DUBLIN (Reuters) - Ireland is under pressure to request an international bailout to prevent a destabilization of the euro zone bloc but any assistance would likely have tough fiscal conditions attached.
The following is a list of possible measures Dublin will have to take:
INTRODUCE A RESIDENTIAL PROPERTY TAX
A government task force last year recommended that Ireland introduce an annual tax on residential properties, something that has not existed since 1997. The government has instead relied on revenues from stamp duty -- a value-based tax on property sales -- which have plummeted in the property crash.
Latest Irish view: The task force said the tax should be calculated through a valuation database, work the government admits it has not done. A flat rate charge has not been ruled out and despite certain opposition from indebted homeowners, there seems little way around saving 15 billion euros without this new charge and a similar tax on water charges.
Likely EU/IMF stance: Given property taxes exist in most other European countries, such a charge will likely be a condition of a bailout. However most countries use property tax to fund local government and Europe may want Ireland to wean its exchequer’s reliance off such a charge over time.
INCREASE INCOME TAX
The weight of adjustment of Ireland’s first two austerity budgets in late 2008 and early 2009 fell on taxation with income tax rates rising through a levy on wages.
Latest Irish view: Lenihan has said there is limited scope for further hikes and instead plans to bring another 300 million euros in a year by taxing some of the 50 percent of the workforce currently not paying income tax. He is also reported to be seeking to raise the same amount through axing tax breaks.
Likely EU/IMF stance: After years of tax cuts in the “Celtic Tiger” era budgets, Ireland’s Central Bank Governor Patrick Honohan has said the country’s stance as a low tax economy was coming to an end. Outside assisters would likely subscribe to the same view but -- like the Irish government -- would want the brunt of savings achieved through spending cuts.
INCREASE CORPORATION TAX
Dublin’s 12.5 percent corporate tax rate, one of the lowest in the European Union, has been a key part of its economic strategy and has been crucial to tempting big employers like Google Inc and Pfizer to Ireland.
Latest Irish view: Ireland is relying on strong exports to help the economy grow by a forecast 1.75 percent next year and has repeatedly said it will not increase the rate it taxes the output of multi-nationals.
Likely EU/IMF stance: While Honohan believes the IMF would not be interested in damaging any kind of growth by hiking corporation tax, the low rate is a source of irritation in some European capitals, which view it as unfair competition and there is a real fear in Dublin that Europe would demand an increase.
Ireland reversed 2008’s 0.5 percent VAT rate increase in last December’s budget, primarily to slow the mini boom among retailers across the border in Northern Ireland, who were helped by sterling’s sharp fall against the euro.
Latest Irish view: There have been no signals that the government is considering increasing VAT from its current rate of 21 percent and doing so was the only option unanimously opposed by analysts presented with 18 policy options in a Reuters survey last month.
Likely EU/IMF stance: With Ireland facing far more serious problems now than simply shoppers trickling over the border, a percentage point or so rise in VAT would probably be on the way.
Greece had to raise its sales tax to 23 percent from 19 percent as part of its IMF bailout.
CUT PUBLIC SECTOR PAY
Public service salaries were cut for the first time in last December’s budget, with reductions of between 5 and 15 percent saving 1 billion euros. Dublin has since agreed a pay freeze deal with trade unions, which precludes further salary cuts until 2014.
Latest Irish view: The government insist the deal still stands, saying long-term savings will accrue through a halt on recruitment and voluntary redundancy packages.
Likely EU/IMF stance: With pay and pensions accounting for up to 70 percent of some departmental budgets, the EU and IMF would almost certainly demand compulsory redundancies and/or further pay cuts be put back on the table. As part of its pledge to the EU/IMF for a bailout, Latvia’s public service were last year forced to take a general 35 percent pay cut.
REDUCE CAPITAL SPENDING
The one known saving in a limited selection of unknowns - the government announced in July that it would cut its budget for infrastructure projects in 2011 to 5.5 billion euros, generating 1 billion euros of savings.
Latest Irish view: July’s announcement came when Ireland was seeking just 3 billion euros in savings next year and a total of 7.5 billion over the next four years. It is a near given that Lenihan will cut further than originally envisaged.
Likely EU/IMF stance: Any external assistance would likely come with a demand for even deeper cuts with expensive projects such as the ‘Metro North’ -- a railway linking the north and center of Dublin -- almost certain to be shelved.
REDUCE UNEMPLOYMENT BENEFITS
Another government task force charged last year with identifying savings in Ireland’s public sector, advised spending cuts of 5.3 billion euros. The government cut an initial 2 billion euros in last December’s budget, over a third of which came from a 4 percent cut in jobless benefits.
Latest Irish view: With unemployment at almost 14 percent, the sheer size of the social welfare budget will likely necessitate a further percentage point or two being shaven off dole payments.
Likely EU/IMF stance: With Irish unemployment payments still significantly more generous than those offered by the British government north of the border, harsher cuts could well accompany a bailout.
CUT DAY-TO-DAY SPENDING
Aside from cuts to dole payments and child benefit, the government met the remainder of last year’s target by cutting day-to-day savings by almost 1 billion euros. Analysts say that was simply trimming the fat and the severest cuts remain ahead.
Latest Irish view: With the junior government party the Greens pledging to safeguard education as best as possible, the largest two other areas of spending -- social welfare and health -- will be in the firing line. Recommendations like reducing the number of special needs assistants and cutting medical allowances for the unemployed could be unavoidable.
Likely EU/IMF stance: Latvians will testify that the IMF would demand further cuts on top of public pay cuts. Latvia was forced into a general 40 percent reduction in other spending.
REDUCE PUBLIC SECTOR PENSIONS
The government unsuccessfully tried to take on the state’s pensioners by trying to means test medical allowances in its first austerity budget. Some 15,000 pensioners marched on parliament and a government MP joined the opposition.
Latest Irish view: The Greens and several senior government MPs have warned that cuts to the old-age pension must be ruled out of the 2011 budget, however those who have drawn public sector pensions and thus been unaffected by pension levies already introduced, could be hit.
Likely EU/IMF stance: In Latvia, the IMF reduced old age pensions by 10 percent while Greece -- which faced a deeper pension problem -- was forced to reform its ailing social security system. If politicking was no longer an issue, Ireland could expect more of the same.
Editing by Padraic Halpin and Giles Elgood
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