A sharp increase in taxation, deep cuts in social welfare payments, a reduction in the minimum wage and a modest property tax are among the elements in the Government’s four-year National Recovery Plan.
Tax relief on pensions will be reduced dramatically and recipients of public sector pensions will face cuts for the first time.
The 140-page plan published yesterday outlines a package of measures designed to reduce public spending by €10 billion and raise an extra €5 billion in taxes by 2014.
The plan will be front-loaded with a €6 billion adjustment coming in the 2011 budget, to be published on December 7th. That will involve extra tax of about €2 billion in a full year and cuts in social welfare of €760 million.
The Government’s prospects of getting the budget through the Dáil eased last night when it emerged that Independent TDs Jackie Healy-Rae and Michael Lowry are likely to support it.
With the backing of the two Independents the Government would have a potential 82 supporters while the Opposition will have a potential maximum of 80 if Pearse Doherty is elected as Sinn Féin TD for Donegal South West tomorrow.
EU economic and monetary affairs commissioner Olli Rehn welcomed the plan – which maintains corporation tax at 12.5 per cent – saying it represented “an important contribution to the stabilisation of Irish public finances”.
He added that a €6 billion adjustment in the 2011 budget would be “appropriate”.
Taoiseach Brian Cowen has said the plan would provide the basis for surmounting the deepest economic crisis since the foundation of the State. “We are a smart, resilient and proud people, and we are going to come through this challenge because we love our country and we want to make sure our children have a good future,” he told a press conference to launch the plan.
“Lessons will have to be learned . . . It’s a challenge that can be surmounted. I am confident that talent and will and courage of our own people will make this a reality for us as a people,” Mr Cowen said.
As part of the plan the minimum wage is to be reduced by €1 to €7.65 an hour in next month’s budget. Social welfare cuts of almost €3 billion will take place over four years as part of a package of measures to encourage people to get involved in “employment enhancement” schemes.
Income tax changes to rates and credits combined with the reduction in relief on pensions and other measures will lead to a significant rise in the tax take from those already in the tax net. It will also bring more people into the tax net for the first time with a drop in the entry point from €18,300 to €15,300.
The plan states that the after-tax income of a single person earning €55,000 will fall by €1,860 a year, or about €36 a week, a drop of 4.8 per cent. The after-tax income of a married single-income family earning €55,000 will fall by €2,310 a year, or €44 a week; a fall of 5.4 per cent.
As a result of changes to pension reliefs, the after-tax income of a person earning €55,000 who contributes to a private sector pension will fall by a further 2.5 per cent by 2011.
The Croke Park deal which protects the pay of public service workers remains unaltered in the plan but new entrants to the service will start on 10 per cent less than existing salaries and their pension entitlements will be considerably less generous. Existing public service pensioners will be face cuts for the first time, with an average reduction of 4 per cent.
There will be a reduction of 24,750 in the numbers employed in the public service over the period by 2014 compared to 2008, with half of this having already been achieved, while work practices will be reformed to allow for flexibility and more efficient services.
A property tax of €200 a year and water charges of about the same amount will be phased in by 2014.
No change in the State pension is proposed but the plan reiterates a decision to increase the qualifying age to 66 in 2014. The capital budget will be cut by €1.8 billion for next year.
When asked last night about the reasons for the massive adjustment, Mr Cowen referred to the collapse in the construction industry. “People were expecting a soft landing and it didn’t happen. The analysis was wrong and the advice was wrong. I take responsibility for that and I have never ducked that.”
Opposition parties were critical of the plan, with Fine Gael leader Enda Kenny saying it lacked details of budgets for the next four years. He said the European Commission had confirmed to him that any incoming government would not be bound by its proposals.
Labour Party spokeswoman on finance Joan Burton called on the Government to clarify the status of the plan, saying it was not clear if the document represented the Coalition’s opening position as it went into talks with the IMF.
This is the the ugly face of austerity. Cut everywhere, even public pensions and minimum wage. No wonder the Irish are pissed off and protesting. It's going to be a very rough four years ahead.
Meanwhile, over in Hungary, Bloomberg reports that the government is is trying to force 3 million people now in private pension schemes back into the state system to help it meet strict budget targets.
Special incentives would be offered to those switching into the state pension plan by Jan. 31, Economy Minister Gyorgy Matolcsy said Wednesday. Those people remaining in private schemes will become ineligible for public pensions -- a move that would effectively cost them 70 percent of their retirement payouts.
At stake is about 2.7 trillion forints (euro9.8 billion, $13.5 billion) accumulated in individual pension accounts and managed by private pension funds.
The government plan, while not nationalizing private pension funds outright as Argentina did in 2008, is expected to make it very difficult for the 18 funds offering pension services in Hungary to keep operating.
Matolcsy said severe cuts will also be made in how much private funds can charge for fees and operating expenses.
Hungarians will automatically be transferred into the state system unless they opt out.
At present, 10 percent of most employees' wages go into a private pension fund, while employers pay another 24 percent into state coffers. Under the government's new plan, those who stay in the private scheme can count only on their own 10 percent payments when they retire.
Matolcsy told reporters the new plan was an "important turning point in terms of economic policy."
Hungary was hard hit by the global financial crisis and is still facing daunting economic challenges. In 2008, it was forced to rely on a bailout of euro20 billion ($27 billion) from the International Monetary Fund and other institutions to avoid bankruptcy.
Government officials this summer have made contradictory statements about the state of the country's finances, increasing uncertainty in the financial markets about Hungary's credibility and hurting the stability of the forint.
Ever get the feeling that the world economy is hanging on by the skin of its teeth? Sure, it's only Ireland and Hungary, but it could easily shift to Portugal and worse still, Spain. All this tells me the Fed, the ECB and central bankers around the world are going to be busy printing money, counterbalancing some of the fiscal austerity taking place right now. Welcome to the future.