This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 03 DUBLIN 001517 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 01/31/2015 
TAGS: ECON EFIN EINV PREL EI
SUBJECT: BIG HELP FOR WORKING FAMILIES: IRELAND'S 2006 
GOVERNMENT BUDGET 
 
 
Classified By: Ambassador James C. Kenny; Reasons 1.4 (B) and (D). 
 
¶1.  (SBU) Summary: On December 7, Finance Minister Brian 
Cowen unveiled the 2006 Government budget, a televised event 
that annually serves as Ireland's financial 
state-of-the-union address and a window on the governing 
Fianna Fail party's political strategy.  With a robust 
economy and a euro four billion government surplus from 2005, 
Cowen was well positioned ahead of the 2007 general elections 
to focus the budget's chief benefits on Fianna Fail's core 
constituency, middle-class families.  The budget provides 
generous childcare subsidies and lowers taxes for families 
earning average wages, as part of a package that targets 
other middle-class concerns, such as the elderly, education, 
and health.  In areas of USG interest, the budget includes a 
minuscule spending increase for defense and a large jump for 
the Department of Foreign Affairs, which mostly reflects the 
Government's attempt to increase overseas aid from 0.4 
percent to 0.7 percent of GNP by 2012.  While the budget 
received a mostly favorable public reaction, the U.S. 
business community opposed the budget's proposal to eliminate 
tax breaks for foreign executives.  The Ambassador is engaged 
on this proposal with Minister Cowen's personal advisor, who 
believes that the proposal can be modified.  Overall, the 
budget's structure reflects Fianna Fail's bid to protect its 
lead in the polls ahead of the 2007 general elections, while 
being careful not to over-stimulate an already robust 
economy.  End summary. 
 
Background: Spending Increases in a Strong Economy 
--------------------------------------------- ----- 
 
¶2.  (U) On December 7, Finance Minister Brian Cowen unveiled 
the 2006 Government budget to the Irish Parliament, a 
televised event that annually serves as Ireland's financial 
state-of-the-union address and a window on the ruling Fianna 
Fail party's political strategy.  Under the 2006 budget, 
total government expenditures will increase 11 percent over 
2005 to reach euro 50.6 billion, the first time a budget has 
passed the euro 50 billion threshold.  Cowen highlighted the 
positive macroeconomic backdrop to the budget, as 2005 saw 
real GDP growth of 4.6 percent and the creation of roughly 
96,000 new jobs.  For 2006, he projected a government deficit 
at 0.6 percent of GDP, with public debt at 28 percent of GDP, 
one of the lowest debt ratios in the EU.  (The government 
deficit he predicted for 2005 turned into a euro 4 billion 
surplus, thanks mainly to strong revenues from capital gains 
taxes and stamp duties targeting Ireland's vibrant housing 
market.) 
 
The Big Winners: Couples with Children 
-------------------------------------- 
 
¶3.  (U) Whereas the 2005 budget showcased benefits for 
society's least advantaged, the chief beneficiaries of the 
2006 budget will be working households with childcare 
expenses.  The budget features a five-year euro 2.65 billion 
strategy to address the supply and cost of childcare, 
including a yearly euro 1,000 supplement for every child up 
to the age of six.  There will also be funding to train 
17,000 more childcare personnel by 2010, as well as 
investment in childcare facilities to accommodate 50,000 more 
children.  To reduce childcare expenses in a child's first 
year, the Government will extend both paid and unpaid 
maternity leave to a combined 56 weeks, with Government 
funding to defray attendant costs for business. 
 
¶4.  (U) Tax relief under the 2006 budget will also primarily 
benefit middle-class families.  Most notably, the Government 
will raise the income threshold at which a standard 42 
percent personal tax liability applies, effectively pushing 
90,000 people down into the 20 percent tax bracket.  Cowen 
explained that this step would ensure that workers earning 
the average industrial wage would pay tax at the lower rate. 
A range of tax benefits will similarly push 52,000 people 
below the 20 percent tax bracket, out of the tax net.  In 
response to public complaints about millionaires who pay no 
tax, Cowen also pledged to cap by 2007 the level of tax 
relief available to those earning over euro 250,000. 
 
Other Categories of Note 
------------------------ 
 
¶5.  (U) Other budgetary categories of interest are: 
 
A) Education.  The budget allocates euro 1.2 billion to help 
universities build/upgrade their infrastructure and to 
produce more Ph.D. students through a new Strategic 
Innovation Fund.  (This outlay probably means that university 
tuition for Irish students will not be reintroduced this 
decade.) 
B) The elderly.  Besides providing for weekly increases in 
state pensions, the budget includes euro 150 million to 
support the care of elderly at home and nursing facilities. 
There is also a euro 400 million carve-out to compensate 
those elderly who have been wrongly charged over two decades 
for stays in public nursing homes. 
 
C) Health.  Nearly one-quarter of total public expenditures, 
or euro 12.2 billion, will go to the health sector, which 
remains characterized by hospital queues and other 
inefficiencies despite significant increases in spending over 
the past decade. 
 
D) Defense.  The budget raises defense spending (exclusive of 
army pensions) by 2.5 percent to roughly euro 731 million, 
continuing a trend of relatively minor increases in defense 
expenditures over recent years.  (The Irish military will 
probably enjoy cost savings over the next three years as it 
brings home 400 troops participating in the UN Liberia 
mission.) 
 
E) Foreign Affairs and Aid.  Spending on the Department of 
Foreign Affairs (DFA) will jump 8 percent after a paltry 1.4 
percent increase in 2005.  The spending ramp-up reflects a 26 
percent increase in official development assistance (ODA), 
following on Prime Minister Bertie Ahern's pledge at the 
September UN High Level Event to increase ODA from 0.4 
percent of GNP to 0.7 percent by 2012. 
 
