Wednesday, October 15, 2008

Ireland forced to raise taxes to address budget constraints

Here is a perfect example of the difference between Ireland--a member state of the EU that is not a currency issuing nation--and the U.S, which is a currency issuer.

Ireland is forced to raise taxes in order to address its deficits, otherwise the government cannot function. Same holds true for other EU member states that use the euro. These countries are functionally like states within the U.S. If they are constrained by lack of funds, they could shut down.

It's not the case with the U.S. which is a currency issuer and can quite easily continue to credit bank accounts to keep things running. (Even to help out a state, if necessary.)

Higher rates in Europe will exacerbate the current economic contraction, forcing more bank failures and, ultimately, a true test of the bank desposit "guarantee" and even a test of the euro itself. The euro may be the ultimate casualty in all of this. Very few people are focused on this, yet it could be the biggest trade of all time!

Read article below:

Ireland to raise taxes, faces swelling deficit
Tuesday October 14, 3:47 pm ET

By Shawn Pogatchnik, Associated Press Writer

Ireland to raise taxes, slash spending in crisis budget; faces surge in deficit, unemployment

DUBLIN, Ireland (AP) -- Ireland is raising income taxes and slashing spending in a budget proposal unveiled Tuesday -- and government officials will lead by example and cut their own paychecks. Finance Minister Brian Lenihan said painful changes were required to cope with an economy facing its first recession since 1983.

Often shouting to drown out the heckling of opposition lawmakers, Lenihan told the Parliament his package of tax hikes and spending cuts represented "a call to patriotic action." He said government ministers would lose 10 percent of their salaries.

Lenihan forecast that the economy would shrink by more than 1.5 percent this year and by another 1.0 percent next year, while unemployment would rise from its current 10-year high of 6.3 percent to an average of 7.3 percent in 2009. That means tax collections would fall and welfare costs would rise.

Lenihan moved up his government's usual budget speech from December to reflect a stunning reversal of Irish fortunes following the Celtic Tiger boom of 1994-2007.

He said he would tax people who earn up to 100,000 euros ($137,000) an additional 1 percent; those earning more will pay an additional 2 percent.

Meanwhile, national sales tax on most purchases will rise from 21 percent to 21.5 percent. Tax on bank deposits would rise from 20 percent to 23 percent.

A new 10 euro ($13.70) tax on most airline tickets for passengers departing Ireland will be imposed in March. He said this measure would raise 95 million euros ($130 million) next year in this aircraft-dependent island nation.

Lenihan also immediately raised taxes on gasoline, wine and cigarettes -- by 8 euro cents (11 cents) per liter, 50 euro cents (70 cents) per bottle and 50 euro cents per pack.

He said the government plans to shut down 41 state-funded agencies and close army bases, but specified none of those targeted.

However, he proposed to cut or keep steady taxes on Ireland's businesses. That reflects Ireland's dependence on more than 1,000 foreign-owned companies -- a foundation of Ireland's 1990s economic rise -- which might be mulling cheaper bases in Eastern Europe or Asia.

He said Ireland's 12.5 percent business tax rate "will continue to be a central part of Ireland's economic brand." He said businesses soon will be able to reclaim up to 25 percent of their costs on research and development, up from 20 percent rate.

He said that, even if his budget works as projected, Ireland still faces a record 2009 budget deficit of 12 billion euros ($16.5 billion) -- 6.5 percent of its expected gross domestic product.

As part of its membership in the 15-nation euro currency, Ireland is supposed to keep deficit spending under 3 percent of GDP. But Ireland has had no red-ink trouble until this year.

Lenihan said Ireland's 2009 deficit would have risen above 8 percent of GDP without Tuesday's mix of tax hikes and spending cuts.

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