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Text File | 1994-05-02 | 18KB | 348 lines

<text> <title> Ireland: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: Ireland </hdr> <body> 1. General Policy Framework Ireland has a small open economy which is very dependent on trade. Exports of goods and services in 1990 were equivalent to 70 percent of GNP, while imports were equivalent to 61 percent of GNP. Government policies are generally formulated to facilitate trade and inward direct investment. Ireland has a market economy, which is based primarily on private ownership. Government ownership and control of companies generally occurs in those sectors which are considered by the government to be natural monopolies, those in which the state has stepped in to assist failing firms, or those of special importance to the economy. In the majority of cases, government-owned firms are operated on a commercial basis, and may be in competition with privately owned firms in the same sector. In recent years the government has taken steps to reduce its share holding in a number of companies which are considered commercially viable. Fiscal Policy--Ireland's government debt is approximately IP 25.1 billion, of which about IP 8.9 billion is denominated in foreign currencies. The debt has generally been financed by the sale of government securities. The vast majority of the debt was accumulated in the 1970's and early 1980's, partly as a result of oil price shocks, but more generally as a result of expanding social welfare programs and government employment. The debt grew rapidly in the late 1970's and early 1980's due to large government deficits. However, the government has made considerable progress during the past four years in reducing budget deficits and containing the growth of total debt. There has been general cooperation by major political parties, labor and employers in the government's fiscal austerity program since 1987. A three-year national economic program formulated in 1987 by the "social partners" made major contributions to the economic resurgence and fiscal corrections which took place in the period from 1987 to 1990. Government budget deficits fell dramatically while exports, investment and consumer spending showed strong growth. A second three-year national economic pact, known as the program for economic and social progress (PESP), was agreed in early 1991. It contains similar provisions for moderate wage increases and improvements in government finances. Projections for 1991 indicate that government borrowing will be about 2.5 percent of GNP. Irish tax policies have a major effect on personal consumption and demand for imported goods. Personal income tax rates are very high in Ireland. In the 1991 budget the government reduced the standard rate of income tax from 30 percent to 29 percent, while the highest rate was reduced from 53 percent to 52 percent. Just over 60 percent of Irish tax payers are in the standard rate bracket. Irish value added tax (VAT) rates are among the highest in the European Community (EC). In the 1991 budget, the government reduced the standard rate of VAT from 23 to 21 percent. Further reductions are expected in VAT rates as the government moves to approximate the rates of other EC countries as part of the EC's program for a single European market. The standard corporate income tax rate in Ireland is 40 percent. Manufacturing firms and many exporting firms pay only 10 percent on corporate income under special arrangements designed to boost industrial development. Monetary Policy--Ireland's monetary policies are aimed primarily at maintaining exchange rate stability within the European Monetary System (EMS), which ireland joined in 1979. Interest rates are the predominate tool used by the Central Bank to affect monetary variables. 2. Exchange Rate Policies Until 1979, the Irish Pound (IP) was pegged to the Pound Sterling. In March 1979, Ireland joined the exchange rate mechanism (ERM) of the EMS and broke its link to the British currency. It has, however, endeavored to maintain a stable competitive exchange rate against sterling due to the large amount of trade carried on between Ireland and the U.K. Membership in the ERM involves a commitment to maintain the Irish currency within a 2.25 percent band against other ERM currencies except for formal realignments. The Irish Pound has been adjusted downward twice since Ireland joined the EMS; 3.5 percent in 1983 and 8 percent in 1986. As part of the Common Agricultural Policy (CAP) of the EC, Ireland has maintained multiple exchange rates (known as green currency exchange rates) on agricultural goods subject to the CAP. Under EC legislation, Ireland is committed to phasing out all exchange controls by the end of 1992. Liberalization will occur in two stages. In the first stage, effective January 1, 1992, the government will lift the remaining restrictions on non-residents with Irish currency deposits in Ireland and on residents investing in short term foreign securities and foreign property. At the same time, the government will eliminate time restrictions on foreign currency accounts held in Ireland by residents. The second and final stage of foreign exchange liberalization will take place in late 1992, and will include the elimination of all remaining foreign exchange controls, including restrictions on residents owning deposit accounts abroad. Ireland still has exchange controls for foreign travel and for individual investment abroad. Irish residents travelling abroad are allowed to exchange up to IP 1200 automatically, and more if the amount can be justified on the basis of the traveler's itinerary. These restrictions will probably be eliminated in the second phase of liberalization planned for late 1992. 3. Structural Policies In October 1991, the Irish Government adopted a new Competition Act. The legislation marks a shift from the previous system of restrictive practices orders and administrative control, to a system which allows claims of anti-competitive behavior to be pursued in the courts. As a result, the government has revoked price controls on petroleum products and all other restrictive practices orders, except one which deals with the grocery trade. That order is also expected to be revoked following a review of conditions in that sector of the economy. Tax Policies--The Irish tax system for corporations favors manufacturing and exporting companies. Those companies pay income tax of only 10 percent, compared to the normal rate of 40 percent. This gap encourages the development of export and manufacturing industries, and discourages growth in other industries. The 10 percent corporate tax rate has been extended by the government to the year 2010. Personal income tax rates are relatively high, encouraging tax avoidance by people at all income levels. The standard rate, 29 percent, is assessed on single workers earning more than IP 3,400 ($5,236) and on married workers earning more than IP 6,800 ($10,472). The top rate for personal income tax is 52 percent and applies to single workers earning more than IP 9,800 ($15,092) and married workers earning more than IP 19,600 ($30,184). Many pay an additional 7.75 percent of their earnings for a variety of social security programs. The standard rate of value added tax (VAT) is 21 percent, but many essential goods, including food, have a VAT rate of zero. VAT rates and many excise taxes are the subject of harmonization efforts in the European Community. Regulatory Policies--Government investment incentives are weighted toward high technology, export oriented companies. Capital grants by the Irish Industrial Development Authority (IDA) reportedly have tended to favor capital intensive investments over labor intensive ones. 4. Debt Management Policies Ireland's total exchequer debt amounts to about IP 25.1 billion, or about 110 percent of estimated 1990 GNP. While the