Irish Budget April 2009: Ulster Bank Chief Economist Pat McArdle says the Government has funked the big decisions in the  Budget, while Tom Parlon of the Construction Industry Federation (CIF) has accused his former colleagues in the Government of dismantling the Public Capital Programme and rowing back on commitments to prioritise infrastructure improvements as a means of growing the productive capacity of the economy.

Finfacts Budget April 2009 Main Page

Initial reaction from Pat McArdle, Chief Economist at Ulster Bank Group on the supplementary Budget.

“Government funks the big decisions.

The size of the package was about right if a little on the high side at €3.3 bn in 2009 and €5bn in a full year.

This gives a deficit of 10.75% but this will be overshot as the forecast 8% GNP fall looks too conservative in the light of this very tough Budget.

As we feared, the balance struck between spending and revenue is all wrong with taxes up €1.8 bn and spending is cut €1.5bn.

Reason for this is that they ignored the two biggest spending items pay and social welfare.

The cost was that we got two levies doubled not one - health and income levies.

This is taxation with a vengeance.

Announcement of National Asset Management Agency is welcome but does not answer any of the big issues which are what will the price be and how will this affect bank capital, two issues which have bedevilled such schemes in other countries. There is still much to do.”

Turlough O’Sullivan, Director General of IBEC said:“Business considers that this Budget is a credible response to the current difficulties in the public finances. It sends a clear and positive signal that the Irish government is taking effective remedial action over the next five years. IBEC would have preferred a greater emphasis on cutting current expenditure immediately rather than on increasing taxation.

“Unpleasant though it is for all of us, the increases in income levies announced today are the most effective means of raising revenue with the urgency and simplicity required.

“On balance, IBEC supports the establishment of a national asset management agency and believes that this measure will further stabilise the banking sector and will help re-establish lending to businesses and households. It is critical that this is done in such a way that taxpayers’ interests are protected.

“It is regrettable that the supports for enterprise are so modest that they will do little to stabilise employment. This is a matter which must be urgently addressed.

“Whilst each one of us feels pain today, this Budget is a critically important step towards restoring our financial stability and international reputation.”

Eamonn Siggins, Chief Executive of the Institute of Certified Public Accountants in Ireland said: “Micro businesses are in melt down due to severe cash flow problems and the inability to source working capital. This is an immediate problem which is leading to weekly job loss increases. Regrettably there is nothing in this budget to support entrepreneurs and existing businesses in cash flow difficulties. Some form of micro loan guarantee scheme was expected to allow the banks prudently provide working capital or start up capital. Without it, we will continue to see businesses close and our dole queues grow longer. The Budget may well have been comprehensive in introducing measures to address the budget deficit but jobs in the micro business sector remain under threat”.

Siggins said the measures to restore the banking system are innovative and should help restore credibility in the sector. “However the Government must not allow the new commission to become another quango”. He also expressed disappointment at the Minister’s failure to implement much needed public sector reform.

Jackie Masterston, Tax Partner of Russell Brennan Keane said Lenihan duly obliged in terms of the increases in taxation which have immediate effect along with some changes that were not expected. She also said that the Minister detailed a platform for budgetary strategy in future years which entail some very fundamental changes to our taxation system.

 “It was expected that the budget would be focused mainly on cost saving measures and taxation changes that would give instant results in terms of raising revenue, to help address the shortfall in Exchequer funding” said Jackie.   Indeed many of the key changes which were predicted in advance of the budget were in fact confirmed such as;  

• Doubling the rate of the income levy to 2%; 4% and 6%. In addition, the entry levels for each of the thresholds have been lowered

• Increases in the rate of excise duty on diesel (no change to petrol) and cigarettes, etc

• The employee PRSI ceiling is being increased

• The existing health levy has also been doubled

Like all budgets he introduced some new unexpected measures to including;  

• A special stamp duty trade in scheme for residential properties

• Interest relief on rented residential property to be reduced to 75%

• Deposit interest retention tax (Dirt) increased to 25%

• Increases in the rates of Capital Gains Tax and Capital Acquisitions Tax to 25%

• The capital acquisition thresholds are to be reduced by 20%

• Most tax incentives in the health care sector to be abolished

• A scheme of tax relief is being introduced for the acquisition of intangible assets including intellectual property.

