US embassy cable - 04DUBLIN1753

UNCLAS SECTION 01 OF 03 DUBLIN 001753 
 
SIPDIS 
 
SENSITIVE 
 
E.O.  12958: N/A 
TAGS: ECON, EFIN, SOCI 
SUBJECT: IRELAND'S 2005 GOVERNMENT BUDGET 
 
REF: Dublin 1704 
 
1.  (SBU) Summary: Tax relief and social welfare spending 
increases are the marquis features of the 2005 Irish 
Government Budget, a reflection of the Government's newly 
embraced "caring" image.  The Budget provides for a 9 
percent increase in government spending over 2004, 
slightly above the increase projected in the November 18 
Budget Estimates.  Tax relief will take minimum-wage 
earners out of the tax net and will widen income tax 
bands to allow more workers to pay tax at the 20 percent 
rather than 45 percent rate.  Regarding social welfare, 
the Government will increase pension, unemployment, and 
child support payments and launch a multi-year funding 
program for the disabled.  Opposition political parties 
characterized the Budget as a populist attempt to undo 
the social "damage" done by former Finance Minister 
Charlie McCreevy.  A propitious economic environment will 
position Cowen in subsequent budgets to strengthen the 
Government's "caring" image as well as his own 
credentials to succeed Prime Minister Ahern as party 
leader over the longer term.  End summary. 
 
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Overview 
-------- 
 
2.  (U) On December 1, Finance Minister Brian Cowen 
presented to Parliament a Government Budget for 2005 that 
most prominently featured tax relief and social welfare 
spending increases.  The Budget provides for nearly euro 
45 billion in public spending, euro 3.7 billion (9 
percent) more than 2004.  This increase is above the 6-7 
percent spending jump forecast by Cowen in the November 
18 Budget Estimates (reftel).  Budgetary targets for 2005 
include: a government deficit of 0.8 percent of GDP: an 
exchequer borrowing requirement of just under euro 3 
billion, or 2 percent of GDP; and, a debt ratio of 30 
percent of GDP.  Cowen, who was appointed Minister in 
September, noted that the 2005 Budget would be his first 
installment in a three-year effort to strengthen public 
services (ahead of the 2007 general elections).  He also 
said that budgetary measures on tax relief and social 
welfare "gave the lie to those who claim that this 
Government is indifferent to the needs of some of the 
most vulnerable members of our society" (a response to 
criticism that the ruling Fianna Fail party's uncaring 
attitude toward social issues accounted for its poor 
showing in local and European Parliament elections last 
June). 
 
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Social Welfare 
-------------- 
 
3.  (U) The first pillar of the 2005 budget is a record 
euro 12.3 billon package for social welfare.  Cowen had 
announced a euro 300 million increase for social welfare 
in the November 18 Budget Estimates, and he added another 
euro 874 million to the final welfare package, for a 
total increase of euro 1.1 billion, or 8 percent, over 
2004.  Social and Family Affairs Minister Seamus Brennan 
said that funding increases would benefit 970,000 people, 
a quarter of the population, who claim regular social 
welfare payments.  Key components of the package are: a 
euro 12 per week increase in state pensions; a euro 14 
per week jump in unemployment and non-pension welfare 
benefits; and, a monthly euro 10-12 per child increase in 
child benefits.  The 2005 budget also includes increased 
funding for maternity benefits, non-child-related family 
income supplements, and respite care grants.  The total 
welfare package reverses roughly half of the social 
spending cuts introduced in the 2004 Budget. 
 
