The budget for 2010 has been formulated in the context of an unprecedented rate of economic decline which we have experienced in the past year and a half. As a small open economy, we could not escape the full impact of the severe global recession, but it has been compounded by purely domestic factors. As a result, our GDP this year will decline by approximately 7.5% and an Exchequer deficit of more than €25 billion is projected. The Government's strategy in the last 18 months is working and we can now see the first signs of a recovery in our main international markets. We have taken decisive action to manage our way through the crisis. Our concern has always been to protect jobs, provide a functioning banking system and return the economy to the path of sustainable growth. We have sought to do all of this in a manner which is fair and protects the most vulnerable.
The measures we have taken have been commended by international bodies such as the European Central Bank, the European Commission, the IMF and the OECD. They have also won the approval of the international markets. Tangible evidence of this is the reduction in our premium on borrowing in recent months. The European Commission has proposed a one year extension to 2014 of the deadline to bring our deficit below the 3% of GDP threshold under the excessive deficit process. However, this additional year, while easing somewhat the adjustments required in the later years, does not change the focus of our need to stabilise our very large deficit.
There is widespread agreement that an adjustment of €4 billion to the public finances is necessary next year so as to put them firmly on the road to recovery by narrowing the gap between income and expenditure. In this next phase of the Government's plan we must stabilise the deficit in a fair way, safeguard those worst hit by the recession and stimulate crucial sectors of the economy to sustain and create jobs.
We cannot borrow our way out of our deficit problem. Debt service costs are rising rapidly and absorbing a large and growing share of tax revenue, which is not sustainable. We cannot tax our way out of this problem. We will not create jobs by increasing penalties on work and investment. The marginal tax rate is now 52% for PAYE earners and higher for the self-employed. It is also clear that our income tax system has become unbalanced. Next year almost half of income earners will pay no income tax and 4% will pay almost half of the total yield. This is not viable or sustainable if we want to fund the range of services we expect the Government to provide. We must transform how we tax incomes, making the system simpler, fairer and more broadly based.
The Government wants high earners availing of tax incentive schemes to contribute more. For the tax year 2010, the effective rate of income tax for those benefiting from reliefs will increase from 20% to 30%, on top of which they will also pay PRSI and levies. The Minister for Finance, Deputy Brian Lenihan, will examine the curtailment and removal of further reliefs in the context of the finance Bill. He also aims to introduce a new system of just two charges on income in 2011. A new universal social contribution will replace employee PRSI, the health levy and the income levy and income tax will apply on a progressive basis to those with higher incomes, reflecting their capacity to make a greater contribution.
We must ensure every wealthy Irish domiciliary who pays little or no income tax makes a contribution to the State. Measures will be introduced which will impose on all Irish nationals and domiciled individuals whose worldwide income exceeds €1 million and whose Irish located capital is greater than €5 million a requirement to pay an Irish domicile levy of €200,000 per annum, regardless of where they are tax resident.
In the renewed programme for Government we have accepted the recommendations of the Commission on Taxation on the need for a property tax. A good deal more preparatory work has to be done before this can be introduced. The renewed programme also contains a commitment to introduce a system of water metering for homes. Preparations are under way in this regard and when they are completed, it is intended to introduce water charges based on consumption above a free allocation. These charges, like the charge on second homes, will finance the provision of local services by local authorities.
In the light of the enormous economic and social implications of climate change, the Government aims to change behaviour to reduce our greenhouse gas emissions. The budget will introduce a carbon tax equivalent to €15 per tonne. The yield from this tax will be used to boost energy efficiency, support rural transport and alleviate fuel poverty. The tax applied to petrol and diesel from midnight. Increases in the case of home heating oils and gas will apply from next May.
In the future the limited scope for raising further tax revenue should be clear. The only remaining option is to reduce our spending and the aim of the budget is, overwhelmingly, to reduce spending. The current cost of providing public services is not sustainable. Without any correction, day-to-day spending would be approximately €58 billion in 2010, an increase of some €2 billion over the figure for 2009. Given that public service pay and social welfare each account for about one third of all day-to-day spending, reductions in these two areas are unavoidable.
Of significance in considering such matters is that we are in a period of falling prices. The current decline in consumer prices has had the effect of supporting real income levels, thus giving some scope to adjust public spending, while still protecting the living standards of those most in need. The measures announced in the budget amount to savings of more than €1 billion on the pay bill, €760 million on social welfare, €980 million on day-to-day spending programmes and €960 million in savings on investment projects. Combined with other adjustments, these amount to a saving of more than €4 billion in expenditure compared with the pre-budget estimates.