• The 20% special residential land rate of income tax/corporation tax is being abolished and losses from residential property restricted

• Mortgage interest relief on principal private residence will only be available for the first seven years.

 According to Masterston, a number of these changes were signalled but were somewhat wider than expected. With the exception of certain initiatives for training etc. “Unfortunately few initiatives were introduced to support business or enterprise or indeed to assist in the area of unemployment. “For example, the Minister did not use the opportunity to perhaps give a boost to enterprise through lowering of certain VAT rates, reducing the employers PRSI, or introduce new initiatives to boost enterprise and employment”. 

The Minster announced a whole range of initiatives to be introduced over the next few years, as he signalled a platform of reform to be introduced as part of his future budget strategy. The Commission of Taxation is due to report later in the year and its function is to advise the Government on how it might address changes in the taxation system.

Masterson said that “the changes signalled by the Minster will be fundamental and far reaching with a view to widening the tax base, eliminating or reducing many tax incentives and indeed changing the focus in terms of new sources of taxation. It is very likely that changes will involve the introduction of a property tax; taxation of child benefit; the introduction of a carbon tax and changes to pensions”.

Maintaining competitiveness is the only sure way to secure existing jobs and create new jobs both for the private and the public sectors, according to the Institute of Chartered Accountants in Ireland.

“The Minister’s task today was twofold – to halt the increase in money spent over taxation raised by Government, and to reintroduce some stability and confidence back to the economy. Given the size of our deficit, he could only begin to curb the growth in our National Debt, but we feel that matching additional taxation with cuts in spending is a sustainable strategy, provided that a focus remains on cuts on current expenditure” according to ICAI Director of Taxation Brian Keegan.

The tax and expenditure measures announced today will be difficult for all citizens. While the taxation measures will clearly be implemented, the proposals to moderate the size and cost of the Public Sector must be followed through. This will be essential to ensuring that taxes can be kept at acceptable levels in the future, and that the National Debt will not grow out of control. Both are key elements in improving Irish competitiveness.

One of the most important components of the Minister for Finance’s announcement today is the longer term strategy to tackle our economic situation. “The uncertainty both in the business community and among consumers has been a huge factor in the recent economic downturn. Most people realised that the country could not sustain the current levels of public expenditure with the taxes being collected, and that additional taxes would have to be raised. This uncertainty has choked off investment and consumer spending alike,” said Keegan. “We now have clear indications, if not specifics, as to the burden of taxation in the coming years”.

ICAI said it looks forward to seeing the details of the proposed incentives for investment in Intellectual Property, and also acknowledges the Minister’s ongoing commitment to preserving the 12.5% rate of Corporation Tax. “A useful tax regime, comparable with international standards, for the treatment of Intellectual Property is an important component in developing our knowledge economy”.

ICT Ireland, the IBEC group that represents Ireland’s high-tech sector, today welcomed the Government’s commitment to the knowledge economy by announcing that they plan to implement measures to support the ‘Smart Economy’ through investment and incentives to reach an R&D target of 2.5% of GNP by 2013.

“Today’s budget was certainly a tough budget for everyone, but we welcome the Government’s commitment to R&D and innovation. Continued investment in this area is critical if Ireland is to support and attract knowledge driven industries in the current global economic crisis,” said Kathryn D’Arcy, Director, ICT Ireland.

ICT Ireland also welcomed the Minister’s announcement to introduce a scheme of tax relief for the acquisition of intangible assets, including intellectual property, as a means of supporting the Smart Economy. “We look forward to seeing the details of this scheme over the coming weeks”, said Ms D'Arcy.

