Overview Fiscal Adjustment - a multi-annual perspective - - PowerPoint PPT Presentation

Budget 2012:

Presentation to IPA Seminar

Derek Moran, Tax Policy Unit, Department of Finance

9th December, 2011 www.taxpolicy.gov.ie

Overview

• Fiscal Adjustment - a multi-annual perspective
• Cumulative impact of policy adjustments
• Future tax policy orientation?
• Some Observations

Economic downturn…

with correction in domestic construction sector; GDP declines - contracted by 3% in 2008, 7% in 2009 and 0.4% in 2010; cline of 12.6%.

Real GDP

Source: Reuters EcoWin

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 00 01 02 03 04 05 06 07 08 09 10 11 E U R (billion s) 30.0 32.5 35.0 37.5 40.0 42.5 45.0 47.5 12.6% decline in real GDP peak to trough

Fiscal Consequences……

• 12

12 24 36 48 2005 2006 2007 2008 2009 2010 2011 201 2 2013 2014 2015

Year

1 .6 3.0 0.1

• 7.3
• 1

1 .7

• 1

1 .2

• 10.3
• 8.6
• 7.5
• 5.0
• 2.9

Underlying GG Expenditure GG Revenue Underlying GG Balance

Budgetary Consolidation

1 billion over six policy announcements between July 2008 and end-2010; epresents approximately 13% of GDP;

1.3 2.1 revenue & other

• 6. December 2010 (2011 Budget)

2.7 4.3 expenditure

• 5. December 2009 (2010 Budget)

1.3 2.1 expenditure

• 3. February 2009

2.2 3.6 revenue

• 4. April (supplementary Budget)

1.1 1.8 expenditure

• 2. October 2008 (2009 Budget)
• 1. July 2008

Adjustment package

2.5 3.9 expenditure 1.2 2.0 revenue 0.6 1.0 expenditure

Estimated Saving % GDP Estimated Saving €bn Main consolidation form

Budgetary Consolidation 2012-2015

0.7 1.3 expenditure 2015 0.6 1.1 revenue 1.4 2.25 expenditure 2013 0.8 1.2 revenue 1.2 2.0 expenditure 2014 2012

Adjustment package

0.4 0.7 revenue 1.0 1.6 revenue 1.4 2.2 expenditure

Estimated Saving % GDP Estimated Saving €bn Main consolidation form

Impact on Incomes

Source: ESRI

Impact on composition of Tax Receipts

27 29 32 36 36 40 30 31 33 32 32 29 13 13 14 15 15 14 15 14 12 12 12 12 8 7 4 3 3 8 7 4 2 2 2 3 0% 20% 40% 60% 80% 100% 2006 2007 2008 2009 2010 2011f Income Tax Value Added Tax Customs & Excise Corporation Tax Stamp Duties Capital Taxes

Impact on Exchequer Tax Receipts from Peak

2500 5000 7500 10000 12500 15000 2005 2006 2007 2008 2009 2010 2011f € million Income Tax VAT Corporation Tax Customs & Excises Capital Taxes Stamps

Department of Finance 2011 forecast Peak years for various tax revenues

Impact on OECD Tax Wedge 2008

Tax Wedge OECD Members 2008 Single Individual on AIW

10 20 30 40 50 60

Belgium Hungary Germany France Austria Italy Sweden Finland Czech Republic Greece Denmark Turkey Netherlands Slovak Republic Spain Norway Portugal Luxembourg Poland United Kingdom Canada Japan Switzerland United States Iceland Ireland Australia New Zealand Korea Mexico

Tax Wedge

Impact on OECD Tax Wedge 2011

Tax Wedge OECD Members 2011 Single Individual on AIW

10 20 30 40 50 60 Belgium France Germany Austria Italy Hungary Sweden Slovenia Czech Republic Finland Estonia Spain Netherlands Denmark Slovak Republic Portugal Turkey Norway Greece Poland Luxembourg United Kingdom Iceland Ireland Japan Canada United States Australia Switerzland Israel Korea New Zealand Mexico Chile Tax Wedge

Impact on markets (response to improving conditions)

et, reduction of EFSF/EFSM/IMF interest rates, progress on fiscal deficit, yields have fallen by more than 6 per cent from July peak.

Ireland 10 Year Bond Yield

Source: Reuters EcoWin

Jan 10 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 11 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Percent 4 5 6 7 8 9 10 11 12 13 14 15

Revenue Adjustments

2009 – 2011

• Adjustment led by income tax
• MTR increase from c. 43% to 52%
• OECD – Ireland the most progressive income tax

system among EU members

2012

• Shift in emphasis to indirect tax
• VAT, Carbon, Household Charge etc.

…………..and pre-Budget Submissions

700 Budget 2012 1064 Budget 2011 809 Budget 2010 327 Supplementary Budget 2009 313 Budget 2009 289 Budget 2008 Pre Budget Submissions

Future tax changes - Guiding Principle (?) OECD “Hierarchy” of Taxes

Property Taxes Consumption Taxes Personal Income Taxes Corporate Taxes

Most Harmful Least Harmful

10.6% 32.2% 41.5% 25% 28% 23.2% 23.8% 17.5% 16.5% 12.6% 12.7% 19.1% 16.8% 16.7% 28.4% 14.4% 32.8% 31% 27.4% 14.8% 8.8% 22.7% 23.9% 18.2% 23.6% 22.5%

2010: Effective CIT Rates

<20% >25% 20-25%

24.6%

Source: Table II-4.3 Effective Average Corporate Tax Rates, non financial sector Taxation Trends in the EU, 2011, Eurostat

• 2

. 8 % 15% 18% 19% 15% 19% 25% 22% 22% 20% 21% 19% 25% 19% 19% 15% 21.5% 16% 19.6% 20% 19% 20% 20% 20% 20% 19% 25%

2009: Change in VAT rate since 2008 Decrease Increase No change

21%

• 2

. 8 % 15% 18% 23% 15% 19% 25% 23% 22% 20% 21% 21% 25% 19% 20% 17.5% 21% 18% 19.6% 20% 24% 20% 20% 21% 20% 19% 25%

2010: Change in VAT rate since 2008 Decrease Increase No change

21%

• 2

. 8 % 15% 18% 23% 15% 19% 25% 23% 23% 20% 22% 21% 25% 20% 20% 20% 21% 18% 19.6% 20% 24% 20% 20% 23% 20% 19% 25%

2011: Change in VAT rate since 2008 Decrease Increase No change

21%

• Ireland is recovering from a very deep downturn:

– Growth is returning, albeit export led at this stage. – Relatively strong growth is expected over the medium-term. – The economy’s underlying strengths remain in tact.

• There has been a significant policy response:

– On track to correct the excessive deficit by 2015. – Large improvement in competitiveness. – Jobs initiative will assist in employment creation.

• EU/IMF Programme is on track:

– First four quarterly reviews completed. – Policy implementation strong.

• No complacency over challenges ahead.

Some Observations Some Observations