The Government has considered the recommendations of the review body on higher remuneration in the public sector and intends to apply reductions to all public servants in the higher pay bands, including hospital consultants. There will be a reduction in pay of 8% to 15% for those with salaries from €125,000. These are permanent reductions which will be reflected in future pension entitlements. The salary of the Taoiseach will be reduced by 20%. This reduction, together with the pension levy, means the Taoiseach's salary will be cut by close to 30% in total. Ministers and Secretaries General of Departments will take a pay cut of 15%, which comprises an overall cut of close to 25% when the pension levy is taken into account. For the most part, it transforms temporary, voluntary cuts into permanent ones and, in these examples, goes beyond this.
Public servants, including ourselves, have already made a substantial contribution to the necessary reduction in public expenditure. The pension levy has reduced pay by an average of nearly 7%. Public service numbers have been reduced by the moratorium, the incentivised early retirement scheme and career breaks. Like many other workers, public servants have forgone pay increases, but, regrettably, more is required. The reductions we must now make do not reflect any lack of recognition of public servants or the quality of the work they do for all of us. This House will have often heard me spring to their defence. Their pay will be reduced with effect from 1 January 2010, with reductions ranging from 5% to 8% in the case of salaries of up to €125,000. The pay of Members of the Oireachtas will be reduced in line with that of the equivalent public service grades. RTE keeps talking of public servants on €15,000 a year. To the best of my knowledge, there is no full-time public servant on less than €20,000 a year, not a cleaner nor a night watchman on the starting point of the scale.
Exchequer spending on public service pensions will be more than €2 billion in 2010. With improved life expectancy and an ageing population, the State's pension bill will grow from approximately 5% to 13% of GDP by 2050, with one third of the increase on public service pensions. The Government needs to respond not just to the current problems but to make far-reaching reforms to secure our economic future. It has decided to introduce a new single pension scheme for all new entrants to the public service, to bring public service pension terms more in line with private sector norms such as the calculation of benefits based on career average earnings. The minimum pension age for new public servants will also be increased from 65 to 66 years and then linked to increases in the State pension age. As part of the reform of public service pension arrangements, the Minister for Finance will review the current arrangements and consider linking pensions to increases in the cost of living. Pending that review, the pay cuts already outlined will not be applied to existing public service pensioners.
We have a generous social welfare system. The Government is proud of its record in this regard. In the past 12 years we have increased pension rates by approximately 120%, unemployment benefits by almost 130% and child benefit payments by more than 330%. The cost of living has increased by approximately 40% in the same period. We extended coverage, removed barriers and increased entitlements such that the level and extent of social support payments has been transformed beyond recognition. However, we put all this at risk, if we do not make savings now. As the House will know, the overall cost of living has fallen by close to 6% in the past 12 months, including very sharp declines in the prices of the basic necessities of food, clothing and accommodation. This sharp fall in price levels is the background to the reduction of 4.1% in most social welfare working age rates of payment. In other words, the reduction is less than the fall in the cost of living.
Unemployment among the young is a particular concern to the Government. We want to encourage them to stay close to the labour market, while at the same time providing a rate of assistance that compares very well internationally, particularly with our close neighbours. We are making targeted reductions to the rate of job seeker's allowance and supplementary welfare allowance for new applicants aged 20 and 21 years of age who have no dependent children, which is being reduced to €100 per week, and for those aged between 22 and 24 years to €150 per week. For all other cases, the rate will be reduced to €150 per week, where job offers or activation measures have been refused.
Child benefit this year will cost €2.5 billion or 12% of social welfare spending. This universal benefit is inequitable but also unaffordable in current circumstances. For legal and logistical reasons, it was not possible to introduce greater equity at this time by making child benefit taxable or means tested. Accordingly, the lower and higher rate of child benefit will be reduced by €16 per month, bringing these rates to €150 and €187 per month, respectively. Welfare dependent families will be fully compensated by increasing the qualified child allowance by €3.80 per week in order that they will not be affected by this measure. Low income families in receipt of family income supplement will also be fully compensated.
In the budget the Government has decided to reduce spending on public services by almost €1 billion in 2010 compared with the pre-budget estimates. Savings are being sought through efficiencies rather than through reductions in services. Some €400 million of these savings arises in the health area where various measures, including a prescription charge of 50 cent per item under the medical card scheme, are being introduced to reduce the State's medicines bill.
An efficiency review of local authorities will be undertaken. This work will begin immediately and a report is expected by mid-2010. The full details of the review will be announced by the Minister for the Environment, Heritage and Local Government.
