Economy

Economic impact of Budget 2011 - Marie Diron Economic Advisor to Ernst & Young: "The Budget 2011 confirmed the headlines figures and measures of the National Recovery Plan. It inflicts significant pain for the economy from next year. Irish households will suffer a reduction in disposable income from the lowering of tax bands and cuts in welfare payments in particular. More restrictive pension arrangements will also affect incomes and spending. The Government tried to buffer some of this pain with a few growth-promoting measures such as job placement plans and, importantly, the preservation of the 12.5% corporation tax rate.

But any deficit-reduction programme amounting to 4% of GDP is bound to have a large negative impact on the economy. Indeed, we are forecasting a significant contraction in economic activity in 2011, a much bleaker picture than the Government currently depicts. So the key issue is whether a worse-than-currently budgeted for economy will require yet new deficit reduction measures in order to meet the EU and IMF targets.

The Budget is also surprisingly silent on the restructuring of the banking sector, clearly a key issue about the outlook for the Irish economy. More clarity will need to be brought in the forthcoming week.

Overall, while the international financial aid package has brought some stability to the Irish economy, and has been today confirmed by the Government, the task ahead to bring public finances and the banking sector back to sustainable positions remains daunting."

Employers: IBEC Director General Danny McCoy said: “The scale of the budgetary adjustment is required, but how it is achieved is just as important. More should have been done to reduce current expenditure, which remains too high given the major fall in tax revenue. The size of the public sector is out of line with the size of the economy and more action is needed to address this imbalance. Business is disappointed that there is little in the budget to help job creation or to restore the competitiveness of the Irish economy.

“The budget should give consumers greater certainty about their future incomes and encourage a resumption of more normal spending and saving patterns. Despite the large scale of the budgetary adjustment, the economy remains on track to recover in 2011, largely on the back of a stronger contribution from the export sector.”

 McCoy also made the following points:

Cost of employment: “The reduction in the employer PRSI relief on pension contributions will cost Irish business about €90 million per year at a time when many employers are already struggling to keep pension schemes afloat. Cuts to some working-age welfare rates will also result in higher employment costs for business. Tax changes for employee financial involvement schemes will also be an additional cost to employers."

Capital programme: “The reduction in the capital expenditure budget is excessive and it is particularly disappointing that the Budget did nothing meaningful to facilitate financing from other sources in order to offset the collapse in the Exchequer capital budget.”

Internship programme: “The proposed internship programme is a good idea. It will help get graduates connected to employment opportunities and limit the increase in emigration.”

Excise: “Business is concerned about the excise hike on transport fuels. When the carbon tax is added to this over coming budgets it will lead to a significant loss of competitiveness for Irish business. It would have been better to generate the revenue by increasing the proposed property tax.”

SFA: The Chairman of the Small Firms Association, Dr Aidan O’Boyle has said that “today’s budget should generate greater certainty among small businesses, now we have a plan in place to tackle our problems and hopefully the creation of a better environment for business and growth. However, this budget is not sufficient to improve consumer confidence and get people spending!”

As credit remains a key concern for small firms O’Boyle welcomed the extension of the 15 day prompt payment by the end of June 2011 to the HSE, Local Authorities and state agencies.

Regarding access to credit, O’Boyle commented that while further investment was being made in to the banking system the Government had again ignored the issue of credit for small firms. “This Budget has ignored the fact that many viable small businesses lack two key ingredients to access financial support from the banking system: they lack collateral because of the property bubble collapse and associated high negative equity and they lack a good track record over the past two to three years because of the worldwide economic recession and loss of consumer confidence and spending at home”.

“The banks are commercial entities and will not move from risk assessment criteria about what is a viable business and therefore we will still require government intervention to breach this gap, with some form of risk sharing scheme between government and the banks. We, small business, are the life blood of this country and it is time this was recognised. Time is running out - we need action,” stated Dr O’Boyle.

The SFA welcomed the Minister’s strong commitment to retain the 12.5% rate of corporation tax, and the three year corporate and capital tax exemption for new businesses set up in 2011.

The extension of the Employer Job PRSI Incentive Scheme to the end of 2011 and the review committed under the National Recovery Plan of the REA and ERO frameworks over the next three months are positive steps. The review of the REAs will assist in bringing labour costs in these sectors in line with the current economic environment.

O’Boyle said “the raising of the PRSI rate for the self employed owner manager is not encouraging for small business development at a time when job creation and retention should be our primary objective!”

Commenting on the Social Welfare reforms announced, O’Boyle said that the recent developments in the labour market have highlighted the need to reform the social welfare system in Ireland in order to provide a greater incentive to take up work or training opportunities.

