NEXT WEEK’S emergency budget will begin the process of putting a new tax system in place to deal with the €16 billion structural deficit in the economy, Taoiseach Brian Cowen said yesterday.
Fine Gael leader Enda Kenny later accused Mr Cowen of being directly responsible for that structural deficit because of the policies he pursued as minister for finance between 2004 and 2008.
The Cabinet met last night for another round of budget discussions while Fine Gael proposed a €3.5 billion package of savings and tax increases to deal with the structural deficit.
In the Dáil yesterday Mr Cowen emphasised that the major problem with the Government finances in recent months arose from the fall-off in tax revenues.
“We must seek to replace those revenues. A structural deficit has emerged because, as a result of the change in activity in the economy, the tax revenues that have been lost are not likely to be replaced from the same sources of income from which they were originally collected.
“That deficit could be of the order of 8 per cent [of GDP] or €16 billion. There will be a need to examine tax expenditures and consider other means of raising taxes,” he told the Dáil.
Mr Cowen said that the Government would also be obliged to cut expenditure programmes that were no longer regarded as necessary or to redesign them in light of the new circumstances.
He added that due to the world recession there was less demand for Irish goods and services abroad but that demand would return as growth returns.
“That is the distinction we are seeking to make in trying to analyse what happened and communicating to the public the nature of the problem and the changes that must be made in the context of putting in place a new taxation system. Some of those changes will relate to increased income tax, while others will come about in due course on foot of a broadening of the tax base,” he said.
“The challenge the Government faces not only in the context of next week’s supplementary budget, but also in the coming years, is to redesign the tax base and the systems relating thereto in order to ensure that they will be sustainable,” said the Taoiseach.
Later, at the launch of the Fine Gael pre-budget document, Mr Kenny outlined a package of €3.5 billion in tax increases and cutbacks with the emphasis on cutting public spending.
Mr Kenny said his party believed the focus should be on cutbacks as it was not possible to tax the economy back to recovery.
Fine Gael is proposing that the low rate of VAT should be cut from 13.5 per cent to 10 per cent for the next two years along with a reversal of the half per cent rise in the top rate announced in the October budget.
The party said that the current income tax rates should not be increased this year but it proposed the abolition of the ceiling on PRSI payments and a temporary solidarity tax on high incomes.
On the savings side wholesale reform of the public service to make substantial savings, including a freeze of public service pay and increments until 2012, was proposed.
Fine Gael deputy leader and finance spokesman Richard Bruton, said the four-year plan would eliminate the structural deficit of 8 per cent by 2013.
There was more bad news on the jobs front with the latest figures from the Central Statistics Office showing an increase of 20,000 in the seasonally adjusted unemployment figures to 372,800 for March.
There was a rise in the unadjusted figures of 173,279 over the past 12 months making it the biggest increase on record.
The unemployment rate rose to 11 per cent in March from 10.4 per cent in February.