“At this point in time, we cannot underestimate the importance of schemes such as the current R&D tax credit scheme and the proposed intellectual property scheme to promote R&D and innovation taking place at the enterprise level. These schemes must be more attractive than those schemes offered by countries competing for R&D projects”, D’Arcy said.

Finally, while ICT Ireland welcomed the introduction of an Enterprise Stabilisation Fund to provide targeted support to indigenous companies, it said that it was nowhere near enough to assist companies in the exceptionally difficult business environment in which they are operating at present.

New IP relief to stimulate further inward investment- Deloitte

Tax changes on Intellectual Property welcomed

The introduction of a new tax relief on capital expenditure incurred in the acquisition of Intellectual Property will act as a catalyst to attract further inward investment into Ireland and ultimately lead to the creation of new jobs, according to Deloitte.

“There has been a lot of talk of the need to create a Smart Economy. The new move on Intellectual Property is a way of making the Smart Economy begin to become a reality. We welcome the move as it will serve to not only retain existing operations but to encourage others currently considering locating in Ireland to actually go and do so,” said Padraig Cronin, Head of Tax and Legal Services at Deloitte.

“It is a very good example of how government and industry coming together can help position Ireland as a natural home for Intellectual Property related enterprise. It provides a good foundation for further employment related incentives to be introduced in the future.”

The Construction Industry Federation (CIF) has accused the government of dismantling the Public Capital Programme and rowing back on commitments to prioritise infrastructure improvements as a means of growing the productive capacity of the economy.

The CIF also firmly dismissed any suggestion that the capital investment programme in its current guise can act as a stimulus for the Irish economy.

Speaking on behalf of the CIF, Director General Tom Parlon stated: “Public infrastructure spending has become a vital part of the construction industry and the economy over the past 10 years. The government is now winding down this spending with the inevitable effect of depressing rather than stimulating the economy”.

“The Public Capital Programme cannot be delivered unless sufficient pipelines of projects are commenced each year.

CIF welcomes the use of private investment to provide additional investment on capital plans, and would welcome further exploration of off balance sheet financing.

Many of the government’s assertions about its infrastructure spending plans do not hold up to scrutiny. The CIF has been monitoring the situation on the ground and all the indications are that the value of new projects started this year will not exceed half a billion. To achieve the targets set down by the government the value of new starts this year would need to be 16 times this figure.”

The CIF says the situation on the ground is clear:

- the social housing and water improvement programmes are at a standstill because of the funding difficulties within local authorities
- this year’s roads programme will comprise just one new project
- the rollout of new schools projects is badly disrupted
- the value of new starts in health will be of the order of €50m
- the public transport programme is cast in almost permanent uncertainty

Referring specifically to the cut backs in spending on non-national roads, the CIF Director General said: “These are the roads used by school busses and children cycling to school and the very same roads feature most of the country’s accident black-spots. The decision to cut investment in maintaining and improving these roads is extremely regrettable”.

Housing

The CIF said the budget is a lost opportunity to stimulate activity, and realise outstanding VAT receipts. The value of trapped VAT in built but unsold houses is €1.1Bn.

The stamp duty trade-in scheme will have little impact on the overall market.

The reduced Mortgage Interest Relief for investors will deter any future investors in the residential market. This ultimately will impact on the supply of rental properties, and ultimately the rental market.

Reacting to today’s announced cut of €100m in Ireland’s overseas development assistance for 2009, ONE Co-founder and Executive Director Jamie Drummond said: “It’s staggering that Ireland of all countries would slash its overseas aid budget at a time like this when it’s needed more than ever. In so doing, Ireland would forfeit its moral leadership role and the global goodwill it has built up through years of effective overseas co-operation.

“After four consecutive aid cuts, Ireland’s promises to the world’s poorest and most vulnerable people are in danger of ringing hollow.

