EFSF delivers results in Ireland

Dátum: 04.09.2013

The Slovak version of this article was published on INEKO SME blog website on 9 August 2013.

Irelands’ international financial assistance in the amount of 67.5 billion EUR finishes at the end of this year. Thus, Ireland becomes the first example, whether austerity measures that the financial aid was conditional on, have worked. So far it appears that it will be a success story.

This is supported by the fact that Ireland has been able to partly finance its public expenditure and long-term loans in the financial markets since 2012. In this regard, Ireland is the most successful country among the states being rescued. Moreover, after three years of recession, the Irish economy in 2011 returned to growth, and is currently the only state among the ones being rescued, that is not in recession.

These facts suggest that Ireland could fulfill the views of Slovak economists, who said that the greatest portion of the financial assistance will be repaid back by Ireland among the countries being saved. According to the results of the INEKO poll in November 2012, in which twelve economists participated, the loans to Ireland should be repaid back in full. That is certainly not the case for Greece, Portugal or Cyprus.

It should be noted, that especially in comparison with Greece and Portugal, Ireland had significantly better starting position in a number of structural indicators. Ireland has long been standing as one of the OECD countries with the lowest payroll tax burden on labor income, has a very good position in Doing Business Ranking of the World Bank as well as in the competitiveness ranking of the World Economic Forum, low spending on social benefits and pensions (relative to GDP), and a relatively flexible labor market.

Unlike Greece and Portugal, Ireland has not been led into the crisis via irresponsible management of public finances, but due to a banking crisis.

Ireland has received a pledge in November 2010 for a rescue package amounting to € 67.5 billion of which 45 billion EUR comes from temporary rescue mechanism in the EU and the euro area and 22.5 billion EUR comes from the International Monetary Fund. The average interest rate that Ireland pays for the loans is 5.8%. The maturity of EFSF loans will expire in the years 2029 to 2042, an average of 21 years. Ireland, along with Portugal has had their average maturity extended by 7 years in April 2013, in order to facilitate the full return to financial markets.

The rapid growth of the public debt forced Ireland to request international assistance after the government had to bail out banks that suffered from the burst of the real estate bubble. Public debt has skyrocketed from 25% of GDP in 2007 to 118% of GDP in 2012; the unemployment rate has risen from 5% to 15% over the same period.

Financial assistance to Ireland was conditioned on recovery measures in the amount of 15 billion EUR, representing about 9% of GDP. Here is an overview of the most important measures already implemented (the main source is the report of the European Commission):

Tax reform:

  • Increase in the VAT from 21% to 23%.
  • Introduction of a property tax of 0.18% up to the value of 1 million EUR. Properties above this threshold will be taxed at a rate of 0.25%. One-time annual fee of 100 EUR for each residential household has been temporarily introduced from 2012, so called “Site Value Tax”. As the values of the properties will be gradually obtained over the next years, one-time fee will change into a fee linked to the value of the property on the assumption of progressivity between the value of the assets and the amount of the fee.
  • Increase in the excise taxes on cigarettes, alcohol, car and solid fuels. Increase in the taxes on cars by 10%.
  • Increase the total income tax burden through lower applicable tax credits.
  • Introduction of a single 1% tax on real estate sales volume up to 1 million EUR, 2% tax will be applied for the transactions over this limit.
  • Restriction of R&D tax credit by increasing the exemption base (of 100 thousand EUR) for the first investment. Only higher (over 200 thousand EUR) investments will be eligible to obtain the credit.

Social system reform: Reduction of the allowance for the third and fourth child. The allowance eligible for the third child falls by 19 EUR from 167 EUR to 148 EUR per month. The allowance for the fourth child falls by 17 EUR from 177 EUR to 160 EUR per month.

Public administration reform: The 2013 budget reduces the number of public officials by about 8% (from 312 thousand to 287 thousand). Salaries in the public sector were frozen until 2013.

Labor market reform: The hourly minimum wage has been frozen since July 2007 at 8.65 EUR/h with a short exception in 2011 when it was temporarily reduced to 7.65 EUR/h. Support of the employment of long-term unemployed – employers who employ workers from the register of unemployed will receive a pay of 96 EUR per week for a period of two years for employing people who have been unemployed for more than 24 months and 72 EUR per week for employing people who have been unemployed for 12-24 months.

Education reform: One time registration fee for third-degree education of 1500 EUR will be replaced by annual tuition fee of 2000 € or 200 € for participants in professional training centers. The Government is committed to gradually raise tuition fees to 2,500 EUR in school year 2013-2014, 2750 EUR in school year 2014-2015 up to 3000 EUR in school year 2015-2016.

Pension reform: The retirement age will be gradually increased to 66 years in 2014, 67 years in 2021 and up to 68 years in 2028. Pensions of people who work in the public sector were reduced by 4%. License fee and free travel subsidy for pensioners will be frozen until 2014 (at the 2010 level).

Health Care Reform: The current 50-cent fee per prescription (for each drug) increases to 1.50 EUR. Increase in the threshold for the amount that patients pay monthly for drugs before getting covered by the state from 132 EUR to 144 EUR.

Peter Goliaš, Roman Bašár, INEKO

See also INEKO articles on the reform measures implemented in Greece and Portugal:

This article was created as part of the INEKO project titled “The debt crisis in the EU – possible solutions and position of the Slovak Republic”. Objective of the project is to strengthen expertise in discussing possible solutions to the debt crisis in the EU and thereby help optimize SR decisions in this area. Project is implemented through funding from the Konrad Adenauer Stiftung foundation and the Open Society Foundations.

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