4.  (U) A centerpiece of the budget's social agenda is a 
euro 900 million package for disability services covering 
2006-2009 -- the first time that the Government has taken 
a multi-year approach to the sector.  The package comes 
in addition to a euro 2.8 billon planned expenditure on 
disability for 2005, an increase of euro 290 million, or 
11 percent, over 2004.  Total funding over the next four 
years will: provide more than 4,500 respite centers for 
the disabled; transfer roughly 600 people with mental 
disabilities out of psychiatric hospitals; establish 400 
community-based mental health facilities; and, provide 
1.2 million extra hours of home support and personal 
assistance.  Cowen noted that disability services had 
previously "been at the end of the queue" for government 
resources, but would feature prominently in future budget 
allocations.  Disability support groups welcomed the 
funding increases, but warned that the Disability Bill, 
published in October, could undermine the budget package 
in restricting the definition of "disabled" and failing 
to provide rights to disability services. 
 
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Tax Relief 
---------- 
 
5.  (U) The second pillar of the 2005 Budget is broad- 
based tax relief, estimated to cost euro 682 million. 
The central components of this pillar are: 
 
a) Personal Taxation: The standard rate tax band (with a 
personal tax rate of 20 percent) was increased by euro 
1,400 for a single person to euro 29,400 and by euro 
2,800 to euro 58,800 for a dual-income married couple. 
This widening of the standard rate tax band, the first in 
three years, means that over 52,000 workers will no 
longer have to pay tax at the higher 42 percent rate. 
(Modest wage inflation, however, could push many of these 
back into the higher tax band in the coming years.)  In 
addition, those earning the minimum wage, euro 7 per 
hour, will fall outside the tax net. 
b) Stamp Duty: The threshold at which stamp duty is 
charged to first-time buyers of second-hand houses was 
increased from euro 190,500 to euro 317,500.  Second-hand 
homes sold for between euro 317,501 and euro 381,000 will 
have stamp duty charged at 3 percent (down from 4.5 
percent), and a 6 percent rate will apply to houses sold 
for between euro 381,001 and euro 635,000 (down from 7.5 
percent).  (This form of tax relief targets young urban 
professionals who have had difficulty in recent years 
affording a first home.) 
 
c) Excise Duty: No changes were made to the main VAT 
(Value Added Tax) and excise rates in the 2005 Budget. 
Minister Cowen said he decided against excise duty 
increases on cigarettes because of hardships that the new 
smoking ban in enclosed public places had imposed on 
smokers (cigarettes sales fell by 17.6 percent in the 
first 10 months of 2004, and tobacco excise collections 
will be euro 128 million below forecast).  Cowen also 
argued that an increase in duties for cigarettes and 
alcohol would have created inflationary pressures. 
 
6.  (U) Responding to public complaints that more than 40 
Irish citizens with incomes over euro 500,000 legally 
avoided taxes in 2004, Minister Cowen announced that he 
would initiate a comprehensive reform of tax incentive 
schemes.  He has instructed the Department of Finance, in 
conjunction with the Revenue Commissioners, to evaluate 
the effect of incentive reliefs and exemptions, with the 
aim of improving tax system equity. 
 
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Capital Expenditures 
-------------------- 
 
7.  (U) The Government will spend euro 36.3 billion on 
improving the State's infrastructure in the period 2005 - 
2009, a proportion of GDP that is nearly twice the EU 
average.  Euro 6.3 billion in Exchequer capital will be 
made available in 2005, including euro 237 million 
carried over by Government Departments from 2004. 
Roughly euro 10.2 billion (28 percent) of the 2005-2009 
capital envelope will be invested in transport 
infrastructure, which the Government regards as key to 
economic competitiveness and balanced regional 
development.  In his Parliament speech, Cowen stated that 
he was "extremely conscious of the need to optimize the 
value for money from the very significant levels of 
capital funding now in place" (a response to criticism 
that capital spending in recent years had not yielded 
appreciable infrastructure upgrades). 
 
