IFA Report on the 2009 Budget

Introduction – Budget 2009

Part I Government Expenditure in relation to Agriculture/ Estimates for 2009

Part II Taxation

Part III Social Policy

Part IV The Public Finances and the National Economy

Overview of 2009 Budget INTRODUCTION – BUDGET 2009

On 3rd September 2008, the government, taking account of the deterioration of the Irish economy, and in particular the major shortfall in tax revenues, announced its decision to present the budget for 2009 on October 14th 2008, rather than the usual date of the first week in December.

The delivery of the budget three months before the end of the year may impact on the accuracy of the projected revenue and expenditure figures for 2009, which are based on the expected 2008 outturn. Unlike previous budgets, where receipts and expenditures for the year up to December 1st were available, the figures that underlie the estimated outturn for 2008 and projected expenditures and revenues for 2009 are based on information that is available up to end of September 2008 only. In general, tax revenues are highest in the final quarter of the year. As a result, the final tax returns for the end of the year may differ significantly from those that have been estimated at this point in the year. This may then impact on the actual expenditure that will occur in 2009.

The largest contributor to the decline in government finances has been the fall in tax revenues received in 2008 compared with the projected tax revenues estimated at the start of the year. The tax revenues for 2008 are expected to be approximately €42.4 billion, which is 13.1%, or €6.4 billion below the projected figure of €48.8 billion, which was estimated at the start of 2008. At the same time, current expenditure on the public services is running slightly above expectations, with projected net expenditure of €40.9 billion by end 2008, which is 4.5% above the €39.2 billion estimated at the start of the year.

Overall, after a number of years of budget surplus, the government has now projected a very large budget deficit (i.e. borrowing requirement) of €10.4 billion, or 5.5% of GDP in 2008. This differs greatly from the original estimates at the start of 2008, which projected that the government would run a small budget deficit of €1.8 billion or 0.9% of GDP. In 2009, this trend is set to continue. With lower expected tax revenues, due to a contracting economy, and with expenditure pressures remaining, the government is projecting a budget deficit of over €12 billion or 6.5% for 2009.

This report is divided into the following sections:  Part I outlines the changes in government expenditure in relation to Agriculture for 2009;  Part II identifies the main taxation measures that have been introduced in the 2009 budget;  Part III outlines the social policy changes in the 2009 budget; and  Part IV provides a summary of the public finances and national economy.

Finally, an overview of the main measures of Budget 2009 is presented, including the main budgetary decisions impacting on farmers.

2 PART 1: GOVERNMENT EXPENDITURE IN RELATION TO AGRICULTURE – ESTIMATES FOR 2009

Department of Agriculture, Fisheries and Food (DAFF)

The following is a summary of the gross expenditure by the Department of Agriculture, Fisheries and Food (DAFF), the receipts to the Department (mainly from the EU), and the net expenditure for 2008 and 2009. (The estimates do not include expenditure fully funded by the EU, such as the Single Payment, but gross expenditure includes measures part-funded by the EU, and the EU funding element is deducted under “receipts”).

DAFF (€m) 2008 estimate 2008 forecast 2009 estimate % change from 08 outturn outturn Gross expenditure 1,868 2,063 1,803 -12.6% Receipts 413 413 363 -12.1% Net expenditure 1,455 1,650 1,440 -12.7%

Relative to the 2008 forecast outturn, gross expenditure by the DAFF for 2009 is down by 12.6%. Net expenditure by the DAFF, i.e. the cost to the National Exchequer, is down by 12.7%.

