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I am using this day as an excuse to bring up Ireland’s success in dealing with the economic crisis.  It is not Greece.  It is going the opposite way.  The worst of times brings to light the true nature of  leadership.  In Ireland, it has shown itself strong.  The International experts have all praised the results.  Ireland is on course to cut its deficit to 3% of GDP by 2014.   The leadership proclaims that we can not tax and borrow our way to prosperity.  They are right.  I do not agree with everything they propose especially a carbon tax, but it is straight shooting leadership.  Right now Ireland has more than that famous luck going for it.  It has thoughtful leadership.  Imagine if President Obama gave this speech at the State of the Union.  He would be at 65% approval. 

This is from the Minister of Finance Brian Lenihan:

The economy went into reverse for three reasons:

• a steady loss of competitiveness during a prolonged boom;
• the bursting of the property bubble; and
• an international banking crisis which triggered a worldwide recession.

Over the last eighteen months we have put in place a range of far reaching measures to stabilise the banking system. We took those measures not for the sake of the banks but for the sake of our economy.

We have gone through a severe and painful correction in the property market. I know this has dealt a heavy blow to individual homeowners, many of whom are now in negative equity and some of whom are experiencing difficulties meeting their mortgage repayments. But the collapse of the property bubble has also impacted on our public finances by greatly reducing the tax take and increasing the demand for welfare payments. In the last two Budgets, I have sought to address this shortfall by introducing a highly progressive income levy and various other taxation measures.

A key focus of today’s Budget is regaining our international competitiveness.

 

RESTORING OUR COMPETITIVE EDGE

Unless we regain our competitive edge, we will be unable to return to the tried and tested strategy of export-led growth that ushered in the boom in the early 1990s. We must be able to compete and win again in the international marketplace.

In the recent Lisbon referendum the Irish people reaffirmed our place at the heart of Europe. This was the right decision for our economy, for our future and for our children. The single currency has provided huge protection and support to Ireland in the current crisis. It has prevented speculative attacks on our currency and provided funding to the banking system. But, membership of monetary union also means devaluation is not an option. Therefore the adjustment process must be made by way of reductions in wages, prices, profits and rents.

Some progress has already been made. Consumer prices in Ireland are now declining at the fastest rate in the euro area and the European Commission has forecast that, uniquely in the euro area, our unit labour costs will fall this year.

But our prices are still amongst the highest in Europe. Over the last decade wages have gone up 70 per cent, well above the euro area average.

Put simply, we have priced ourselves out of the market. We will not be able to stem the haemorrhage of jobs until our prices and the costs of doing business here move down in line with those of our main trading partners.

 

WHY BORROWING MORE IS NOT THE ANSWER

Some have argued we should continue to borrow and wait for the economy to grow again before tackling the budget deficit. There are three reasons why this is not a viable proposition.

• First, we know from the 1980s how large deficits, left unchecked, can lead to a dangerous spiral of mounting debt and ever increasing interest payments. Never again should we return to a position where all of our income taxes go to pay interest on the national debt.

• Second, international debt markets have become more crowded and more fragile. If lenders were to lose faith in our ability to restore order to the public finances, the consequences for our economic wellbeing would be profound.

• Third, only decisive action will restore confidence. Consumers will only start to spend and business owners will only invest and create jobs if they believe we are tackling our deficit problem now.

In our everyday lives we do not borrow to pay for our household bills. We cut back and seek to live within our means.

The same strictures apply at national level. Borrowing hundreds of millions a week to pay for day to day spending is just not on. Stabilising the deficit is the next key milestone in our plan to deliver economic recovery for this country.

 

WHY WE CANNOT TAX OUR WAY OUT OF THIS

Others have argued for increases in taxes as a means of stabilising the deficit. But those who demand higher taxes fail to recognise what I have already done.

The tax increases contained in my last two Budgets have placed the heaviest burden on those best able to pay. For example,

• a single person earning €25,000 now pays €500 more in tax and levies than in 2008.
• a single person on €100,000 pays around €5,500 more, or eleven times more than the person on €25,000.
• At €250,000 the additional taxes and levies amount to nearly €17,000 or thirty three times the contribution of the person on €25,000.

The progressivity of the recent changes is beyond doubt. But we have reached the limit. We will not create jobs by increasing the penalty on work and investment.

 

REFORMING HOW WE TAX INCOME

It is also clear that our income tax system has become very imbalanced. Next year, almost half of income earners will pay no income tax and 4 per cent will pay almost half of the total yield. If we want to sustain high levels of Government services this imbalance must change. The time has come to transform how we tax incomes, to simplify it, to make it fairer and more broadly based.

It is my objective to introduce in 2011 a new system of just two charges on income.

• A new universal social contribution will replace employee PRSI, the Health Levy and the Income Levy. It will be paid by everyone at a low rate on a wide base as a collective contribution to public services.

• Income Tax will apply on a progressive basis to those with higher incomes reflecting their capacity to make a greater contribution.

These changes pose a challenge but we cannot continue with the current system. I look forward to working with my colleagues in Government on this reform and the closer integration of the tax and social welfare system.

 

BROADENING THE TAX BASE

In the Renewed Programme for Government we have accepted the recommendations of the Commission on Taxation on the need for a property tax. Considerable ground work will need to be done before a Site Valuation Tax can be introduced. Work will shortly begin on the registration of ownership and the valuation of land.

The Renewed Programme also contains a commitment to introduce a system of water metering for homes. Preparations are underway. Water charges, when introduced, will be based on consumption above a free allocation. Further details will be announced by the Minister for the Environment, Heritage and Local Government.

These charges, like the charge on second homes, will finance the provision of local services by local authorities.

High Earners Must Pay Their Fair Share
We have set our face against increasing the burden of income tax. But the Government wants high earners availing of tax incentive schemes to contribute more in the current difficult circumstances. Accordingly, for the tax year 2010, the effective rate of income tax for those benefiting from reliefs will increase from 20 per cent to 30 per cent on top of which they will also pay PRSI and levies. This represents a significant tightening of the restriction which will yield approximately €55 million in a full year. The entry point to the restriction will now occur at adjusted income levels of €125,000 with the full restriction applying at €400,000. I will examine the curtailment and removal of further reliefs in the context of the Finance Bill.

Our tax treatment of non-resident individuals is broadly in line with that of most other OECD countries. But, we must ensure that every wealthy Irish domiciliary who pays little or no income tax makes a contribution to the State, especially during times of economic and fiscal difficulty.

For this reason we will introduce measures which will impose on all Irish nationals and domiciled individuals, whose worldwide income exceeds €1 million and whose Irish-located capital is greater than €5 million, a requirement to pay an Irish domicile levy of €200,000 per annum regardless of where they are tax resident. The full details will be set out in the Finance Bill.

I will also be introducing a package of measures to improve the effectiveness of the Revenue Commissioners in tackling the shadow economy, addressing smuggling and excise frauds, and dealing with tax avoidance schemes.