Lenihan told to tax lower-paid workers
Time running out to cut borrowing, says OECD
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FINANCE Minister Brian Lenihan should cut personal tax credits to bring more low-paid people into the tax net, a leading international think-tank urged yesterday.
The shock recommendation is contained in the latest report on the country's economy from the Paris-based Organisation for Economic Co-operation and Development (OECD).
OECD secretary general Angel Gurria, who unveiled the report in Dublin, also warned Mr Lenihan that the country's borrowing must be reduced quickly, rather than spreading the pain over a longer period as advocated by trade unions.
"The problem is you may not have that time, Mr Minister," he told Mr Lenihan.
"The markets are zeroing in on countries," Mr Gurria added.
The report was published as a ratings agency knocked two points off Ireland's credit rating, citing the severity of the decline in GDP and the exceptional rise in government liabilities.
"The breadth and depth of the country's banking sector problems have substantially increased sovereign risk," agency analysts added.
In its report, the OECD said the Irish economy would return to growth late next year, but recovery would be slow and there was unlikely to be a repeat of the boost which the country received in the late 1980s.
Other recommendations in the 133-page report included:
- Reducing social welfare payments and having more means tests for benefits.
- Cutting public sector pay and numbers.
- Ending the link between public sector pensions and pay.
- Introducing property taxes and ending mortgage relief.
- Scrapping the vast array of housing tax benefits and other tax breaks. The OECD said the projected rise in the national debt was manageable, but would make Ireland particularly vulnerable to rises in interest rates.
"The markets are harsh, and if they do not have confidence in the fiscal policy of the Government, they will make borrowing money more expensive for Ireland," it said.
Mr Gurria said government spending was 50pc higher last year than five years before and clearly this was not sustainable.
"A permanent reduction in the public payroll is an essential element of any fiscal consolidation plan," the report adds.
The OECD advocated bringing more people into the tax net as it said tax revenues and government spending no longer matched. Even if credits are cut, the tax base will also have to be widened with the introduction of a property tax, and an end to many tax breaks, including those for pensions, which it says are the most generous in the 30-nation OECD.
The proposal to cut personal tax credits, which currently stand at €3,660, comes after several statements from Mr Lenihan about how few people are paying income tax.
Two out of five workers paid no income tax last year, and half of all tax came from the one in 30 workers who earn more than €100,000.
The OECD report also found there is a risk of persistent long-term unemployment unless urgent steps are taken to help those who have lost their jobs.
Dangerous
Advocating social welfare cuts, Mr Gurria said it was dangerous if the gap between what can be earned on the dole and in a job became too close.
"It is not a question of reducing the benefits to workers. It is a question of how do you make sure we do not create a disincentive for work and also that we do not create a disincentive for creating new jobs," he said.
The OECD also gave cautious approval for the NAMA plan to stabilise the banking sector. It says nationalisation should be a last resort, but it is clearly worried about the liabilities which the State is taking on.
"Assets should be transferred swiftly (to NAMA) at the appropriate price, with risk-sharing mechanism to protect the taxpayer. Sound and professional management of these assets (loans) to maximise their value will be important."
Fine Gael finance spokesman Richard Bruton TD said the report raises huge questions over NAMA and contained a warning of permanent long-term unemployment due to the lack of a Government jobs plan.
"In the public sector, while pay cuts are inevitable, they should be done in a way where those who accept cuts now will receive a dividend as crucial performance benchmarks are reached in the rationalising of the public services, and in the achieving of a current Budget balance," Mr Bruton said.
Meanwhile, the Government is planning to flush the opposition parties out on how they would cut €4bn from public spending ahead of the Budget.
A special pre-Budget debate will be held in the Dail in a fortnight, three weeks ahead of the Budget on December 9.
Taoiseach Brian Cowen told the Dail no section of expenditure could be immune to possible cuts, including social welfare.
- Brendan Keenan and Fionnan Sheahan
Irish Independent