Main Items of Expenditure by DAFF (€m) Gross Expenditure 2008 2008 outturn* 2009 % change from estimate estimate 2008 Pay and administration 311.7 311.7 308.8 -0.9% Research and training 42.5 42.5 37.0 -12.9% Food safety, animal health and welfare 185.6 185.6 181.4 -2.3% o/w TB & Brucellosis 52.4 57.5 56.9 -1.0% o/w BSE 12.2 12.2 11.0 -9.8% o/w Suckler herd welfare/quality 33 33.0 44.0 33.3% Market supports 19.4 19.4 27.0 39.2% Disadvantaged Areas 257 257 220.4 -14.2% REPS 332 310 355.0 14.5% Land mobility 66 60 56.7 -5.5% o/w Early retirement 56 50 47.0 -6.0% o/w Installation 10 10 10.0 0.0% Development of Agriculture & Food 216 411 196.0 -52.3% o/w Farm Waste Management 129 377 125.0 -66.8% o/w Farm Improvement Scheme 15 11 15.0 36.4% Forestry and Bioenergy 121 121 127.7 5.5% Teagasc 132.5 132.5 122.0 -7.9% Bord Bia 27.5 27.5 25.0 -9.1% Fisheries 128.2 128.2 117.7 -8.2% Other Services + Food Aid 28.8 28.8 28.9 0.5% (* including some IFA estimates)

It should be noted that the 2008 estimated allocation for the DAFF of €1,456 million was approximately 25% above the €1,165 million spent in 2007. In addition to this a supplementary budget allocation of €195 million was made in the third quarter of 2008 for the Farm Waste Management Scheme.

3 MAIN CHANGES IN EXPENDITURE OR POLICY BY DAFF

Food Safety, Animal Health and Welfare - Suckler Cow Welfare Scheme The funding for the Suckler Cow Welfare Scheme is to be restricted to €250m or €50m p.a. as per the Partnership deal. Based on Department of Agriculture application estimates of 960,000 cows, the full annual costs would amount to €77m p.a., leaving a funding shortfall of €135m or 35%.

The Department has confirmed that they will pay the full €80 per cow in 2008/09. In the subsequent 4 years payment could be as low as €40 per cow depending on the final level of participation. In addition, because of the inadequate funding provision, payment may be delayed by up to 12 months.

REPS The Budget for REPS will increase by 7% bringing the allocation to €355m in 2009. This should be sufficient to meet this demand-led scheme with up to 60,000 farmers in the scheme.

Disadvantaged Area Payments A reduction of €34m in Disadvantaged Area payments will have a significant impact on hill areas and full-time drystock farmers. The allocation to the scheme in 2009 is €220m, which represents a 14% reduction.

To implement the reduction the maximum number of hectares eligible for payment decreases from 45 ha to 34 ha. This represents a maximum cut in Mountain and Severely Handicapped areas of €1,055 and €905 in less Severely Handicapped Areas. There is no cut for farmers who have less than 34 ha. In addition the minimum stocking level of 0.15 lu per ha will increase (stocking level not yet decided).

IFA initial estimate is that the average loss will be €566 for around 60,000 farmers. The maximum payment in 2009 in mountain areas will be €3,401, severely handicapped is €3,264 and €2,797 in less Severely Handicapped Areas.

Land Mobility The Early Retirement and Installation Aid Scheme have been suspended for applications from close of business on 14th October. The allocation to both schemes for ongoing expenditure in 2009 is reduced by €10m to €56.7m.

Forestry €127m is allocated to Forestry, which is a 6% increase. The Department has indicated that 6,000 ha will be planted next year, which will be in line with the plantations in 2008.

Development of Agriculture & Food A total of €196m is allocated to investment in the Agriculture Sector. Of this €125m is allocated to the Farm Waste Management Scheme. This is totally inadequate to meet the carryover cost of the FWM to an estimated 17,000 farmers of around €425m in grant aid. In 2008, €377m was paid out to about 10,500 farmers.

€15m is allocated to the FIS which is the equivalent amount allocated in 2008. 5,000 farmers who applied between the 22nd and the 31st October are still not being approved to join the scheme.

4 Other Government Departments – Expenditure On Agriculture/Rural Issues

Community, Rural and Gaeltacht Affairs The following table contains the elements of most direct relevance to farmers and farm families.

Expenditure (€m) 2008 est. 2009 est. Rural Development (incl. LEADER) 23 27 CLAR 21.2 18 Rural Social Scheme 50.3 50.9 Rural Recreation & Rural Development Schemes 8.6 7.1

Social and Family Affairs The allocation for Farm Assist was €85.2m in 2008 and €88.5 million in 2009.

