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Last Updated: Dec 19th, 2007 - 13:17:15 |
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| Department of Finance, Upper Merrion Street, Dublin 2 |
FINFACTS MAIN BUDGET 2008 PAGE
The Tánaiste and Minister for Finance will present Budget 2008 in the Dáil this afternoon from 3:45 pm.
The collapse in housebuilding and contraction in the second-hand market has resulted in an end to Exchequer windfalls and uncertainty about the direction of the Irish economy in 2008.
In November 2004, Brian Cowen said that 28% of the average cost of a new Irish housing unit is collected by the State in revenues such as VAT at 13.5% (there is no VAT on new houses in the UK and while the focus of lobbying has been on stamp duty, VAT is a stealth tax that can easily be buried), local authority charges, income tax, PRSI etc.
It is estimated that every 10,000 fall in new housing units shaves about 1% off economic growth. Against the backdrop of slowing growth in the US and the global credit crisis, official forecasts today may well turn out to be optimistic. There will likely be a bigger challenge to confront in next year's Budget rather than today's, where the Minister will be starting from a stronger base.
Cowen signalled on Tuesday that he will increase all welfare payments by at least as much as inflation in the Budget and he said that the standard of living of all social welfare recipients would be protected, with pensioners in particular expected to benefit.
He also said he intended "to borrow modestly to invest ambitiously", indicating that there will be no slowdown in investment in the National Development Plan.
The Tánaiste is expected to revise the forecast growth rate in real Gross National Product (GNP) from 3% to 2.75% and growth rate in Gross Domestic Product (GDP) from 3.25% to 3%.
Capital spending is projected to grow by 12.% in 2008 and current spending growth will be cut from 12% in 2007 to 8% next year.
Adjustments in tax bands and the deferral of general election promises of a cut in PRSI from 4% to 2% and the reduction of 1% in the top rate of tax to 40%, are expected to be deferred.
Last year, Cowen promised to review the motor vehicle VRT system and a new carbon emissions-linked system will be brought into force for new cars next June.
New three-litre engine cars will cost €148 more to tax from then on, while a 1.6-litre will cost less than €50 more. New commercial vehicles will cost €50 more.
On Tuesday, the Exchequer figures for November, showed that stamp duty receipts sharply fell. A total of €367 million was targeted receipts amounted to just €209 million, €158 million or 43% below target.
The Budget 2007 target for total tax receipts in November was €10.9 billion but the actual amount of tax collected came to just €9.7 billion.
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| Source: Ulster Bank |
Budget 2008 comment from Pat McArdle, Chief Economist, Ulster Bank:
With the recent focus on the deterioration in the public finances, the fact that 2006 was an aberration tends to be overlooked. In the final flush of the property boom, the economy outperformed and tax revenues overshot the Budget estimate by €3.9billion. This, in turn, got reflected in improved forecasts for 2007 and 2008. It was not, however, to last and the 2007 and 2008 tax estimates have since had to be pared back sharply.
As the Table shows, however, all that has happened is that the excesses of 2006 have been removed and we are back where we were two years ago in so far as the tax estimates are concerned.
The first column in the table shows the 2008 forecasts as they stood in December 2005 when the 2006 Budget was unveiled. The second shows the position as presented in last year’s budget while the third is my forecast for the 2008 budget based on the White Paper estimates and recent guidance from the Minister.
The key to the Budget will be the deficit. If the Minister is prepared to go for a deficit as high as that he envisaged two years ago, then the Budget will be a straightforward affair and there may even be some relief when he sits down.
The final column of the table assumes that the increases in current and capital spending will be limited to 8% and 12.5%, respectively, as promised by the Minister. This will be difficult as it implies an additional current spend of little more than €1 billion – hardly enough to allow for significant additional policy measures and an increase in social welfare of 5%. (The Minister spent an additional €1billion last year but, unlike this year, many new policy initiatives had already been included in the Pre-Budget Estimates Volume). The capital provision should, however, be adequate to maintain the NDP (National Development Plan) capital programme. If the Minister’s targets are going to slip, current spending is the most likely candidate.
If, however, spending is kept to the announced limits, there should be enough resources to provide for a tax package of about half a billion. The reasoning is simple. If you spend a billion and lower taxes by half a billion, you get about €500 million back in the form of additional revenue buoyancy.
The net cost of the tax package would, therefore, be virtually zero. €500 million would be a decent enough tax package, albeit less than half of what he did last year. It would be more than enough to index tax bands and allowances to wage inflation, which the Department is likely to put at a rather low 4%. There might even be room, at a pinch, to squeeze in a reform of stamp duties but this is, on balance, still unlikely.
As the table shows, all this can be accommodated within a General Government Deficit (GGD) of about €1.6 billion. By coincidence, this is equivalent to a deficit of 0.8%of GDP, the same as was envisaged in December 2005. Plus Ca change …
© Copyright 2007 by Finfacts.com
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