“The Irish government must now urgently set out how it plans to get back on track to meet its target of devoting 0.6 per cent of national income to overseas aid by next year, and 0.7 per cent by 2012.”

The Chairman of the Drinks Industry Group of Ireland (DIGI), Kieran Tobin, has welcomed the Government decision not to increase alcohol taxes in today’s supplementary Budget.

Tobin described the Government decision as “an act of common sense that avoids increasing the pressure on an industry that continues to be a large employer and a significant generator of revenue for the State.”

Tobin commented, “DIGI welcomes the Government decision not to increase excise taxes on alcohol. Over recent weeks DIGI consistently highlighted that falling consumption and the major increase in cross-border shopping are having a severe impact on our industry, as acknowledged by the Minister for Finance in his Budget speech.

“Off-licenses, bars, restaurants, hotels and nightclubs in vulnerable areas will breathe a sigh of relief that the pressure they are under through their inability to compete with their equivalents across the border has not been intensified in today’s Budget.

“We can now look forward to working with the Government to support our industry and the 90,000 jobs it sustains, as well as the State and export revenues we generate.”

The Houses of the Oireachtas Commission has welcomed the changes to its budget outlined by the Minister for Finance in the Budget which should lead to annual savings of approximately €2 million.

Chairman of the Commission, Ceann Comhairle, John O’Donoghue, TD, said: “As Chairman of the Houses of the Oireachtas Commission, I welcome these changes. The measures outlined today by the Minister are in line with the amendments proposed by the Houses of the Oireachtas Commission in February. The adoption of these proposals demonstrates the willingness of the Oireachtas to provide leadership in challenging times. Members of the Oireachtas have now had very real reductions in their incomes and the level of support they receive towards the substantial costs involved in administering their constituency duties effectively. I believe this deserves to be recognised.”

Among the changes outlined today, there will be a 10 per cent overall reduction in members’ expenses, a measure which was proposed by the Commission in February.

In addition, allowances to chairmen of Oireachtas Committees will be halved to €10,000, while allowances paid to vice-chairmen, convenors to committees and chairmen of sub-committees will be abolished. Overall, this will lead to annual savings of €640,586 - or nearly 74 per cent – in the allowances paid to members of Oireachtas Committees.

Members will no longer receive long service increments. Furthermore, payments to politicians will be benchmarked against comparable European countries.

The savings to the Exchequer in members’ allowances comes on top of the savings already announced from the implementation of the pension levy for Oireachtas members which amounts to savings of €1.7 million this year. From 5th March 2009 members’ mileage rates have been reduced by 25 per cent. The Commitee travel budget has been cut by nearly 70 per cent.

Today’s cuts are in addition to the estimated €20 million in savings the commission has already committed to make from its budget by the end of 2009.

Ceann Comhairle, John O’Donoghue, TD, said: “Given the current difficult financial situation we face, we feel it is incumbent on us as politicians to lead by example and show the way in ensuring that greater value for money is achieved when it comes to the operation of our Parliament. The Commission is committed to ensuring that our parliament is run in a cost effective and efficient manner and the changes announced today underline that commitment.”

“While it is widely acknowledged that there is a real need for efficiency in the running of a modern democracy and Parliament, there must also be some recognition that Members of the Oireachtas need to be provided with the resources to serve our constituents when asked to do so. The challenge for us is to do this in a wholly transparent and open way which can bring greater confidence to the system.”

Matthew Ryan, President, Irish Hotels Federation, said the Minister is too reliant on tax increases for public financial stabilisation instead of current expenditure reductions. The 2009 adjustment is an extra €1 billion in tax, €800 million in PRSI and Health levies which are effectively taxes and only €886million of a current expenditure reduction with €576 million of a capital reduction. Ryan stated that the 2010 and 2011 situations is worrying in that a combined (full year basis) adjustment of €9.35 billion is planned of which €4.6 billion is tax and only €3 billion is current expenditure. This is not sustainable and will not contribute to increased economic activity.

