Jim O’Leary provides an extensive analysis of the options for this not-so-mini budget here.
Deutsche Bank have an online summary analysis of the problems facing the Irish economy (hat tip Turbulence Ahead). Overall, it provides a reasonable account of the current situation. However, it does perpetuate the misleading impression that the the scale of the Irish banking system is extraordinarily large relative to its GDP. As has been noted repeatedly on this blog and elsewhere in the domestic media, the aggregate statistics are dominated by the ‘pure offshore’ activities of international banks at the IFSC, with the ‘domestic’ component of the banking system large but not to this ‘off the charts’ extent.
The New York Times carries an article today about whether Europe is doing enough in terms of its institutional response to the financial crisis, whether in relation to management of sovereign risk in individual countries or in relation to the economic slump: you can read the article here.
It looks like the CPI will fall by a substantial amount during 2009 due to the economic slowdown, the weakness of Sterling and the cut in mortgage interest rates, amongst other factors.
This provides an opportunity to raise VAT and excise taxes, in view of the fiscal situation (less painful to raise indirect taxes when the CPI is in decline than when the CPI is increasing). The is the mirror image of the situation several years ago, when Ireland’s relatively high inflation rate led to widespread calls for cuts in indirect taxation in order to combat inflation. While there would be undoubtedly some leakage across the border, an increase in indirect taxes should be a significant source of revenue.
In a way, an increase in indirect taxes can be interpreted as a mechanism by which the government can reap some of the gains from the terms of trade improvement that is embedded in the appreciation of the euro against Sterling: this provides a real income gain for Ireland vis-a-vis other euro area countries, since Ireland imports much more from the UK than is the case for other euro area countries.
The regressive nature of indirect taxes can be taken into account in terms of the overall package of tax and welfare policies.
Various commentators and parties have recommended that landlords should not be able to deduct interest payments on debt in calculating taxable income. More generally, ending the favourable tax treatment of debt is one of the central recommendations from the IMF, in its recent analysis of how macroeconomic policies should change in the wake of the global financial crisis (paper is here). By favouring debt over other funding options, the tax deductability of interest charges encouraged excessive leverage and thereby contributed to risk in the financial system.
Accordingly, tax reform in this area has the potential to improve allocative efficiency while also raising revenue. No doubt the shift to a new system must involve a transition phase, such that the initial improvement in revenue may be limited.