The renewed programme for Government includes a commitment to introduce new measures to protect families having difficulty with their mortgages, a matter frequently raised in this House. As a first step in the process, the Minister for Finance has asked the Financial Regulator to examine the extension of the six-month moratorium on legal proceedings already in the code of conduct on mortgage arrears to 12 months for all lenders. Certain transitional arrangements for mortgage interest relief will apply which will extend it for two years to those who bought at the peak of the market, but the intention is to abolish this relief entirely by the end of 2017. The review of the Government's mortgage interest subsidy scheme which provides help and support for families in difficulty with their mortgages will be completed early in 2010. There is an incentive up to 2013 to buy homes to qualify for relief.
The Government intends to introduce a national solidarity bond to enable ordinary citizens to provide money for the State to stimulate economic recovery and create employment. The details are being worked out, with the scheme expected to be open for investment early in the new year.
Although public investment spending is being reduced next year, it will still be €6.4 billion or 5% of GNP for 2010 and €5.5 billion each year for the years 2011 to 2016. Tender prices for many new projects have also fallen back significantly, thus enabling us to get better value for money. Since the national public procurement operations unit, NPPOU, was established in my office earlier this year, it hasoverseen savings in the order of €23 million across the public sector. It has researched and analysed the public procurement spend with a view to completing a spend profile for the public service. Research identified specific markets appropriate for an aggregated or collaborative approach to market intervention by the NPPOU. It has been actively engaged in a review of competition documentation and general conditions of contract with support from the Office of the Chief State Solicitor and the Office of the Attorney General in streamlining all tender, competition and contract documents used across the various parts of the public sector. It is working closely with the Department of Environment, Heritage and Local Government to produce the country's first green procurement action plan.
In 2010 our investment projects will focus on labour intensive areas such as schools building and maintenance, energy efficiency measures and investment in tourism infrastructure. Other key investment priorities will include science, technology and innovation; the promotion of environmental sustainability; implementation of green enterprise initiatives; housing and urban regeneration; the health sector; public transport and finishing the interurban motorways.
The budget was framed against the background of severe difficulties in the labour market. Unemployment has risen considerably, with the construction, retail and manufacturing sectors the worst affected, and stands now at 12.5%. While it is anticipated to rise into next year, recent labour market developments suggest the rate of increase in unemployment has slowed. Against this background, the creation and protection of jobs, including helping people back to work, remain a priority of Government policy. All aspects of active labour market policies are required to ensure work rather than unemployment remains the norm.
To provide an additional 26,000 individuals with training places and supports, nearly €136 million in funding is being provided, bringing the total number of places available for the unemployed to more than 180,000. The €136 million is being allocated as follows: €56 million to FÁS for short-term courses; €20 million to an activation fund involving an open call for innovative proposals with the capacity to provide work, education and training; €14 million, additional to €26 million from the European Union, for supports for redundant workers in eligible companies under the European Globalisation Adjustment Fund; €9.5 million in support measures to enhance the competitiveness of the food industry, a key indigenous sector, and to encourage employers to take individuals off the dole; €36 million to an employers job incentive scheme providing for a PRSI exemption. The stabilisation fund and the temporary employment subsidy scheme which will cost €165 million in 2010 are already providing substantial supports for employers.
While these measures are important, we must also reposition the economy on a more sustainable, export-led growth path through regaining our international competitiveness. Part of the strategy to improve competitiveness must include reducing labour costs — through some combination of nominal pay reductions and enhanced productivity. At EU level, work is under way to agree a new and ambitious successor to the Lisbon Agenda to be called EU 2020. We are strongly supportive of this process and the intention to keep the focus of EU 2020 firmly on the core issues of growth and employment. Ireland is committed to the view that the key aspects of the new strategy must be a well functioning Internal Market, higher labour market participation rates, increased research and development investment, a more business friendly environment, a more skilled, flexible workforce, and the fostering of innovation within the public sector. Sustainable economic growth will be built on information-based services, energy and environment-related businesses. The new strategy will also need to help sustain this growth through measures designed to increase competitiveness, innovation and entrepreneurship.
A number of stimulus measures are provided for in the budget to aid economic recovery in the short term and help to ensure sustainable growth for the future. They include a reduction in excise duty on alcohol products with the aim of reducing losses to the Exchequer and the retail sector due to cross-Border shopping. The standard VAT rate will be reduced by 0.5% from 1 January, reversing the increase imposed in October 2008. The British Government yesterday confirmed it would be reinstating its 17.5% VAT rate, reversing the 2.5% VAT cut implemented last year; therefore, the difference across the Border will be roughly halved from 1 January. However, I appreciate that exchange rate differences are the main factor in cross-Border shopping.
