The country is back on track - but we shouldn't be complacent, writes Paul Wyse of Smith & Williamson Freaney
Published 17/08/2014 | 02:30
There is little doubt that Ireland Inc is back on the right track. The Exchequer's returns were already €1bn ahead of target at the end of June, and the Government is expected to easily beat the 4.8pc deficit target set for 2014.
Meanwhile, the feelgood positivity surrounding the Irish economy has been further fuelled by the ESRI increasing its forecasts for 2014 and 2015. But while confidence in the economy is rapidly increasing, the Government still has crucial decisions to get right if Ireland's progress on the road back to prosperity is to be maintained.
Tough budgets over recent years have increased the tax burden on all taxpayers so the Government would do well to take note that any significant dipping into the pockets of people in this year's budget could quickly destroy the growing but fragile consumer confidence.
The good news for businesses and consumers alike is that the Government does not appear to need to take €2bn out of the economy in 2015. This is because it is well on the way to beating the target set by the IMF and the EU Commission to achieve a deficit target of 3pc GDP by 2015. The rise in employment will help fuel stronger domestic demand, while driving higher revenues for the Government and at the same time lowering social welfare payments.
Nonetheless, it is important the Government continues to boost and support the rise in job figures by sticking with the current employment incentives. But despite the good news, there are plenty of banana skins that could bring this recovery crashing down. It is vital the Government continues to support the local domestic economy and helps improve the net take-home pay of employees.
It has already indicated it would target a reduction in the top rate of income tax before the next election. However, it needs to address the fact that the entry point to the marginal rate of income tax in Ireland is the lowest in the OECD. Taking people out of this top tax tier will have a significant impact on spend in the local economy.
Water charges are due to be levied in 2015, in addition to the property tax charges introduced in previous budgets. The Government needs to make sure it does not dampen consumer confidence. With this in mind, the Government should focus on indirect rather than direct taxes to ease the burden placed on consumers.
So, rather than directly reducing people's take-home pay, the Government should focus on indirect and transaction taxes. This is because indirect taxes enable people to make discretionary choices of where they spend their income, rather than being taxed at source, and this will have an impact on consumer spending.
Also, with the property sector finally powering its way back, property-based transaction taxes rather than labour-based taxes should also be reviewed in light of the increased activity in that sector.
The underlying picture behind the property market at present is that prices are rising in an illiquid market, with cash buyers and weak housing supply squeezing out first time buyers. This needs to be urgently addressed. Indeed, the Government needs to ensure there is a concerted effort between planners, local councils and developers to increase supply in a balanced approach that brings supply and demand back in line.
The Government also needs to reverse the development land windfall taxes introduced in boomtime budgets and treat these as normal, commercial activities and tax them accordingly. This will help create an environment that encourages development of suitable residential sites.
The Government should also continue to focus on sectors important to jobs and recovery in the Irish economy, such as construction, food and agriculture, IT and R&D. Crucially, it needs to ensure the current tax reliefs and advantages remain in place to encourage these activities here.
The R&D tax credit scheme is essential in driving innovation in indigenous firms and in encouraging overseas firms to locate in Ireland and to make wider investment here. In fact, the Government should increase the certainty around this scheme.
Another vital challenge for the Government is to examine the refinancing of expensive IMF loans, currently at 5pc interest, and replace them by issuing Irish bonds. This would reduce our annual deficit and reduce the need for additional taxes.
As the recovery continues, there will be a large improvement in Ireland's public finances. This will help deal with reversing the massive cuts in employment and the salaries of the public sector and help with the significant work still to be done regarding the healthcare system.
But any increase in public spending needs to be undertaken at a pace the country can afford.
Overall, the Government needs to be cautious and pragmatic. This will help ensure it avoids the many minefields that could upset economic recovery.
The lessons from the Celtic Tiger era and the tough measures required to stabilise the economy should serve as a stark reminder that we cannot afford to mess up this recovery.
Smith & Williamson Freaney is authorised to carry on investment business by the Institute of Chartered Accountants in Ireland
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