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News : Irish Economy Last Updated: Oct 16, 2013 - 6:14 AM


Irish Budget 2014: Nation to be "astounded" by job creation and pension measures
By Michael Hennigan, Finfacts founder and editor
Oct 14, 2013 - 7:44 AM

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Irish Budget 2014: Michael Noonan, finance minister, said at the weekend that the nation will be "astounded by all the good news in the Budget," which will be delivered on Tuesday afternoon. He is expected to announce some eye-catching job creation and possibly pension measures that may well result in a continuation of the levy on private sector pensions.

The White Paper with the Estimates of Receipts and Expenditure [pdf] released late on Friday night shows the Department of Finance's 2014 estimates prior to Tuesday's adjustments. The paper shows that the 2014 general government deficit would be 5.8% of GDP (gross domestic product) while the 2013 deficit is forecast at 7.3%.

Seamus Coffey, the UCC economist, says that around three-quarters of the 1.5 percentage point improvement can put down to three factors:

  • The February 2013 liquidation of the IBRC required a €1.1bn (0.7% of GDP) payout under the Eligible Liabilities Guarantee (ELG) which will not happen in 2014;
  • The 9% temporary VAT rate for the tourism sector introduced in July 2011 automatically expires on the 31st of December 2013. This will increase VAT receipts by around €360m (0.2% of GDP);
  • The full-year roll-out of the Local Property Tax is expected to generate an additional €250m (0.2% of GDP) of revenue in 2014;
  • That only leaves 0.4 percentage points of a “do nothing” deficit improvement to possible growth effects (and there are other minor carry-forward effects that kick-in in 2014).

Coffey says that if deficit outturn for 2014 is set at 4.8% of GDP that means a 1.9 percentage point improvement in the deficit would be required in 2015 to keep in line with the limits set out under the Excessive Deficit Procedure (an EDP limit of 2.9% of GDP has been set for the deficit in 2015).

Noonan is expected to announce public investment in job creation projects and a cutting of the capital gains tax for entrepreneurs.

We said last June on the wind-up of the public pension fund:

With no credible jobs engine that could result in the creation of 200,000 net sustainable jobs in coming years; no prospect that an international recovery could trigger the "rocket" growth that Michael Noonan, finance minister, waxed eloquent about in 2012; ministerial economy with the truth in respect of the economy and challenges ahead; international tax rules likely to be changed for the first time since Ireland began using tax policy to promote inward direct investment in 1956; a weak indigenous sector illustrated this week by Elan, the onetime biotech firm reduced to a shell and putting itself up for sale and a Labour Party, the junior member of the governing coalition on the ropes mid-way in the election cycle, provides the backdrop to this week's announcement that the €6.4bn left in a public pension fund after bank recapitalisations, will be transferred to an Ireland Strategic Investment Fund (ISIF) to create jobs."

So there is significant funding available for projects between now and the general election in 2016.

The expected cut in the capital gains tax rate from 33% for entrepreneurs is not going to impact job creation. Unless a rate is punitive, nobody is going to decide on starting a business  based on the rate.

Besides, a low rate could even make the innovation policy more ludicrous by providing an additional sweetener to founders of publicly supported young high tech companies  to sell to bigger American firms, before the taxpayer gets a return.

The Central Statistics Office has reported that 33,000 jobs were created in the economy in the year to June 2013. The CSO says most of the jobs were in agriculture and tourism activities  and almost half the number were in self-employment (without employees).

Ministers brag about the 33,000 but at 86,000, there are more than that number in publicly-funded back-to-work schemes. Over 30,000 unemployed are in receipt of  education allowances and the remaining 50,000+ are counted as employed in schemes such as JobBridge and community schemes.

So it's not only emigration that  can give a misleading picture of the jobs market.

Last year the Labour Party ministers on two pensions demanded a big cut in tax relief for pension pots that delivered pensions over €60,000 in income and this is set to take effect in 2014. The net benefit for the exchequer is €250m. Beneath this overall limit, tax relief will continue to be granted on pension contributions at the individual’s marginal rate of income tax.

Various groups have lobbied for the retention of the 9% tourism VAT rate that was introduced in 2011 and paid for by a €1.8bn raid on private pensions via an annual levy of 2% which is due to expire next year.

Of course the advocates of retention of the low rate haven't said how it should be funded and the minister who has 3 pensions (he is a former teacher) may be tempted to continue the levy.

In a period of low yields, 2% plus charges on funds can wipe out any annual gain that a person near retirement invested cautiously, could achieve.

Irish Budget 2014 Page

Last week's ESRI Quarterly Economic Commentary said:

The Quarterly National Household Survey data show that seasonally adjusted employment rose by at least 0.5% quarter-on-quarter for the last quarter of 2012 and the first two quarters of 2013, resulting in an accumulative increase in employment over the three quarters of over 1.5% These data on employment have a good record on reliability and are rarely revised, unless due to a census.

While the CSO has indicated that there was some uncertainty about the sectoral classification of the employment increase, the change in total employment could be treated as being reasonably reliable.

The Live Register data up to September 2013 suggest that the fall in unemployment has continued into the third quarter. If this is the case, then the growth in average employment in 2013 compared to 2012 is likely to be closer to 2% than to the 1.5% that would transpire if there were no further employment growth in the third and fourth quarters…When the growth in employment is combined with a conservative estimate of only a small rise in productivity, this suggests a growth rate for the economy in 2013 of around 2% - - the forecast for GNP in this Commentary.

Some of you may recall a month ago that Joan Burton, minister for social protection,  told a press conference: “Ireland is now firmly in recovery mode,” having broke some good news at a Cabinet meeting. “I have just got the figures for the Live Register this week, it’s fallen by 7,700.”

At the end of September, there were 500,000 on the Live Register including 86,000 in publicly funded activation programs.

The 86,000 unemployed are counted as employed or in ‘Back to Education’ courses.

In April there were 33,000 in ‘Back to Education’ courses and 21,000 dropped off for the summer months with some signing on the Live Register (as the education allowance is not paid during the summer period). In September they returned to courses and this was why Joan Burton thought there was a jobs miracle in the making as they signed off the LR. The seasonally adjusted fall in the month was 2,000.

I have a suspicion that part of the rise of 33,000 additional jobs in the year to June 2013 reflects an understatement of earlier quarters.

Q1 2012 showed a non-seasonally adjusted drop in jobs in the quarter of 22,000 even though the Live Register fell as well.

Seasonally adjusted net jobs rose 11,000 in Q1 2011 and fell 8,000 in Q1 2012.

In the QNHS June 2013, almost half the jobs added (15,000) are in self-employment. It is not clear how many of these are classified as full-time.

Part-time workers who want full-time work was at 149,000 in June 2013 up from 4,000 in 2007.

I’m not disputing that there have been jobs added but data remains fragile. The CSO has reported falls in its monthly services index in July and August.

Full-time jobs in agency-assisted foreign firms in Dec 2012 were down 3,700 on 2007.

As regards the growth impact, there are 235,000 people either in activation programs or underemployed - - 11% of the workforce . Together with 301,000 officially unemployed, that gives a total of over 24% who are not making big bucks.

Is that a basis for a big growth surge in 2014?

Michael Hennigan

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