an agency would be set up on a commercial semi-state basis with a mandate aligned with the public interest.

TAXATION: FAIRNESS AND REFORM

- The interest subsidy afforded to landlords is an unjustified subsidy for investment in housing assets, that has driven speculation in housing, and should be phased out.

- Capital gains and capital acquisitions are taxed at a single rate of 22%, when a person on a modest or average wage faces a marginal rate of 41%. This difference also opens up a major avenue for tax-planning, where wage income is re-routed and re-categorised as a capital gain.

- The rate of capital acquisitions tax should be increased to 28%. The threshold for Category A should be reduced to €250,000.

- Tax relief for all property related schemes must be ended. In order to prevent the re-emergence of such schemes in the future, we propose that a minimum effective tax rate of 30% should be applicable to all incomes over €250,000.

- A cap should also be placed in the Artists exemption at €75,000, with a facility for averaging incomes over a number of years.

- A new 48% tax rate should be introduced for those earning over €100,000.

- The existing system which allows tax exiles to avoid paying a variety of taxes should be greatly restricted. This can be achieved by restricting the number of days that a person can spend in Ireland without losing their non-resident status. Restrictions should also be imposed on temporary periods of non-residency. A requirement should be introduced so that a tax clearance certificate must be produced with passport applications.

- The long-promised Carbon Tax should now be implemented at a rate of €20 per tonne.

- A package of excise measures totally approximately €400 million in a full year should be introduced.

- A tax of 1c per text message should be introduced. The proceeds from this tax should be earmarked initially to help fund youth related health programmes such as the cervical cancer vaccine and the Cystic Fibrosis centre..

- The existing system of tax relief for pensions is expensive and heavily distorted in favour of those who pay tax at the higher rate. The Department of Finance was not able to cost a number of options for reform in this area. Reforms can be achieved by measures such as restrictions on employer's relief, and an emergency levy on small self-administered schemes