Overshadowed by a Resignation 
----------------------------- 
 
¶6.  (SBU) Although the Government had expected good publicity 
for the budget, headlines were partly stolen by the December 
8 resignation of Ivor Calley, (Junior) Minister of State for 
Transportation and Fianna Fail parliamentarian.  The Irish 
press reported on December 7 that a construction company had 
painted Calley's home for free in the early 1990s, a 
disclosure that capped several weeks of reports on Calley's 
questionable ethical actions at the Department of Transport. 
After his resignation on the morning of December 8, the 
national radio station, RTE, interviewed Calley in the slot 
that had been reserved for Minister Cowen's budget briefing, 
keeping Cowen in the studio wings for a half-hour. 
Afterward, Calley inexplicably attended a Parliamentary 
session on the budget in his minister's seat.  His presence 
led opposition leaders to interrupt Prime Minister Ahern 
repeatedly to demand a statement about the resignation, 
preempting discussion of the budget for most of the session. 
 
Reaction: Mostly Favorable, but U.S. Firms Protest 
--------------------------------------------- ----- 
 
¶7.  (U) Notwithstanding the Calley story, the budget received 
a mostly favorable public reaction.  Families interviewed by 
the press expressed enthusiasm for benefits that would reduce 
the cost of care for children and elders.  Economists also 
generally applauded the budget, though some voiced concern 
that the budget's benefits package might lend inflationary 
pressure to an already robust economy.  In contrast, other 
economists noted that higher interest rates, mounting 
consumer debt, high fuel costs, and a possible housing market 
slowdown could bite into Cowen's predictions for continued 
strong economic growth and tax receipts in 2006.  As is 
customary, the political opposition criticized the budget, 
primarily for not being more generous with social welfare 
benefits. 
 
¶8.  (SBU) The U.S. business community strongly opposed the 
budget's unexpected proposal to eliminate the remittance 
basis of personal income taxation for resident foreign 
executives.  Currently, the tax system allows foreign 
executives in Ireland to receive their salary outside 
Ireland's jurisdiction and pay tax only on money they 
"remit," or bring into, the country to support themselves. 
On December 8, the American Chamber of Commerce issued a 
statement that the budget proposal would "make Ireland 
unattractive as a base for these senior executives" and act 
as a disincentive to foreign investment.  The Sunday Business 
Times also reported that, at a December 8 post-budget brief 
for the financial industry, U.S. firms heavily lobbied 
Minister for Enterprise, Trade and Employment Micheal Martin 
to support the remittance basis for taxation.  Business 
lobbying will likely continue in the run-up to Parliamentary 
debate in early 2006 on the Finance Bill, where the budget 
proposal could possibly be inserted. 
 
Cowen's Advisor: U.S. Firms' Input Welcome 
------------------------------------------ 
¶9.  (C) On December 12, the Ambassador discussed the 2006 
budget with Alan Gray, Chairman of Indecon, a large economic 
consultancy, and Minister Cowen's personal advisor on the 
budget process.  The Ambassador cited U.S. business 
opposition to the tax remittance proposal, and Gray expressed 
optimism that the proposal could be modified in response to 
U.S. firms' input.  Gray asked the Ambassador to canvass 
executives with key U.S. IT firms and get back to him (which 
we plan to do before Christmas).  Regarding some economists' 
warnings that the budget might be inflationary, Gray argued 
that that the benefits package was generous, but not to the 
point of inviting price pressures.  Even if such pressures 
did arise, he said, the Government could respond with 
measures to improve market competition, such as the recent 
rescission of regulations preventing supermarkets from 
selling goods at below-invoice prices.  Gray, furthermore, 
confirmed that Government leaders were "fuming" at the timing 
of Ivor Calley's resignation, which had stepped on a 
carefully planned choreography to maximize the budget's 
political punch. 
 
Comment: A Finely Tailored Product 
---------------------------------- 
 
¶10.  (SBU) From a political perspective, the 2006 budget hits 
all the right levers, reflecting the governing Fianna Fail 
party's bid to lock in its lead position in current polling. 
Cowen publicly denied that the budget was drafted with the 
2007 general elections in mind, but budgetary benefits 
nevertheless target Fianna Fail's core constituency: 
middle-class couples with children.  In recent press surveys, 
rising childcare expenses had consistently ranked atop 
parents' concerns, especially with women entering the work 
force in droves to help families meet the high cost of 
living.  The budget's generous childcare benefits and tax 
relief measures should thus improve Fianna Fail's support 
among working families in the last full year before 
elections.  The budget also catered to another key political 
demographic, the elderly, who will welcome higher pensions, 
increased funding for home/hospital care, and compensation 
for wrongful charges at public nursing homes.  Meanwhile, 
continued increases in other social welfare benefits will 
enable to Fianna Fail to claim that it remains focused on 
society's disadvantaged groups, the theme of the 2005 budget. 
 
¶11.  (U) Economically, the budget is stimulatory, but 
prudent.  Whereas the benefits package received most 
attention, the 11 percent increase in government expenditures 
is similar in size to budget increases in recent years.  As 
one Irish economist observed, the budget benefited everyone, 
but not dramatically so.  One possible reason that the 
Government chose not to risk over-stimulating the economy 
with an even more generous budget is the impending maturation 
of the Special Savings Incentive Accounts (SSIAs).  The SSIAs 
are a nationwide personal 5-year savings scheme launched by 
the Government in 2001 that will begin in 2006 to put roughly 
euro 14 billion back in the hands of the accounts' holders -- 
another nice benefit for prospective voters. 
KENNY