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A government U-turn on taxes

Finance Minister Michael Noonan's refusal to rule out any tax increases in next December's Budget provides the strongest indication so far that this Government is preparing to renege on its promise, made in the Programme for Government just three months ago, not to increase income tax rates or cut tax credits and bands.

With Environment Minister Phil Hogan having already announced plans for a property tax -- sorry, household charge -- from the beginning of next year, it is becoming depressingly clear that, despite the reformist rhetoric we were treated to during the general election campaign, our new Government is more inclined to push up taxes rather than take the necessary tough decisions.

This is despite the fact that the consequences of the failure of the previous government to bite the bullet and push up taxes instead are now becoming obvious. Already the EU and the IMF have slashed their forecasts for Irish economic growth this year to just 0.6pc. These anaemic economic growth forecasts make a nonsense of the assumptions underlying last November's four-year plan, which formed the basis of the EU/IMF bailout.

For what it is now worth, the four-year plan envisaged average annual economic growth of 2.75pc in the four years to the end of 2014. These strong economic growth forecasts, which even at the time most neutral observers reckoned were excessively optimistic, were vital if the State was to keep tax increases within tolerable parameters.

Of the €11bn growth in annual tax revenues forecast by the four-year plan, €6bn was to come from tax increases with the remaining €5bn coming from economic growth. In other words, the previous government was relying on higher economic growth to deliver almost half of the forecast growth in tax revenues.

With the economy already flat-lining, relying on economic growth to push up annual tax revenues by €5bn over the next four years requires optimism of heroic proportions. Barring a miraculous turnaround in our economic proportions, the €5bn of extra tax revenues which the previous government had hoped would come from higher growth will not now materialise. Hence, the tax-raising noises now emanating from Michael Noonan and cabinet colleagues.

However, any attempt to bridge the growing revenue gap with even more tax increases will make a bad situation even worse. If the tax increases already imposed and proposed have had such a devastating impact, just imagine what a further €5bn of tax increases will do. It doesn't even bear thinking about.

Buoyed up by the feel-good factor generated by the royal and presidential visits and public relief that their hugely unpopular predecessors had finally been forced from office, this Government has enjoyed an extended honeymoon period.

However, reality is now beginning to intrude. The much-ballyhooed "renegotiation" of the bailout quickly fizzled out and now the Government is faced with the unpalatable choice of further spending cuts or tax increases. It is time for Taoiseach Enda Kenny and Michael Noonan to be bold. They must be prepared to show their domestic and external opponents some steel. If that means thinking the unthinkable and acting accordingly, then so be it.

Irish Independent