Environment, Heritage and Local Government The allocation for the National Farm Plan Scheme under the National Parks and Wildlife Service heading is €5 m

5 PART II: TAXATION MEASURES

INCOME TAX

Personal Taxation The main changes to personal income taxation, which take effect from 1 January 2009, are as follows –

Changes to income tax

New standard rate bands from 1 January 2009:

Current Proposed Change Single €35,400 €36,400 €1,000 Married one income €44,400 €45,400 €1,000 Married two incomes €70,800 €72,800 €2,000 Income levy A new income levy of 1% on income up to €100,100 and of 2% on income in excess of €100,100 has been introduced (this excludes social welfare payments, contributory and non-contributory pensions).

Note: The levy is paid on gross income, before deductions for capital allowances or contributions to pensions.

Tax credits There is no change in the Personal Tax Credit or PAYE Tax Credit.

Mortgage Interest Relief The rate of mortgage interest relief is being increased from 1 January 2009 for first time buyers from 20% to 25% in years 1 and 2, and to 22.5% in years 3, 4, and 5. The additional relief will be available to new first time buyers and buyers who have bought a house in the last 4 years.

The rate of mortgage interest relief for non-first-time buyers is being recuded from 20% to 155 from January 2009.

DIRT The rate of retention tax on deposit interest and rate of tax on life assurance policies and investment funds will be increased from 23% to 26% from January 2009.

Health Expenses Health expenses relief will be granted at the standard rate only from 1 January 2009, with the exception of nursing home expenses, which will be standard rated from 1 January 2010.

Pensions The annual earnings ceiling limit for determining maximum tax relievable contributions for pension purposes is being set at €150,000 for 2009 as compared with the 2008 limit of €275,239.

6 VAT The standard rate of VAT will be increased from 21% to 21.5% with effect from 1 December 2008.

EXCISES Mineral oil and petrol The excise on petrol will be increase by 8 cent per litre with effect from midnight on 14 October 2008. This increase will not apply to diesel.

FARM TAXATION Stamp Duty Relief for Young Trained Farmers Extended for four years to 31 December 2012.

Stamp Duty for Farm Consolidation Extended for two years to 30 June 2011.

Stock Relief Extended for two years to 31 December 2010.

Farm Pollution Control Capital Allowances Extended for two years to 31 December 2010.

Flat rate VAT addition The flat rate farmer VAT addition remains unchanged for 2009 at 5.2%.

STAMP DUTY Currently the top rate of stamp duty on non-residential property (including farmland) is 9%, which applies to amounts over €150,000. The top rate has been reduced to 6%, applying on amounts over €80,000. This change is effective on transactions executed from 15th October 2008.

CAPITAL GAINS TAX The rate of CGT has been increased by 2% from 20% to 22%, applying on disposals made from 14th October 2008. The payment dates for CGT have also been changed.

THIRD-LEVEL STUDENT SERVICES CHARGE The third-level student services charge may increase in 2009/2010 up to €1,500 in individual institutions.

7 PART I II: SOCIAL POLICY

Social Welfare Weekly Rates (from January 2009)

Main Social Insurance/Assistance Rates (€/week ) 2008 2009 Increase(%)

State Contributory Pension

Personal rate (<80) 223.3 230.3 3.1% Incl. qualified adult <66 372.1 383.8 3.1% Incl. qualified adult >66 423.7 436.6 3.0% State Non-Contributory Pension

Personal rate (<80) 212 219 3.3% Incl. qualified adult <66 352.1 363.7 3.3% Jobseekers Allowance/ Farm Assist

Personal rate 197.8 204.3 3.3% Incl. qualified adult 329.1 339.9 3.3% Increase for Qualified Child

General 24 26 8.3%

Farm Assist

Farm Assist income thresholds and rates will increase in line with the increase in the Jobseekers Allowance and the Increase for Qualified Child. However, the calculations are somewhat complex because of the existence of both the 30% income disallowance and the child disallowance.

IFA will prepare a separate information note on the changes to Farm Assist shortly.