Banking system – access to credit

“Whilst, the Federation welcomes the measures announced to stabilise the banking system and seek improvements in the supply of credit to the real economy. The objective must be to provide greater transparency around access to liquidity and to provide small and medium sized enterprises with access to the working capital they need for the day to day running of their businesses. We hope the cleansing and repairing the banks’ balance sheets will assist a return to normal lending practices that will support economic activity. We are however, concerned that the general tax payer should not carry the burden of the loan write down without a substantial contribution from the banks shareholders.”

VAT: The IHF is concerned that scope was not found to reduce VAT to stimulate economic activity. This could have been financed by additional current expenditure reductions.

Public Sector Charges: “We are calling on the Government to re-examine public sector charges and commercial rates which are having a considerable knock-on effect on businesses throughout the country. There is a pressing need for reductions in this area. It is no longer feasible for Government to talk about competitiveness at the national level and allow local authorities to impose monopoly type price increases which directly reduce competitiveness.”

The tourism industry made a direct contribution of 4% to overall GNP in 2008, making it Ireland’s most important indigenous industry supporting an estimated 250,000 jobs, of which over 60,000 are in the accommodation sector alone. With an estimated 2 million people presently at work in Ireland, tourism expenditure supports over 12% of those in employment.

Bank of Ireland welcomes the initiatives announced by the Minister for Finance in the Budget speech today concerning the extension of the Government Guarantee of certain liabilities of Irish Banks and to set up a National Asset Management Agency, to be run by the NTMA, which will be involved in the management of land, property development and associated loans of Irish Banks.

On March 31 2009 Bank of Ireland announced that it had received an investment of €3.5billion in Core Tier 1 capital from the National Pension Reserve Fund following an extensive and detailed due diligence by the NPRF and its advisers.

Bank of Ireland will actively engage with the NTMA and the Government to explore how these initiatives will apply to Bank of Ireland and assist in continuing to support customers, aiding economic recovery and, over time, rebuilding value for stockholders.

The Small Firms Association has broadly welcomed today’s Budget, as being important in restoring confidence to the economy. “In particular, the clear commitment by the Minister for Finance to tackling the fiscal imbalance in the economy should send the right messages to the international markets, and give businesses the confidence to reconsider investment decisions that have been postponed due to the uncertainty that has prevailed over the last number of months”, commented SFA Chairman, Dr Aidan O’Boyle.“We would have preferred to see the balance tilt to greater expenditure cuts rather than increases in taxation, but welcome the Minister’s clear commitment to retilt this balance in future budgets.”

However, the SFA Chairman was critical of the “paltry €100mn over 2 years Enterprise Stabilisation Fund”, which he said “would do little to support struggling small businesses in real terms”. The SFA had been seeking a €1bn range of supports for small businesses in 2009 to help businesses maintain jobs, improve their management development and innovation capacities.O’Boyle commented: “It is much more sensible to try to retain people in jobs that exist rather than retrain people who have lost jobs, for jobs that do not and have no prospect of existing in the short-term.” The SFA has serious concerns that the €128mn which is being reallocated to support 25,000 people in job activation supports, will be moved from the current funding for companies to upskill their employees to make them more competitive, which O’Boyle said “would be a serious policy mistake” and the SFA is seeking clarification from the Tanaiste in this regard.

Whilst the SFA chairman accepted the fact that practically speaking, raising taxes on income, including the income levy, PRSI ceiling and health levies, is the only way in the short-term to raise sufficient revenue to plug the whole in the public finances, he stated that he “fully expects that the burden of taxation will be moved from labour and capital to the less economically damaging property tax measures proposed in the next budget”. “The broadening of the tax base in the next number of budgets is absolutely essential”, he said.

In conclusion, O’Boyle welcomed the announcement of the establishment of the National Asset Management Agency to take the banking sector’s toxic debts, in the anticipation that this will mean a return to “business as usual” lending by the banks to small firms who desperately need support, in particular on working capital.