Bank chief urges widening of tax base

CENTRAL BANK governor John Hurley has urged the Government to consider broadening the tax base to help contain the State’s fiscal crisis.

He argued that painful choices and a short-term drop in living standards are required to restore stability to the public finances.

In a bleak forecast which indicates that the contraction of the economy is the worst in modern times and will lead to the loss of about 98,000 jobs this year, the bank said the ability of the State to meet the public sector pay bill was beyond the scope of resources. The pay bill “must be addressed” in current talks on the public finances, it said.

Account must be taken of the fact that the outlook for inflation has changed significantly since the national pay deal last year and the fact that private sector workers face a decline in nominal and real income. Inflation is forecast to drop 2 per cent this year after a 4.1 per cent rise in 2008.

The bank said a broadening of the tax base to areas other than direct taxes could raise the tax yield while avoiding the need to change existing tax rates.

Tom O’Connell, assistant director general, said this could be achieved by cutting the number and scope of tax avoidance schemes, a greater recourse to user charges for public services or a property tax. “In this regard it should be noted that Ireland is an outlier internationally in not applying annual charges to residential property holdings.”

Stating that people living in apartment complexes paid annual management fees in the order of €1,000 for the maintenance of their development, Mr O’Connell said a €1,000 annual tax on the 1.7 million dwellings in the State would yield €1.7 billion per year.

It was also possible to charge for water services and many other services offered for free.

“We have an awful lot of public services here that are provided free, whether it’s third-level education, free travel for the over-65s, all these things arguably could be looked at. Should people over 65 pay one-quarter of the fare, half the fare?

“We have a situation here where we expect that our public services are often provided free, [but] we also want a low tax environment. There’s something a bit incompatible with that.”

The bank said the rate of unemployment was likely to rise to 10 per cent by the end of the year and might rise well above that before recovery takes hold. “I don’t think you could rule a 12 per cent peak out of the ball park,” said Mr O’Connell.

The average unemployment rate will rise this year to 9.4 per cent from 6.2 per cent.

In its first quarterly report of the year, the bank forecasts gross national product (GNP) will shrink by 4.7 per cent in 2009 after a 2.6 per cent decline last year. The State has never previously suffered a contraction of this magnitude in two successive years, said John Flynn of the bank’s economic and analysis unit.

The latest assessment indicates that conditions have worsened considerably since October, when the bank forecast a GNP decline of 1.3 per cent for 2009. Gross domestic product (GDP) is forecast to decline 4 per cent after a 1 per cent contraction in 2008.

In a statement, Mr Hurley said the Irish economy was in an “exceptionally difficult” position.

“Our forecasts published today indicate a further serious downturn in the coming year. To support a return to more stable economic activity in the medium term, difficult decisions have to be taken and implemented now.”