Tax rises and public sector cuts 'inevitable'
TAXES must rise after several years of being below "normal levels", the IMF report says.
The Government's policy of taxing middle- and upper-income workers makes sense and protects vulnerable households, but it is only the beginning of a process that must include higher taxes and a broadening of the tax base.
There is scope to raise new taxes and to increase the number of people who pay tax, the report adds.
The Government needs to raise an extra €6bn (3.75pc of GDP) over the next five years through income tax, VAT and other taxes, the IMF calculates. This will help to offset a fall in state revenues following the collapse of the property markets. This would mean that the actual increase in the tax take was about 2.5pc of GDP.
"The tax base must be broadened, while limiting the impact on labour costs," the report says. A property tax is "long overdue" but raises significant administrative challenges.
The IMF suggested there is scope to increase PRSI contributions, even though this would narrow the gap between gross and take-home pay. But there are limits to how much new revenue can be raised from indirect taxes such as VAT.
Minimum wage
Future action must concentrate on spending, the IMF says. It suggests new measures such as means-testing child benefit and a lower minimum wage for younger workers.
"The international evidence is clear; fiscal adjustment should focus on expenditure cuts," the report says, and this could include more wage cuts, especially in the public sector.
Public sector wages are higher than other advanced economies and cuts in the public sector are now "inevitable", the IMF says. Government should reduce spending by 9.5pc of GDP, or about €17bn, over the next five years, the report says.
"The (fiscal) consolidation will help the recovery only if it generates confidence that a fundamentally strong re-orientation of government priorities is under way. If not done right, the downturn could worsen," the IMF says.
"This, in turn, will require a substantial effort to scale back the scope of government activities and to improve the efficiency of government services."
Pay agreements should also be linked to new baskets of goods, the IMF says, without indicating what baskets. The Government has argued in the past that public sector salaries should not automatically rise every time cigarettes and alcohol are taxed, and some economists say mortgage rate rises intended to curb inflation changes should not spark pay rises.
- Thomas Molloy
