Lenihan's budget plan is revealed
Government will borrow €10.5bn to shore up deficit Tax deficit to be in excess of €7bn Income tax increase being considered Further incentives are likely for first-time house buyers Revenue will fall to 2004 levels Government depts to see 10 per cent cuts
AS the Cabinet gathers this morning for their crisis pre-Budget summit, the true impact of Ireland's economic turmoil has emerged -- and today we publish several key features of Finance Minister Brian Lenihan's first Budget.
Following the conclusion of the bilateral meetings with his Cabinet colleagues last week, the Minister is set to deliver "the hardest Budget in living memory", complete with "savage cuts" which will cause real pain.
Firstly, as a result of Ireland's first recession in 25 years and the collapse in tax revenues, Mr Lenihan will announce on Budget Day (October 14) that the Government will have to borrow at least €10.5bn to balance the books -- almost twice the current EU borrowing limits.
Yesterday, senior Government sources confirmed that tax receipts will be more than €7bn behind expectations, caused primarily by the downturn in construction.
However, of more concern to ministers and their departments is the range of "savage cuts" in expenditure that are to be made next year.
The Sunday Independent can confirm that spending next year will be over €2bn less than planned. And when inflation is taken into account, it equates to a 5 per cent cut in real terms. This is on top of the 3 per cent cut in public spending that Mr Lenihan announced in June before the Dail's summer recess. However the Finance Minister is not ruling out a possible further 2.5 per cent cut on top of that.
In total, savings of about €7bn will have to be made up by Budget Day. Revenue will be back from €50bn this year to €43bn -- which is where it was back in 2004.
The level of revenue next year is uncertain, but it is likely to be €10bn lower in 2009 than was forecast by Government in their projections on Budget Day last December.
At that time, the deficit was expected to be €2.4bn. As it now will hit €12.4bn, the Government is likely to curb next year's planned spending level by at least €2bn.
The collapse in tax receipts from Stamp Duty, VAT and Capital Gains Tax has led to a situation where the Government will have to explain to the EU why it has to borrow €10.5bn -- 5.5 per cent of the country's wealth -- to balance the books.
The EU limit for state borrowing is 3 per cent, and Brussels is now "very concerned" at Ireland's economic situation.
The Cabinet has not ruled out increasing the higher rate of income tax by 1 per cent. This would bring in an additional €1bn in revenue, but there is some resistance to such a move at Cabinet level.
However, Mr Lenihan has been cleared by the Taoiseach to do "whatever is required" to steer the country out of recession, and while there is deep frustration around the Cabinet table, most ministers accept cuts will have to be made.
Mr Lenihan also admitted in the Dail last week that, contrary to his earlier denials, he is raiding the National Pension Reserve Fund, taking more than €2bn to help limit the exposure of borrowing.
The Opposition parties say that this is simply an attempt to massage the figures and ensure the situation does not look as bad as it is.
There is some good news for prospective house-buyers as the Cabinet has also agreed in principle to extend further incentives to first-time buyers, in order to help shift the "overhang in supply" of new houses.
According to Central Statistic Office figures published last Wednesday, the economy contracted by 0.8 per cent in the second quarter of this year, compared with a year earlier.
At the start of the summer, the Department of Finance stated that the tax shortfall would be about €3bn. In September, it said the gap would be €5bn. Now it claims the figure will be at least €7bn -- but could be even higher.
There is also concern about the future of the National Development Plan (NDP), which looks set to be curtailed or streamlined in light of the economic crisis.
Noel Dempsey's Department of Transport refused to deny that key aspects of the NDP are under threat.
Commenting on the budget revelations, Fine Gael's Richard Bruton said the Government must ensure the cuts do not hurt the most needy and vulnerable.
"If all that happens is that frontline services get cut and the bureaucracy remains intact, then the Government will have failed utterly. We now need to see real reform of the public sector."
Mr Bruton added that the Finance Department was trying to lower public expectations, in the hope of being able to give some positive news on Budget Day.
- Daniel McConnell