Finfacts Budget 2011 Page

Minister for Finance Brian Lenihan TD with the Budget 2011 documents at Government Buildings, Tuesday, Dec 07, 2010.

Taxation/ Accountants

Budget Does little to Support Enterprise: Commenting on today’s budget, Eamonn Siggins, Chief Executive of the Institute of Certified Public Accountants in Ireland said: “Consistent with the National Recovery Plan, the 2011 budget will see €4 billion in spending reductions and €2 billion in tax increases, however spending cuts and an increased tax take in themselves will not be sufficient to increase our GDP. We need to do more to protect key incentives to generating enterprise. There is no evidence here of a solid strategy to improve our international competitiveness, boost consumer confidence, grow indigenous business or create jobs. We appreciate that the fiscal challenges of this year’s budget were huge however, from a business perspective; more could have been done to create a platform for long term economic recovery. This budget was a tax gathering exercise with little stimulus.

“Small and medium enterprises are in a critical state 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 that are experiencing cash flow difficulties, compounded further by increasing energy and local authority costs.

“Whilst there is some acknowledgement of the important contribution of the SME sector with the planned introduction of Business Investment Targeting Employment Scheme (BITES) we do not believe this goes far enough to address the issue of business funding. The Budget may well have been comprehensive in introducing measures to address the fiscal deficit, but employment in the micro business sector will remain under threat”.

Siggins also welcomed the commitment to retain the corporate tax rate at 12.5%

Ernst & Young - Budget 2011 - Reaction

Quotes below include:

• Corporate tax - Corporation tax; Competitiveness ; Bites scheme; Start up exemptions; Air travel
• Property tax - Stamp duty; Property incentives
• Income tax - Marginal rate; Universal Social Contribution; Tax Rates and credits
• Pensions
• Indirect tax

Corporate Tax - Kevin McLoughlin - Head of Tax Services Ernst & Young

Corporation Tax

"We have consistently highlighted the importance of the 12.5% corporation tax rate as a factor in maintaining Ireland's international competitiveness. We anticipate that investors can look forward to long-term stability in the 12.5% rate."

Competitiveness

"The Budget acknowledges the need for Ireland to remain competitive through acknowledging that our tax system must not damage our growth prospects. Ernst & Young will continue to engage with key stake-holders on improvements to Ireland's attractiveness as a location for international business. We are continuing to present the views of our clients on improvements to our regime in a variety of key areas including intangible assets, R&D and innovation credits, treasury activities and green energy."

It is interesting to contrast the corporate tax measures with those announced in the recent UK consultation document on corporation tax. Ireland is very much adopting a 'what we have we hold' approach whereas the UK is proposing some interesting measures in the taxation of income from intellectual property, and foreign profits, which could make the UK a more significant competitor for mobile inward investment than heretofore."

Bites scheme

"As flagged in the National Plan, there will be significant enhancements to the current BES (to be renamed 'Employment and Investment Incentive'). Improvements include increases in the annual and lifetime limits that can be raised under the scheme, with the promise of simplified certification requirements. If it works, it could provide companies much needed access to capital when most traditional sources have dried up.

Start up corporate tax exemption

"Business will welcome the extension of the start up corporate tax exemption, and the accelerated capital allowances scheme for energy efficient equipment. What will also be welcome is the long overdue reduction in the rate of withholding tax from 35% on payments to tax registered subcontractors in the construction sector, finally bringing it into line with the standard rate of tax, which applies in most other withholding tax situations."

Air travel

"The standardisation of the rate of air travel tax is probably more to do with having a system which does not discriminate based on distance flown, and therefore potentially subject to challenge under EU law, than supporting tourism."

Property tax reform - Susan Lynch - Director Personal Tax Services Ernst & Young

Stamp duty

"The reform of the stamp duty regime for residential property is welcome and may provide a much needed boost to the second-hand property market. However it may not be welcomed by builders holding stocks of new properties in respect of purchasers may have benefited from the exemption or relief under the old regime. "

Property incentives

"The announcement that property incentive reliefs applicable to existing investments will be phased out will be a matter of concern to taxpayers who entered into investments with the expectation of obtaining tax reliefs. These reliefs may now be withdrawn before the taxpayer has had an opportunity to benefit in full from the relief. In many cases the price paid by the taxpayer for the investment will have included some premium based on the availability of the relief and so will be left out of pocket."

Income tax - Jim Ryan - Tax Partner Ernst & Young

Marginal Rate

"Despite the 1% increase in the rate of PRSI payable by the self employed, when it is aggregated with the Universal Social Contribution, which replaces the health contribution and income levy, it will bring their marginal rate in line with those in PAYE employment of 52% thereby removing the current anomaly under which self employed individuals have a marginal rate of up to 55%."

