Ireland unveils new taxes to trim 2012 deficit

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Posted: Dec 06, 2011 3:23 PM
Ireland unveils new taxes to trim 2012 deficit

Ireland's government announced Tuesday it will impose euro1 billion ($1.35 billion) in new taxes to help the bailed-out country reduce its deficits as international donors expect.

Finance Minister Michael Noonan said he would increase charges on drivers, homes, savers, smokers and shoppers _ pretty much everyone in this country of 4.5 million _ in hopes of rolling back the 2012 deficit to below 8.6 percent of GDP, the next goal set by Ireland's foreign financiers.

"Personal wealth has been destroyed, thousands of people are sinking into poverty, emigration has returned and unemployment is far too high," Noonan told a somber parliamentary chamber. "The task of this government is to regain control over Ireland's fiscal and economic policies, to grow the economy again and to get people back to work."

Noonan's biggest tax-raising measure will increase the sales tax by 2 points to an Irish-record 23 percent. Opposition lawmakers and business chiefs decried the move as likely to stoke inflation and make Ireland less competitive.

But Noonan said Ireland's commitment to austerity was paying dividends, with this year's deficit expected to decline to 10.1 percent of GDP versus previous estimates of 10.6 percent, a target set in Ireland's November 2010 bailout deal with the European Union and International Monetary Fund.

Ireland's 2012 budget includes euro2.2 billion in spending cuts and euro600 million in additional taxes that were imposed in the 2011 budget. Combined with Tuesday's tax hikes, the total impact on reducing the 2012 deficit should be euro3.8 billion ($5.1 billion).

The Irish, who have suffered five emergency budgets since 2008 following 14 years of Celtic Tiger boom, still face at least three more years of austerity to get their deficit back within the eurozone limit of 3 percent of GDP.

Ireland this year is spending euro57 billion _ including more than euro10 billion in aid to nationalized banks _ but collecting barely euro34 billion in taxes.

Last year Ireland recorded a modern European record deficit of 32 percent because of the exceptional cost of saving five Dublin banks from the brink of default. Those bailout efforts, begun in late 2008 as the country's property boom started to implode, could end up costing more than euro70 billion. Irish property prices have fallen around 50 percent from their 2007 peak and are still sliding, with hundreds of thousands of families now trapped in negative equity.

Noonan said the key to Irish recovery rested with its approximately 1,000 export-focused multinationals that account for barely 5 percent of jobs but 18 percent of GDP. He didn't touch on Ireland's 12.5 percent tax rate on corporate profits, a major magnet for foreign investment that draws regular criticism from high-tax France and Germany.

He also took about 330,000 of Ireland's most poorly paid workers out of the net for income taxes, raising the entry point from euro4,004 to euro10,036 ($13,433). He didn't otherwise touch income-tax rates or bands following three years of salary hits on Ireland's shrinking work force.

But practically everything else faces higher charges in Ireland, where unemployment sits near an 18-year high of 14.5 percent and around 100,000 job-seekers have emigrated over the past two years.

Noonan estimated that the increase in sales tax taking effect Jan. 1 would raise euro670 million ($900 million) extra next year.

Capital gains and acquisitions taxes are rising from 25 percent to 30 percent, a move that the government thinks will net an extra euro132 million in 2012. Likewise, the tax deducted from interest on bank deposits would rise from 27 percent to 30 percent, gaining euro50 million annually for the state.

Noonan also confirmed that Ireland will impose its first property tax, called the "household charge." Residences in Ireland will be charged a flat annual fee of euro100, a temporary measure until a new system based on each dwelling's value can be established. The tax is expected to raise euro160 million in 2012.

A few tax hikes took effect immediately. Tax on a packet of cigarettes rose euro0.25, a move worth euro41 million to the government in 2012. Tax on motor fuel _ which currently costs around euro1.50 per liter ($7.70 a gallon) _ increased 1.5 cents (2 U.S. cents).

Car owners faced much tougher taxes in the new year, even those who operate relatively new, environmentally friendly cars.

Ireland's previous government, which included the environmentalist Green Party, introduced a new system of annual car taxes that imposed punitive charges on operators of older gas guzzlers and offered tax breaks to those who used new, low-emission cars.

Noonan announced hikes to all categories of cars in the hope of raising an extra euro46.5 million next year. Those in the cheapest band of "green" cars will see their annual tax rise 54 percent to euro160 ($215), while those operating the highest-emission vehicles would see their annual charge rise 7 percent to euro2,258 ($3,045).

Noonan announced measures designed to offer a lifelime to those strapped to bloated Celtic Tiger mortgages, and to raise Ireland's housing market from the dead.

Those who took out mortgages for the first time from 2004 to 2008 would receive 30 percent tax rebates on their mortgage interest payments, a move that will increase the 2012 deficit by euro52 million.

He said capital gains tax would be waived for any properties purchased between now and the end of 2013, so long as they aren't sold again for at least seven years.

And new home purchasers were offered the chance to receive tax rebates on their mortgage-payment interest _ but only if they buy in 2012.

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Online:

Budget 2012, http://budget.gov.ie/Budgets/2012/2012.aspx