Children

For children aged 18, a half rate Child Benefit payment will be made from January 2009. From 2010, entitlement for Child Benefit will cease once the child has attained the age of 18 years (to compensate social welfare and low-income families for this, the Qualified Child payment in respect of children aged 18 will increase to €41).

Medical Card Eligibility

Automatic entitlement to a medical card is being ended for over 70s.

An annual cash grant of €400 will be paid to people over 70 who do not qualify for a medical card or GP Visit card and whose weekly gross income is up to €650 (€1300 for a married couple).

8 PART IV : THE PUBLIC FINANCES AND NATIONAL ECONOMY

Budget Balance (Budget surplus or deficit):

The challenge faced by the government in framing a budget is to get a balance between the expected revenues that will be generated through taxation and the expenditure requirements of the economy. In 2008, due to a downturn in economic activity in Ireland, the tax revenues have fallen significantly, while expenditure requirements have stayed steady or risen slightly. Therefore, the government will be required to run a budget deficit in order to make up the disparity between its revenue earned and expenditure required. A requirement under the EU “Stability and Growth Pact” (SGP) is for member states in the euro to normally have balanced budgets, with a limit on budget deficits to not exceed 3% of GDP in years of economic downturn. The measure of budget balance used is termed the General Government Balance (which is a wider definition than just the exchequer balance).

The projected General Government balance for 2008 in last year’s budget was a deficit of €1,845 million or 0.9% of GDP; the outturn was much less favourable, with a projected end of year deficit of €10,395 million, or 5.5% of GDP. The 2009 post-Budget estimate is a General Government deficit of €12,162 million or 6.5% of GDP. These projected figures are significantly above the 3% deficit limit. But the rules on the SGP are flexible to allow for a deficit that has occurred when it is the result of negative annual GDP growth. As this is the case with Ireland in 2008 and projected for 2009, the breach of the 3% limit should not incur a penalty for Ireland.

Year General Government Balance G.G.B. as % of (€m) GDP 2004 2,117 1.40% 2005 497 0.30% 2006 3,980 2.30% 2007 900 2.23% 2008 -10,375 -5.50% 2009 -12,162 -6.50% (- = Deficit)

1% of GNP (€1,584m in 2009) is put into the National Pensions Reserve Fund (NPRF) annually to help pre-fund future pension liabilities of the state (both PRSI and public service pensions). This does not affect the General Government Balance as it is accounted for as a transfer of an asset rather than as expenditure. A review of the NPRF is currently being conducted, which will be completed by the end of the year.

General Government Debt:

The key measure of government debt is the General Government Debt : GDP ratio. The general government debt: GDP ratio stood at 25% in 2007. The ratio rises to 36% in 2008, and is forecast to rise to 43.4% of GDP in 2009, and to 47.5% by 2010. While Ireland has had one of the lowest debt: GDP ratios in the EU (with average EU25 figure at 60%), the budget data shows that Ireland’s debt level is rapidly increasing. The level of Government debt in 2008 is approximately €67.4 billion.

The Spending/Taxation balance and the Role of Economic Growth: 9 The budget each year sets out the Government's priority as regards the balance between (i) public expenditure, (ii) taxation adjustment and (iii) budget surplus or deficit. The rate of economic growth has a crucial impact on the growth in tax revenue and thereby the growth in public expenditure. The table below outlines the pattern of growth in real GNP in the economy since 2004.

Year Growth in Real GNP (%) 2004 3.70% 2005 5.80% 2006 6.30% 2007 4.10% 2008 -1.60% 2009 * -1.00% * estimate

Whereas the growth rate for 2008 projected in last year’s budget was 2.8%, due to a contraction of the economy, the expected outturn will be a negative growth of –1.6%. For 2009, the government is projecting a further 1% decline in the size of the economy.

Public Expenditure:

Net Current Expenditure and Public Service Pay

The following table gives the trend in the net current expenditure on the public services. The 2009 Budget outcome provides for a modest increase of 2.6% in current expenditure, mainly as a result of an 8.4% increase in spending on Social Welfare, a 2.7% increase in spending on education and 2.1% increase in spending on Health. Spending in all other main areas is broadly static or slightly reduced.