Universal Social Contribution

"In reality the Universal Social Contribution will simplify the administration, calculation and collection of the health contribution and income levy by consolidation them into one 'contribution' with a combined rate of 7% on income above €16,016,with a lower rate on lower income. This raises the question as to legitimacy of the temporary nature of the 'income levy'."

Tax Rates and Credits

"Both the amount of income chargeable at 20% and the personal tax credit have been reduced by 10%, and we can expect to see similar reductions for the next 3 years. In reality this will lead to an increase the individuals tax liabilities of between €20 and €36 depending on whether they are single or married."

Pensions - John Heffernan - Tax Partner Ernst & Young

"On top of the restrictions in pension tax relief already announced, the Minister has gone a step further and has made 50% of the employee pension contribution subject to employer PRSI at 10.75%. This takes effect from 1 January 2011. This is a retrograde step as it places a further costly burden on employers in providing funding for occupational pension schemes.

High earners are particularly hard hit. As well as the range of restrictions on pension tax reliefs, there are 3 specific pension measures aimed at the high earner. These are (1) High earners will take a further tax hit on the earnings cap for pension relief which is to be reduced from €150,000 to €115,000 (2) The maximum pension funds that can be created for an individual is to be reduced from €5.4m to €2.3m and (3) the maximum amount that can be extracted tax free from the pension fund is to be capped at €200,000."

A sting in the tail for ARFs.

"In a surprise move, the Minister has moved to increase the tax take from Approved Retirement Funds ( ARFs ) by 40%. The annual deemed taxable income in an ARF is to be increased from 3% of the fund value to 5% of the fund value. This tax is to be applied regardless of the performance of the fund and so will apply even at a time when the fund value is falling.

High earners hoping to get full tax relief on pension contribution for 2010 were taken by surprise in the Budget. Under well established tax rules, self employed and AVC contributors can wait until 31 October in the following year before paying pension contributions. In this way, pension contributions paid up to 31 October 2011 can qualify for tax relief in 2010. High earners were hoping to maximise their 2010 contributions and avoid some of the harsher restrictions on pension tax relief to take effect for the 2011 tax year. The Minister is to close off this opportunity. The reduction in the earnings cap from €150,000 to €115,000 will apply to pension contributions made in 2011 for the 2010 tax year"

Tourism

Ryanir on travel tax cut to €3: Ryanair said the Irish Government still has no tourism policy and Irish tourism will continue to be strangled by a €3 tourist tax and the high and increasing charges levied by the Government owned DAA airport monopoly. While the reduction in the tourism tax from €10 to €3 per departing passenger in budget 2011 is welcome, this was clearly forced on the Irish Govt by the EU Commission’s infringement proceedings against the illegal €10 tax. Ryanair condemned the Government for not going the whole way and scrapping this useless tourist tax altogether as the Dutch, Belgian and Spanish governments previously have.

DAA Launches New Incentive Scheme to Encourage Traffic Growth At Its Three Irish Airports: The Dublin Airport Authority (DAA) has unveiled a major new financial incentive scheme to encourage traffic growth at Dublin, Cork and Shannon airports next year.

The Grow Incentive Scheme will see Dublin, Cork and Shannon airport effectively waiving all airport charges for passenger traffic once an overall threshold of 23.5m passengers is reached during 2011.
Once the passenger target of 23.5m for the three airports is surpassed, the DAA will subsequently rebate the airport charges for all of the additional passenger traffic to its airline customers.
The threshold of 23.5m passengers for next year is equivalent to the throughput across the three airports this year, normalised for the exceptional impact of the volcanic ash crisis.

“This innovative scheme will encourage airlines to maintain and grow their traffic from Dublin, Cork and Shannon airports next year,” according to DAA’s Director of Strategy Vincent Harrison. “Any additional traffic over and above the 23.5m threshold will be free of airport charges. We estimate that an increase of 1m passengers above the 23.5m target would be worth about €10m to airlines in terms of airport charges waived.”

Rebates will be based on each airline’s proportion of the total traffic across Dublin, Cork and Shannon airports during 2011. Rebates will be paid to airlines in early 2012 for all passengers over and above the 23.5m threshold.

The Irish Tourist Industry Confederation (ITIC) welcomed many of the measures in today’s Budget and complimented Minister Mary Hanafin, Minister for Tourism, Culture and Sport, on achieving high recognition at Cabinet for the job creating possibilities which the industry possesses.

“In a perfect world we would have wished that some of these changes were not necessary, but given that recovery must start from here, several of the measures which the industry sought, and which have been met to a substantial degree in Budget 2011, give tourism a realistic chance of staging a recovery in 2011,” said Eamonn McKeon, Chief Executive of ITIC. “The reduction in the airport departure tax to €3 is a significant development. When this is coupled with the DAA incentive of free landing charges for all additional new passengers produced by the carriers, this is a major incentive for the airlines to develop new routes,” he said.

