Irish Economy
Irish Budget 2015: Economic analyses of the tax and spending changes
By Michael Hennigan, Finfacts founder and editor
Oct 15, 2014 - 9:09 AM

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Source: Davy

Irish Budget 2015: The Government implemented €1bn of tax cuts and spending increases in Tuesday's Budget -- we present economic analyses here.

Conall Mac Coille, chief economist at Davy, comments:

"Budget 2015 was in line with expectations. Together, the tax (€420m) and spending (€630m) measures are worth €1bn. However, since Friday an additional €320m of non-tax revenues have been found; as a result, the impact on the general government deficit is just €585m, or 0.3% of GDP. This small loosening will leave the overall deficit at 2.7% of GDP in 2015. Irish government debt is expected to remain relatively high at 110.5% of GDP at end-2014.

The bulk of the good news on economic performance and tax revenue growth has been used to reduce the €2bn adjustment originally planned for 2015 into a small Budget giveaway. Recommendations for a more cautious approach from the European Commission, IMF and Irish Fiscal Advisory Council have been ignored. Clearly, the electoral cycle and traditional political pressures for pro-cyclical fiscal policy have re-asserted themselves. However, the Budget numbers are probably still conservative to ensure targets are met and do not pencil in any benefit from future sales of state assets in the banking sector.

On balance, household incomes will be left broadly unchanged. They have been pushed up by €458m in income tax cuts but offset by €300m in new water charges in 2015. Unfortunately, the 52% marginal tax rate remains in place, hurting the economy’s ability to attract highly skilled workers. A 1 percentage point cut in the top rate of income tax to 40% and paid at a higher €33,800 has been offset by the new 8% Universal Social Charge on incomes over €70,000. This is a little disappointing given prior commitments. However, Minister for Finance Michael Noonan did re-commit to reduce the marginal rate in the future. More encouragingly, the 0.6% pension levy will end in 2014, and the government is committed to eliminate the remaining 0.15% in 2015.

Concerns that spending discipline is being eroded, particularly in the Department of Health, will now grow. Effectively, the €500m budget over-run in 2014 is being locked into next year’s Budget estimates. There was also a €196m increase in Social Protection spending. Worryingly, Minister for Public Expenditure and Reform Brendan Howlin also appeared to argue that savings from falling unemployment should largely be recycled into Social Protection spending – currently inflated by the 11.1% unemployment rate. For example, this year will see a €5 per month increase in already bloated child benefit payments, granted irrespective of household income."

Davy report

Dermot O'Leary, chief economist at Goodbody, comments:

"Budget 2015 marks the end of austerity, while there is some slippage from the prudent policies of recent years. Fiscal measures will support economic growth momentum in the short-term and we upgrade GDP forecasts yet again. See attached note.

First expansionary budget in seven years leads to further GDP upgrades
After an unprecedented seven contractionary budgets, Budget 2015 will have an expansionary impact on the Irish economy. The measures support the view that Ireland will be the fastest growing economy in the euro area in 2015. On the back of this, we upgrade our GDP forecast for 2015 from 4.0% to 4.2%.

Some slippage from the fiscal path of recent years
We were advocating a neutral budget for 2015, so the measures announced yesterday are slightly less prudent than we would have liked. While deficit forecasts will still be achieved and debt levels are beginning their descent, there has undoubtedly been some slippage from the prudent path of recent years. Interest savings have been used to facilitate a slower rise the primary budget surplus and may be criticised by the Troika in its post-programme mission in November.

Income tax changes progressive and target the “squeezed middle”
On taxes, this was a budget to target the “squeezed middle”. The top rate of income tax was reduced to 40% (from 41%), but this effect was offset by an increase in the universal social charge above incomes of €70,000. Consumption should be helped modestly by the measures, with disposable incomes of those on the average wage increasing by c.1% as a result of the tax changes. Total expenditure will stand at 41.6% of GNP in 2015, relative to 44.4% of GNP in 2014. Almost all of this reduction is due to economic growth, with the current expenditure ceiling being increased by €1.9bn. While we welcome the increase in resources in social housing provision, we question some of the current spending measures, particularly those of a universal nature. We are also cognisant of further spending pressures over the coming years in the form of pay and an aging population.

End of the double-Irish
Announcements in relation to corporation tax were made in recognition of the pressure that has been heaped on Ireland over recent months. The so-called double-Irish will be phased out over the period to 2020 for existing companies and will be abolished for new entrants immediately. Consultations will continue on this complicated issue, but the Minister has pledged once again that the 12.5%."

Goodbody report

Irish Budget 2015 Page


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