Net Current Expenditure on the Public Services Year €m. % Increase

2004 27,247 7.1% 2005 29,723 9.1% 2006 32,921 10.8% 2007 37,100 12.7% 2008 40,943 10.4% 2009 41,988 2.6%

The net cost of the exchequer pay and pensions bill included in the above is €18,826 m in 2008 and €19,448 m in 2009, an increase of 3.3%. Approximately 41% of pay goes to Health and 33% to Education.

The budget outlined a programme of public service reform, focussing on public service pay and numbers. Following the report from the Task Force on the Public Services due in November, a review of public service numbers in all branches of government is to be undertaken to assess whether resources are being used efficiently. In addition, a targeted voluntary early retirement scheme will be introduced for the HSE. This scheme will be extended to other areas of the public service where surplus staff are identified.

10 The number of State bodies and agencies will be reduced by 41, and the number of army barracks will be reduced. Finally, pending a review of the decentralisation programme in 2011, further implementation of the remaining decentralisation programme will be deferred.

Capital Expenditure

The following gives the trend in voted capital expenditure on the public services for recent years, and the provision for 2009 of €7,765 million, a decrease of 8.8 %.

Growth in Net Capital Expenditure

Year €m. % Increase

2004 5,398 0%

2005 5,835 8%

2006 6,631 14%

2007 7,700 16%

2008 8,513 11%

2009 7,765 -9%

The result of this decrease in funding is that the scale of the capital programme (National Development Plan) has been reduced, with a stated focus now on projects that should add to

11 the economy’s productive capacity and employment. Key features of the capital programme include continuing work on major inter-urban roads, improvements in public transport, such as the LUAS extension, and investment in water services. In addition, €581 million will be spent on the school building programme and €1.4 billion on capital housing projects.

Tax Revenue:

The total tax revenue was projected to increase in the 2008 budget by 3%, from €47,325 million to €48,776m. However, the 2008 outturn of €42,360 million was 13.1% below this projection, which is a shortfall of €6,416 million. The Budget projection is that taxation is set to fall to €41,210m in 2009, a decrease of 2.7% (see table on Detailed Tax Revenue)

Total Tax Revenue

Year €m. % Increase 2004 35,700 12.4%

2005 39,308 10.1%

2006 45,452 15.6%

2007 47,325 4.1%

2008 42,360 -10.5%

2009 41,210 -2.7%

The main sources of tax revenue are Income Tax, VAT, Excise, Corporation Tax, Stamp Duty and Capital Gains Tax (CGT). Although the returns from each of these sources were below those projected for 2008, the shortfall in tax revenues was not evenly distributed. Taxes linked to construction-related activities, e.g. Stamp Duty and Capital Gains Tax experienced the largest difference between projected and actual revenues, as outlined in the table below. Outturn for 2008 for CGT was only 54% of the estimated revenue at the start of 12 the year. For Stamp Duty, this figure was 61%. In 2009, the projected tax revenues of €41,210 million reflect the further contraction in the economy, including the low level of activity in the construction sector.

Detailed Tax Revenue (€ million)

2008 Outturn as a % Source 2008 estimate 2008 outturn of estimate 2009 estimate Value-Added Tax (VAT) 15,225 13,525 89% 13,250 Income Tax 14,170 13,200 93% 13,400 Corporation Tax 6,665 6,000 90% 5,680 Excise 5,885 5,539 94% 5,434 Capital Gains Tax 3,180 1,710 54% 1,350 Stamp Duties 2,950 1,810 61% 1,530 Capital Acquisitions Tax 400 320 80% 310 Customs 300 255 85% 255 Total 48,776 42,360 87% 41,210

The National Economy / Ireland's Stability Programme:

A feature of the budget is the publication of Ireland's Stability Programme, i.e. economic and budgetary projections for the next 3 years, in the framework of Ireland's membership of the euro. As the following table shows, the economy is expected to contract in 2009 by approximately 1%, but growth is assumed to resume in 2010 (although some commentators consider this return to growth by 2010 to be very optimistic). The fall in fixed investment reflects the decline in construction activity, particularly in the housing sector. The assumptions on personal consumption figures also seem optimistic and are very dependent on factors in the rest of the economy, such as employment. The reduction in the inflation rate reflects a number of factors including the slowdown in the economy, the recent reduction in oil prices and the expectation that the increases in food commodity prices of the last year have now come to an end.

