Noonan signals no income tax hikes in Budget 2012

The Government is planning a €3.8 billion adjustment in next year’s budget, which will include €1.6 billion in tax measures and €2.2 billion in spending cuts.

The details are contained in the Medium-Term Fiscal Statement which provides an update to the Government’s medium-term budgetary strategy and sets out the budgetary framework for the four years from 2012 to 2015.

Over this period, it calls for further measures totalling €12.4 billion in a bid to bring the GDP deficit down to the target of 3 per cent target of GDP which is stipulated in the bailout agreement with the EU-IMF troika.

Minister for Finance Michael Noonan said the savings - €200 million more than previously estimated - are necessary to prepare the country for any further shocks amid the deepening euro zone crisis.

However, Mr Noonan said he was not planning to increase income tax rates next year. "We think we can do this without touching income tax in 2012," Mr Noonan said during his presentation of the plan at Government Buildings.

Publication of the statement is first stage in a sequence of budget-related announcements to be published prior to budget day on December 6th.

The document says Exchequer revenues for this year are likely to be €450 million behind target, mainly due to weak consumer spending, and the knock-on implications for Vat revenues. Exchequer returns published earlier this week showed Vat returns at the end of October were €300 million below forecast.

In a statement, Mr Noonan said the economy "has returned to growth", but warned "significant challenges" remain for Ireland.

"[However,] the large gap that still exists between Government spending and revenue must be closed. Continuing to run big deficits and engaging in the high levels of borrowing required to fund them is simply not viable. To do so would result in unsustainable debt and a long-term loss of sovereignty," he said.

He pointed out that while the State’s debt repayments required 3.5 per cent of all tax revenues in 2007, the equivalent figure for 2011 would be about 14 per cent.

He said exports were likely to be the only significant source of positive momentum in the Irish economy for the next couple of years. “That being the case, safeguarding and expanding the economy’s export base will remain a critically important objective of overall economic strategy,” Mr Noonan said.

Mr Noonan said it was essential domestic demand recovers. “It is only when consumer spending and investment start increasing again, that appreciable, broadly-based employment growth will re-commence. The restoration of business and consumer confidence is a pre-condition for this renewed growth,” he said.

According to the statement, the €12.4 billion adjustment will be weighted towards spending cuts, which will total €7.75 billion, while €4.65 billion will be raised in taxation measures.

It says the Government has “not been persuaded” by arguments for even greater frontloading in terms of the required adjustments. This was to give the shallow economic recovery a chance to strengthen.

It says this balance reflected the view that “fiscal consolidations tend to be more successful when they rely more on spending cuts than on tax increases”.

A growth forecast published in April by the Department of Finance, predicting 2.5 per cent growth this year and an average of 3 per cent per annum until 2015, has been cut in the statement to 1.6 per cent and 2.8 per cent respectively.

According to the statement, the main reason for the downward revision is the outlook for global economy has deteriorated in the last six months.

Exports are the growth area in the economy and, coupled with lower growth, the outlook for job creation is relatively bleak.

According to the statement, employment is forecast to increase by 65,000, a total which will bring the unemployment rate down only marginally, to 11.6 per cent. It notes that 34,000 people in net terms left the country in the 12-months to April.

It says the numbers on the Live Register have, on average, been far higher than expected - averaging between 440,000 and 445,000 - with a knock-on implication for social welfare spending.

The statement says these forecasts do not represent Government targets.

Domestic consumer demand remains weak, with the statement suggesting that it will take time for export growth to filter through to personal consumption and investment.