TAXES WILL have to rise and billions need to be cut from projected State spending plans over the next five years to bring the exchequer’s finances back into line, the Government has told the European Union.
Following an €8 billion fall in tax revenue, the Government has now warned that revenues will fall by a further €4 billion this year to €37 billion, before remaining at that figure for 2010, if the latest predictions from the Department of Finance are correct.
Minister for Finance Brian Lenihan is to produce an emergency plan to cut €2 billion off this year’s spending as agreed in the October budget, while €4 billion will have to be cut off the projected spend for both 2010 and 2011.
Tax revenues, now back to 2005 levels, will not return to last year’s disastrous performance until 2012, and they will bring in just €42 billion the following year.
In a clear signal that the State’s payroll costs will have to be curbed, it said the exchequer’s deficit would be double last year’s result for each of the next five years if the Government stood by and did nothing.
“The Government regards this as untenable and has decided that urgent action over and above that already agreed will be taken,” the Department of Finance told the European Commission in an updated stability report.
Vowing to eliminate the current budget deficit – which hit €12 billion last year and will jump to €18 billion this year – it said this could not be done until 2013, rather than two years earlier as it committed to do in the October budget.
Even with a €2 billion spending cut this year, the exchequer will be a further €18 billion in the red by the end of the year.
The 2010 deficit will be €16.8 billion; in 2011, €13.7 billion and in 2012 it will reduce to €11.5 billion.
The exchequer will still be spending €8 billion more than it receives in 2013, although borrowing for day-to-day purposes should be eliminated, if the latest forecast is correct.
“It is no longer practicable or sensible to do this in three years, as it would layer too great a shock on the economy and would be counter-productive,” said a Department of Finance document.
Offering clear evidence tax rates will have to rise over the five years, if not this year, the document said the Government will adjust “taxation levels to reflect the changed realities”.
Gross domestic production will fall by 4 per cent in “the sharpest annual decline of output ever recorded in Ireland”, while gross national product, excluding the contribution made by multinationals, will fall even more, by 4.5 per cent.
Lower incomes “combined with poor sentiment” will cut spending by 2.7 per cent this year, but inflation, as measured by the Consumer Price Index, will disappear, replaced by a 1 per cent price fall.
The situation could be even worse, the department warned: “It must be recognised that there is considerable uncertainty – even more so than normal – attached to the current set of economic forecasts.”
Ireland’s main trading partners could suffer “a steeper or more prolonged downturn”, while global financial market problems could “deepen or persist for some time” and there is a possibility “that declining price levels feed into expectations and lead to a more prolonged deflationary environment”.
Just 20,000 houses will be built this year, “a drop of 60 per cent on last year”, while other construction sectors “especially commercial – look set to decline also”, said the Department of Finance.
