Financial aid to be released on quarterly basis if targets are met
BUDGET SAVINGS of €15 billion, the establishment of a national water utility, a deadline for savings from the Croke Park agreement and detailed reviews of the Government deficit are included in the Memorandum of Understanding published yesterday.
Financial assistance will be released to Ireland on a quarterly basis over the next three years provided the targets of the memorandum are met. The Government has also agreed to consult the International Monetary Fund, European Central Bank and the European Commission before adopting any policies not consistent with the memorandum. The Government has agreed to the following timetable for action:
The first payment will be made available to Ireland after budget 2011 is passed by the Oireachtas.
TAX MEASURES: The budget will include tax increases of €1.4 billion next year and €2.2 billion when in effect for a full year. Lowering of income tax bands and credits will raise €945 million (€1.245 billion in a full year). A reduction in pension reliefs will yield €155 million (€260 million in a full year). General tax expenditures will be cut by €220 million Increases in excise and other taxes will raise €80 million next year and €110 million in the following years. Measures to raise €700 million in one-off taxes will also be introduced.
SPENDING CUTS: Current expenditure will be cut by €2.09 billion in 2011 through cuts in social welfare, reductions in the number of public sector workers, progressive cuts in public sector pensions and other savings of €l.03 billion. Capital spending will be reduced by €1.8 billion.
DEFICIT: As in each of the following 11 quarters, the Government has committed itself to “rigorously implement the budget” for that year and the “fiscal consolidation measures” announced afterwards. Progress will be assessed against quarterly deficit targets.
LABOUR MARKET: The national wage will be reduced by €1 while firms will be allowed to invoke the “inability to pay clause” more than once. An independent review of Registered Employment Agreements and Employment Rights Orders, which set minimum terms and conditions in sectors such as construction and hospitality, will begin. Reforms to the welfare system, which will save €750 million next year, will be introduced to “provide incentives for an early exit from unemployment”. Jobseekers will be profiled according to their individual needs and will need to provide evidence that they are looking for work.
APRIL-JUNE 2011: The Government will have to submit a timetable for implementing the recommendations of the memorandum. After consideration by the European Commission, IMF and ECB, the agreed timetable will become the benchmark for subsequent reviews of Ireland’s progress.
PENSION REFORM: Legislation to increase the state pension age to 66 years in 2014,67 in 2021 and 68 in 2028, will be introduced.
STRUCTURAL REFORMS: A budgetary advisory council to provide an independent assessment of the Government’s budgetary position and forecasts will be established. The 15-day rule relating to prompt payments by Government departments will be extended to the health service executive, local authorities and state agencies. Any additional unexpected revenues must be spent on debt reduction.
JULY-SEPTEMBER 2011: The Government has agreed to “consider an appropriate adjustment” in public sector wages, if the Croke Park agreement does not deliver “the projected savings arising from administrative efficiencies and public service numbers reductions”.
STRUCTURAL REFORMS: Legislation removing restrictions to trade and competition in “sheltered sectors”, including the legal, medical and pharmacy professions, will be introduced. This will include the establishment of an independent regulator for the legal profession. Judges will be given powers to impose fines and other sanctions in competition cases. A study will be conducted on the economic impact of eliminating the cap on the size of retail premises.
PUBLIC SECTOR PENSIONS: Pension entitlements for new entrants to the public service will be reformed. This will include a review of accelerated retirement for certain categories of public servants and an indexation of pensions to consumer prices. Pensions will be based on career average earnings. New public service entrants will see a 10 per cent pay reduction.
OCTOBER-NOVEMBER 2011: The Government will provide a draft budget for 2012 which will detail savings and revenue increases totalling €3.6 billion.
TAX MEASURES: Tax increases which will raise €1.5 billion annually will be introduced. Measures will include the lowering of personal income tax bands and credits; reduction in private pension tax reliefs; reduction in general tax expenditures, introduction of a property tax; reform of capital gains tax and acquisitions tax; an increase in the carbon tax.
SPENDING CUTS: Government expenditure will be reduced by €2.1 billion in 2012. This will be achieved through a combination of social expenditure reductions; reduction of public service numbers and public service pension adjustments; and reductions in capital expenditure.
STRUCTURAL REFORMS: The Government will undertake an “independent assessment” of the electricity and gas sectors. When complete, the authorities will set targets for their possible privatisation. Responsibility for providing water services will transfer from local authorities to a state water utility.
2012: The Finance Bill 2012 will introduce the VAT increases for 2013 and 2014. Legislation to reform personal bankruptcy to be introduced. The 2013 budget will be drafted outlining tax increases and cuts amounting to at least €3.1 billion. Tax revenues will be increased by €1.1 billion while spending cuts will amount to €2 billion.
2013: Quarterly reviews of spending and deficit levels will continue.
THE DOCUMENTS: WHAT THEY CONTAIN
What has been published?
The Government has released five draft documents setting out the conditions under which financial support is to be provided by the European Union and the International Monetary Fund. They have to be finalised but the Government does not expect any changes in substance.
Memorandum of Economic and Financial Policies 2010 (MEFP):
This the “foundation document” and sets out the extent of the external financial assistance being given; the reasons for the financial assistance, and the principal policy objectives which are: banking reorganisation, fiscal consolidation and renewing growth.
Memorandum of Understanding on Specific Economic Policy Conditionality (MoU):
This sets out the conditions that must be met each quarter during the three years of the agreement in order to trigger the release of funds to Ireland.
Letters of Intent to the IMF and the EU Authorities: These are Ireland’s formal applications for support to the EU and IMF.
Technical Memorandum of Understanding (TMU) attached to the Letter of Intent (LoI) to the IMF:
It sets out the way in which financial information on Ireland’s finances will be reported to the EU and IMF. It contains a number of definitions and a formal commitment not to default on external debt and guaranteed debt.