Economic Outlook (Percentage Volume Changes) Economic Outlook (% volume changes) 2008 2009 2010 2011 Gross Domestic Product (GDP): -1.3 -0.8 2.7 3.7 Gross National Product (GNP): -1.6 -1 2.4 3.5 Expenditure on GNP: Personal consumption: 0.7 0.5 1.7 2.4 Public consumption: 3.9 0.7 0.6 0.4 Fixed investment: -19.2 -17.2 3.5 5.5 Exports: 2.5 2.5 3.4 3.7 Imports: -0.8 -1 2.2 2.3 Inflation 3.4% 2.2% 1.8% 1.6% Employment growth (%) 0 -0.9 0.5 1.2 Unemployment rate (%) 5.8 7.3 7 6.5 Labour productivity -1.3 0.2 2.1 2.4

Public Finances (% of GDP) Finally, the government balance is expected to be in deficit for the next number of years. The National Debt: GDP ratio will also increase significantly, from 36% in 2008 to 43.4%

13 in 2009, and will continue to increase up to 2011.

Public Finances ( % of GDP) 2008 2009 2010 2011 Government revenue 34.6 35.3 35.9 36.2 Government expenditure 40.1 41.8 40.7 39.1 Government balance -5.5 -6.5 -4.7 -2.9 Debt : GDP ratio (%) 36 43.4 47.5 47.8

14 OVERVIEW OF 2009 BUDGET

Public Finances: Economic growth in Ireland stood at 4.1% in 2007 (in GNP terms) but the economy fell into recession in 2008, and is projected by government to continue in recession in 2009. The most dramatic consequence of the recession is for tax revenue, which was down by 10.5% in 2008, and is expected to be down again in 2009, despite the tax increases announced in the budget.

The lower rate of tax revenues will impact on the amount of public expenditure that can be undertaken. The 2009 budget involves a 0.6% increase in public expenditure, comprising a 2.6% increase in current expenditure and a decline of almost 9% in capital expenditure.

The General Government balance for 2009 is a deficit of 6.5% of GDP. Although this figure exceeds the 3% limit of the Stability and Growth Pact, it is unavoidable in order to meet the public expenditure requirements, given the significant decreases in tax revenues available to the government.

Inflation: The policy of the European Central Bank (ECB) is to achieve an inflation rate of 2% or less in the euro zone overall. Ireland’s inflation rate in 2008 is 3.4% and for 2009, the projected inflation rate is 2.2%.

Economic Outlook: The Government is projecting a return to economic growth in 2010 (GNP growth of 2.4%). This may be an optimistic assumption if the global economy is in recession. Clearly the government has limited means with which to stimulate the economy, and Irish consumer expenditure is likely to be weak.

Benefits or Costs to Farmers: Agriculture and farm families are affected by the Government expenditure decisions and taxation decisions for 2009 in the following ways:

 Inadequate DAFF funding for the Farm Waste management scheme for 2009;

 In addition, probably inadequate funding for the Farm Improvement Programme and no indication of progress on the currently excluded 5,000 applicants from October 2007;

 Cutback in payments under the Disadvantaged Areas Scheme;

 Suspension of the Early Retirement and Installation Schemes;

 No increase in funding for the Suckler Cow Welfare Scheme above the €250 million already decided, despite the high number of applicants. This will result in reduced payment rates for 2009-2012, possibly to €40 per cow;

 A 1% income levy, which will bear more heavily on farmers than employees, as it will apply on gross income before any deductions for capital allowances;

 Finally, a number of existing tax reliefs for farming have been renewed. These are Stamp Duty relief for young trained farmers, Farm Consolidation Stamp Duty relief, Stock relief and Farm Pollution Control capital allowances.

15 Rowena Dwyer Con Lucey Gerry Gunning Chief Economist Farm Business Committee Rural Development Committee

15th October 2008