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Defense, Foreign Affairs, ODA 
----------------------------- 
 
8.  (U) The 2005 Budget provides roughly euro 758 million 
for the Irish Department of Defense, or 1.7 of total 
government spending.  The Department of Foreign Affairs 
will receive euro 197 million.  The Budget will allocate 
euro 60 million for Official Development Assistance 
(ODA), a 15 percent increase over 2004.  ODA funds will 
come out of the euro 535 million set aside for 
International Cooperation, a distinct basket from Foreign 
Affairs.  The Irish Government has also committed to 
minimum funding of euro 65 million for ODA in both 2006 
and 2007.  (With a euro 60 million outlay in 2005, ODA 
will reach 0.4 percent of GNP, in contrast to the 
Government's Millennium commitment to bring ODA to 0.7 of 
GNP by 2005.  This shortfall has prompted criticism from 
Ireland's international charitable organizations.) 
 
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Reactions 
--------- 
 
9.  (U) Opposition political parties characterized the 
Budget as an attempt to repair the social "damage" done 
by Former Finance Minister and EU Commissioner-designate 
Charlie McCreevy.  (This view holds that McCreevy 
emphasized wealth-creation to the neglect of social 
spending.)  Fine Gael spokesperson on Finance, Richard 
Bruton, described the Budget as "pretending to say sorry" 
and "designed to bury the McCreevy image."  While he 
conceded that income tax would fall for most people in 
2005, he stressed that this would not make up for 
increases in the cost of living in recent years.  Joan 
Burton, Labour's Finance spokesperson, called the budget 
a "populist" rather than "visionary" document, "full of 
half-measures."  In a reference to Fianna Fail's 2002 
election slogan of "a lot done, a lot more to do," she 
described the Budget as "some damage undone, a lot more 
to do".  Echoing these sentiments, Dan Boyle, the Green 
party spokesperson on Finance, said it would take half a 
dozen such budgets "before you would even begin to repair 
the damage the last seven budgets have done". 
 
10.  (U) Prominent businesses and social organizations 
were generally positive, though cautious, in their 
reactions to the Budget.  Most Irish firms interviewed by 
the press welcomed the Budget's tax cuts and welfare 
increases as stimuli for consumer spending, which has 
flagged in recent years.  Indigenous Irish software firms 
and the U.S. Chamber of Commerce, however, expressed 
disappointment that the Budget did not target Ireland's 
competitiveness by providing incentives for scientific 
research and development.  Social organizations generally 
praised budgetary measures to help the disadvantaged and 
disabled, though some criticized the Budget as not going 
far enough.  The Children's Rights Alliance said that 
child benefit increases would not reduce the number of 
children living in poverty.  The National Women's Council 
and labor unions also faulted the Budget for failing to 
alleviate high daycare costs for children. 
 
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Comment: Santa Cowen 
-------------------- 
 
11.  (SBU) Comment: In the spirit of the season, Irish 
newspapers have run political cartoons of Cowen dressed 
as Santa Claus, doling out tax breaks and welfare checks 
to a disaffected electorate.  The cartoons emphasize the 
point noted in reftel that the 2005 Budget was framed to 
target popular perceptions of ruling Fianna Fail party's 
indifference to social concerns.  Cowen was fortunate 
insofar as a euro 2.3 billion overshoot in 2004 tax 
revenues made possible large giveaways in social welfare 
spending for 2005, without pushing the projected fiscal 
deficit close to the EU Growth and Stability Pact ceiling 
of 3 percent of GDP.  Cowen also stands to benefit from 
Ireland's most propitious macro-economic environment in 4 
years, with GDP growth of at least 5 percent predicted 
through 2006 and an inflation rate that, after many 
years, has converged toward the 2 percent eurozone 
average.  The Finance Minister is thus positioned to 
strengthen the Government's "social" credentials further 
in the two budgets that remain before the 2007 general 
elections.  Those budgets will likely extend benefits 
beyond the disadvantaged to more of the middle class, 
with possible child daycare subsidies and additional tax 
relief for dual-income families.  Ireland's positive 
budgetary and macro-economic outlook will also improve 
Cowen's own credentials as the reported favorite 
candidate to succeed Prime Minister Ahern as Fianna Fail 
leader over the longer term. 
 
 
KENNY