Budget: Morning in Ireland — the good times are back again
Apart from a tax rise on cigarettes, the two ministerial statements on Tuesday setting out budget tax cuts and planned spending rises in 2016, were packed with items of cheer for the public that politicians yearn to deliver. Watching the change from the grim budgets from 2008, it seemed like a Morning in Ireland moment with the good times back at last.
Michael Noonan, finance minister, said the upcoming centenary of the 1916 Easter Rising, was an opportunity to reflect on the journey travelled over the past 100 years. "The banking, fiscal and economic crisis of recent years will rank as one of the greatest of such challenges. But we have emerged from this challenge too and we are on a new path," he added — hardly comparable with the setting up of the new state at a time of civil war in 1922; the Depression; the Economic War with Britain; and the development of a new economic policy in response to the grim 1950s?
The difference with the recent crisis was that it was possible to borrow up to €100bn since 2007 to fund day-to-day public spending. In effect, while austerity was borne by a minority of the population including those who lost their jobs, apart from lower disposable income because of tax hikes, it could not be credibly compared with earlier periods.
In the 1950s, 50,000 were emigrating each year to work in menial jobs, while a net 147,000 Irish nationals emigrated in the period May 2009-April 2015. However, according to the CSO most of the recent Irish emigrants had either jobs or were in study prior to leaving.
Eaten bread is soon forgotten!
The package of measures announced yesterday is relatively modest overall and while the audacity of the historical claim over the span of a century is bad enough, the claim of 100% credit for the recovery to the wisdom of ministers since March 2011, to the exclusion of everything else including the role of Mario Draghi, ECB president, in the dramatic fall in government bond yields, suggests that ministers with their self-belief in their Midas touch, are unlikely to waste time on challenging long-term issues.
Noonan in his speech said: "This Government has consigned to the history books the days of boom and bust, and the attitude of ‘if I have it, I'll spend it,’" — the latter was a reference Charlie McCreevy who was finance minister in 1997-2004 while the reference to "days of boom and bust" was a version of Gordon Brown's mantra on ending Tory boom and bust when he was UK chancellor of the exchequer, only to live through a bust after becoming prime minister.
The one issue that went beyond delivering good news was the need to use Nama to take charge of providing 20,000 social starter housing units — will there be time or interest in social planning?
This is where the contrast between the easy part for politicians and for example developing viable policies to tackle the housing crisis or an innovation policy that works, on more than a tax rate incentive of 6.25% for what is called a knowledge development box or patent tax regime.
Last year Noonan cut the windfall profits tax on rezoned land to 33% and this year he met the demand to cut the capital gains tax (CGT) from 33% to 20% for gains of up to €1m to boost entrepreneurship.
Next year there will be pleading for a further cut in the CGT as "UK based entrepreneurs can enjoy a rate of 10% up to £10m and 28% on the excess."
People who are not entrepreneurs naively believe that a CGT rate that is not at a punitive level can be a disincentive to people starting a business — if such people exist they should stay in the day job.
Tax incentives may work or not and usually the people advocating them work on hunches not evidence.
Michael McGrath, Fianna Fáil Finance spokesperson, raised an issue that Finfacts has highlighted for years — the broad rate of unemployment: "Unemployment in Ireland has fallen in recent years but the broad jobless rate is 18% when account is taken of the official number of unemployed people, together with the number of people on activation schemes and part-time workers who would like to work full-time."
Conall Mac Coille and David McNamara comment in a report on the Budget:
"The €1.5bn giveaway in 2016, worth 0.7% of GDP, was equally split between tax cuts and spending increases. The deficit is expected to equal 2.1% of GDP in 2015, falling to 1.2% in 2016. The deficit in 2015 is slightly larger than the 1.7% of GDP we had recently forecast for 2015, mainly reflecting the additional €1.5bn of spending for this year, announced over the weekend, and largely carrying through into 2016. The structural deficit will fall by 0.8 percentage points (pp), inside the 0.6pp required by EU rules. The government expects debt to fall to 97% of GDP in 2015 and to 92.8% in 2016. The projections do not include any reduction in debt from future sales of state banking sector assets.
Tax cuts focused on reducing income tax rates to 49.5%, spending measures on Social Protection and public sector pay rises
As expected, the bulk of tax cuts focused on reducing income taxes. The marginal tax rate was cut to 49.5% for incomes between €18,868 and €70,044, achieved by reducing the 7% Universal Social Charge (USC) rate to 5.5%. Spending increases were biased towards public sector pay rises of €300m and €220m of social spending increases. However, the spending measures announced today did not include the €600m supplementary budget for Health in 2015, which will carry through into 2016, and the other total spending rises worth €1.5bn announced over the weekend. The Budget also announced that the minimum wage will rise from €8.65 to €9.15 per hour.
Knowledge Development Box will be subject to 6.25% rate
Minister Michael Noonan also announced that qualifying incomes under the new Knowledge Development Box will be subject to a 6.25% rate. The new tax structure will be consistent with the OECD’s Base Erosion and Profit Shifting (BEPS) project so that qualifying incomes should be tightly linked to costs on research and development that takes place in Ireland.
There was no increase in the banking sector levy, although it will now be extended to 2021. On housing, there was no announcement regarding rent controls; however, the Minister said that NAMA is now aiming to deliver 20,000 residential units by the end of 2020."
John Perry head of Financial Services Tax Practice at Grant Thornton Ireland commented:
"Country by country reporting, as recommended in BEPS Action 13, will be introduced in Finance Bill 2015. Large multinational corporations (MNCs) will be required to file Country-by-Country Reports that will provide annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax and income tax paid and accrued. It also requires MNCs to report their number of employees, stated capital, retained earnings and tangible assets in each tax jurisdiction. Finally, it requires MNCs to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities each entity engages in.
Country-by-country reports will be disseminated through an automatic government-to-government exchange mechanism. The implementation package included in the BEPS report sets out guidance to ensure that the reports are provided in a timely manner, that confidentiality is preserved and that the information is used appropriately, by incorporating model legislation and model Competent Authority Agreements forming the basis for government-to-government exchanges of the reports.
Ireland will be an early adopter of country-by-country reporting."
Many first time buyers will be forced to defer home ownership
Angela Keegan, managing director of MyHome.ie said government action to address the lack of supply of new homes in certain areas, particularly in Dublin, was sadly lacking in Budget 2016.
“The lack of starter homes has had a knock on effect on the rental sector and exacerbated the social housing situation. Until we meet this demand rents will continue to rise – at present they are just 0.5% below their previous peak - and the social housing lists will continue to grow and grow.”
“There were just 6,745 housing completions in the first seven months of 2015 which means we will probably struggle to exceed 13,000 this year well short of the 25,000 required”
“We said previously that the low level of new builds needed to be addressed by government through initiatives on planning, the freeing up of development land and the removal of inappropriate levies and charges on residential developments. While the commitment from NAMA to build 20,000 over five years is welcome at this stage there is no indication of the timeframe in which that will happen.”
“Along with many others we thought the Government was listening — obviously not. Unfortunately this is really bad news not just for many first time buyers who will have to defer buying a home for several years but also for the property market as a whole. ” Keegan concluded.