Property

Stamp Duty: Under the new regime, a flat rate of 1% stamp duty will apply on all properties up to a value of €million and 2% thereafter.

"The new regime will mean that stamp duty will plummet for existing homeowners who wish to trade up or simply relocate" said Frank Conway, Director at Irish Mortgage Corporation.

Using the example of a second-hand property costing €250,000, existing homeowners will now have a stamp duty liability of just €2,500 compared to €8,750 under the current stamp duty regime (Note: there is no stamp duty currently on new homes for owner occupiers).  First time buyers however will return to paying stamp duty for a the first time in a number of years. Currently, first time buyers pay no stamp duty on either new or second hand properties.

Under the new regime, on a property costing €250,000, first time buyers will now have a liability of €2500 whereas under the current regime, their stamp duty liability is €0.

"First time buyers make up about 40% of the mortgage market currently so it will be interesting to see what affect the change will have" said Conway. "The new stamp duty changes are welcome because for the first time, there is certainty in the property market. Existing homeowners will no longer be crippled with significant stamp duty costs. At the same time, there are no property price bands (except for properties costing more than €million) which became property setting points under old stamp duty regimes."

IAVI: Today the Irish Auctioneers & Valuers Institute has welcomed the announcement by the Minister of Finance to reduce the level of stamp duty on residential property to 1% on properties valued up to €1million and 2% on sums in excess of this figure.

According to Simon Ensor of the IAVI National Council: “The reduction in stamp duty will afford people greater opportunities to trade up and down in the market and will offer people greater mobility and improve efficiency in the use of the national housing stock.

“Stamp duty reform is long overdue and we hope it will provide an impetus to the market. While these reductions will be good for the market they may prove to be a disincentive for first time buyers who were exempt from stamp duty on all new homes and up to €150k on second-hand homes. The Minister indicated that all stamp duty related reliefs were being abolished.

“The development of a National Property Price Register is crucial to ensure transparency in the market and we welcome the Minister’s commitment to this critical measure. Today’s measures together with the recent National Recovery Plan to introduce an annual property tax will provide the market with greater certainty,” he said.

Surveyors: The Society of Chartered Surveyors has criticized the decision by the Government to limit the capital spending programme to 3.6% of Gross National Product. The SCS said 200,000 construction jobs had been lost in the last 3 years and reducing the capital spending programme would lead to further job losses. The SCS said direct exchequer funding for new public building and civil engineering works had been cut back during the last two Budgets and the collapse of the construction sector had spread to the wider economy.

However SCS President Peter Stapleton said the Society welcomed the fact that the National Pension Reserve Fund would be used to finance infrastructural projects and the Society would work closely with the Government to ensure that this new funding mechanism would offset the ongoing cuts in direct funding.

‘While great strides have been made to complete Ireland’s infrastructure jigsaw, the last pieces need to be put in place. We are pleased that government will harness the power of the National Pension Reserve Fund and use this period of low tender prices to finish the national public infrastructure project. Nonetheless, more direct investment is needed to secure jobs in the short-term and position Ireland to return to growth in the long-term,’ according to Stapleton.

The SCS welcomed the substantial curtailment of Stamp Duty for residential property sales which will provide a kickstart to the current very inactive market and which will stimulate and improve the volume of transactions.

The SCS also welcomed the Governments decision to introduce an energy efficiency initiative for domestic houses. In our pre Budget submission we suggested such an initiative. This measure will cut consumers energy costs while at the same time increasing employment Stapleton concluded.

CIF: Capital investment cuts to impact up to 25,000 construction jobs and create drag on domestic recovery

The CIF has expressed huge concern for employment and activity in the construction sector, and the impacts for the wider domestic economy, arising from the €1.8 billion cut in capital investment announced for 2011 announced by the Minister for Finance.
Reacting on behalf of the CIF, which represents employers operating across all sectors of the construction industry and who collectively employ over 125,000 people directly and a further 32,000 indirectly, its Director General Tom Parlon said:

“Cuts in capital investment are over 50% of the expenditure measures announced today despite capital accounting for less than 10% of the total day-to-day spending in the economy and the fact that the investment is returned to the State in employment and future productivity and competitiveness improvements. We acknowledge that the Government was faced with difficult choices but believe that the impact of the cuts in capital investment will create a significant drag on economic recovery next year and that productive investment should have been ring fenced to support recovery. We believe the wrong choice has been taken in terms of the proportionality of cuts between capital investment and current spending”.