November 17, 2011 / 12:43 PM / 7 years ago

Exclusive - Ireland to raise VAT in December budget

BERLIN/DUBLIN (Reuters) - Ireland will increase its top rate of sales tax by 2 percentage points in next month’s budget and make up the rest of the 1 billion euros (854 million pounds) it is targeting in new revenue measures through indirect taxes, documents obtained by Reuters showed on Thursday.

The Irish flag flies above the General Post Office on O'Connell Street, in Dublin, Ireland November 27, 2010. REUTERS/Cathal McNaughton

Ireland is committed to making budgetary adjustments of 3.8 billion euros for next year under its EU/IMF bailout and Finance Minister Michael Noonan has said he will not reveal the exact measures until he presents the budget on December 6.

However, according to a document presented to the budget committee of the German lower house of parliament on Wednesday, Dublin will raise the top rate of value-added tax (VAT) to 23 percent, generating an additional 670 million euros.

Under German law the budget committee has to be informed by the German government about any issues concerning the euro zone bailout fund, the European Financial Stability Facility.

“After successive budgets in which income tax burdens were raised significantly, we have decided to focus on indirect tax increases to deliver the bulk of the 1 billion euros additional tax effort required in 2012,” the document said.

“To this end, the VAT rate is being raised by 2 percentage points to 23 percent, which will generate 0.67 billion euros.”

Ireland’s deputy prime minister said the government had not yet finalised the budget.

“Where this seems to have come from is the Troika and that seems to be based on a statement which was made in the memorandum of understanding, which was entered into this time last year by the previous government which talks about an increase in the VAT rate,” Eamon Gilmore told TV3 news.

“But certainly as far as the government is concerned we have not made any decision on tax matters.”

The original memorandum of understanding, published in December 2010, refers to 1 percent VAT increases in 2013 and 2014.

The document presented to the committee — titled ‘Ireland: memorandum of economic and financial policies’ — is attached to a draft “Letter of Intent” from Irish Finance Minister Michael Noonan and the Governor of the Irish Central Bank Patrick Honohan to the International Monetary Fund, the European Central Bank and the European Commission.

The draft letter was not signed by either Noonan or Honohan. It was dated November 2011 with a space left for the exact date.

The memorandum says a further 100 million euros will be raised through a reform of capital gains taxation while around 160 million euros will be generated by a previously announced household charge.

The remainder in fresh revenue will be raised through increases in other forms of indirect taxation.

The document did not detail the 1.45 billion euros in expenditure savings Dublin is targeting but said reforming entitlements, reducing unemployment traps and improving the targeting of social supports would account for cuts to social welfare.

The earmarked adjustments mean Ireland’s government will be able to keep commitments made during February’s election campaign where it promised not to cut social welfare rates or increase income tax rates or bands.

However, the updated memorandum of understanding between Ireland and its creditors — also presented to Germany’s budget committee ahead of publication — said a broadening of the personal income tax base would form part of the 2013 budget.

The memorandum states that the government may substitute another measure for the proposed change to income taxes in consultation with its European Union, European Central Bank (ECB) and International Monetary Fund (IMF) “troika” of lenders.

Another change to the updated memorandum shows that the government is to fund its struggling credit union sector to the tune of 250 million euros by the end of the year.

RISKS TO CONSOLIDATION

The government has so far passed all of its bailout reviews since signing a 85 billion euro deal almost a year ago. According to a separate document, the troika said that while Ireland continues to perform well, significant risks remained.

Those risks included an evaporation of the improved market sentiment towards Ireland and mark down of growth prospects in the case of adverse developments elsewhere.

“The growth outlook could deteriorate significantly in the months ahead, if Ireland’s main trading partners do slide into a recession,” the document said.

“This would complicate the authorities’ consolidation effort markedly.”

There is also potential for higher-than-anticipated bank losses from continued weakness in the property market and higher-than-expected unemployment, and a risk of consolidation fatigue setting in, particularly if private sector involvement in other countries is seen as a “quicker” and less painful way to address the high debt problem.

Additional reporting by Conor Humphries in Dublin; writing by Padraic Halpin; Editing by Ruth Pitchford and Susan Fenton

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