The rate of corporation tax must be seen in terms of international markets and our ongoing ability to foster enterprise and future job creation. Our corporation tax rate of 12.5% will not change. A car scrappage scheme, providing VRT relief of up to €1,500 per new car, is being introduced to run throughout 2010. VRT exemptions and reliefs for electric and hybrid vehicles are also being extended by two years, until the end of 2012.
Credit is essential to support healthy Irish businesses and jobs. The Minister for Finance is establishing a credit review system. Under the NAMA legislation, he proposes to issue guidelines to all banks participating in NAMA which have business with SMEs to ensure SMEs, sole traders and farm enterprises will have recourse to an independent external review of decisions of credit refusal by the banks. It is hoped banks not participating in NAMA or covered by the Government guarantee will also decide to participate. Mr. John Trethowan, an experienced banker with a demonstrated commitment to public and social service, has been asked to oversee the establishment of this credit review system, with initial administrative support from Enterprise Ireland.
A growing area of innovation with major commercial and employment potential is boosting energy efficiency. This is good for the environment and the economy. We are allocating about €130 million for energy efficiency measures which will include a new multi-annual national retrofit programme in 2010. Of the carbon tax yield, €50 million will be used to fund measures such as help for households at risk of fuel poverty to make their homes warmer. Local authorities will receive additional funding to retrofit the social housing stock. This represents a significant boost to the plan to retrofit more than 1 million homes by 2025.
Support is also being provided for agriculture and tourism, both important sectors of the economy. We remain committed to supporting an environmentally sustainable agriculture sector and are in discussions with the European Commission with a view to introducing a new five year agri-environmental scheme. A total of €50 million will be provided from within the existing allocation to support the scheme. More than €121 million will be provided for forestry and bio-energy. This includes a capital provision of €116 million to plant a further 7,000 hectares of trees next year. The total tourism budget will be increased in 2010 to enable a marketing drive aimed at increasing tourism numbers and revenue by 3%. Investment in visitor attractions will be increased threefold to €22 million.
I wish to refer briefly to the recent flooding in the west and south of the country which has had such devastating consequences for everyone affected. The scale and magnitude of the flooding have not been seen before in living memory. The impact of the flooding would have been even more severe had it not been for the tremendous efforts of the emergency teams; thanks to them, no lives were lost. We witnessed a co-ordinated and dedicated response from all the emergency services, including local authorities, the Defence Forces, Civil Defence, the Garda and local volunteers, for which we are very grateful. OPW engineering staff have provided technical and additional material backup. While it is too early yet to assess the full scale of the damage caused, it is clear that the economic and social damage has been substantial. Some insurance industry sources are speculating that the cost of flooding damage to homes and businesses around the country may exceed €250 million. There is also the issue of premises that were not insured and not insurable.
In late 2004 the Government decided that future flood management policy would be to minimise the national level of exposure to flood damage through the identification and management of existing and, in particular, potential future flood risks in an integrated, proactive and river basin-based manner. The OPW will be commissioning catchment flood risk assessment and management studies for all river catchments, to be completed in the next six years. The planning and development process is critical in avoiding the creation of further flood risk. The OPW has worked with colleagues in the Departments of the Environment, Heritage and Local Government and Agriculture, Fisheries and Food to develop guidelines on the management of flood risk in planning and development. Development in flood plains should be avoided where possible.
I have given the highest priority to the OPW's programme of major structural flood relief schemes to reduce the flood risk in areas which have a long history of flooding and where non-structural measures would not offer protection. The OPW has spent nearly €190 million on capital projects since 1996, with more than €100 million spent in the last five years. It was announced in the budget that more than €70 million would be provided in the remainder of 2009 and into 2010 to help those affected by recent flooding and fund works to minimise the risks of future incidents. This total is made up of €50 million for major flood relief schemes, the €10 million in humanitarian aid already announced, €10 million to assist local authorities in dealing with the cost of the crisis and an additional €2 million to assist the agriculture sector. The review of investment priorities to be published shortly will also provide for continued substantial investment in flood relief. The Government is keeping the situation under review and will commit further resources as required.
We are facing tough challenges and to succeed in dealing with them, we must continue to pursue appropriate policies to position the economy to benefit from global recovery. The Government is acutely aware that businesses, families and almost all of society are affected by the deterioration in economic conditions. In the budget we have brought forward measures that will ensure the burden of adjustment is spread as evenly as possible. The Government has taken and will continue to take action that will enable the economy to return to a more sustainable growth path in the medium term. This will facilitate a return to employment growth and a sustainable improvement in the living standards of all. I look forward to hearing the views of Senators on the budget.