Tuesday 21 November 2017

A cautious, focused Budget that now faces the test of time

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Mike Hayes

For the second year running, the measures introduced in the Budget have been broadly uncontroversial and no major changes have been announced to business or personal taxation. By no means could this be mistaken for a "populist" Budget designed to "give back" to the maximum number of voters. Indeed, income tax changes were restricted to a modest reduction in USC rates applied at the lower income bands.

Instead, the broad objectives seem to be focused on making incremental improvements in areas where these are perceived to be most needed.

Unsurprisingly, the spectre of Brexit loomed large and Noonan spoke at length on the need to provide assistance to certain sectors of the economy which may be adversely affected, including agriculture and tourism. These included the retention of the reduced VAT rate for the tourism and hospitality sector (to counterbalance the negative effect of the drop in value of sterling). Farmers will also benefit with the introduction of a number of measures including an 'opt out' from the income-averaging basis of taxation in tough years.

While there is some evidence that Government also considered the longer term impacts of Brexit (and other macro-economic shocks) by committing to the 'rainy day fund' and revising the targeted debt-to-GDP ratio, arguably there is not enough in the Budget to draw new businesses into Ireland.

To the extent that UK-based businesses are forced to relocate as a result of Brexit, it is hoped that future budgets will take more positive steps to attract these to Ireland.

It was evident that the Budget needed to address the housing crisis in some shape or form and the key initiative which has been announced is the already widely publicised 'Help to Buy' scheme to assist first-time buyers.

As was expected, the initiative will apply to first-time buyers of newly built homes and it will provide them with a rebate of income taxes paid (up to a particular threshold) in order to assist them in meeting the Central Bank imposed deposit requirements.

Already there have been criticisms of the proposals from those who believe they undermine the Central Bank's macro-prudential rules and that the rebate will serve only to increase house prices and that it will not automatically lead to an increase in supply.

The minister has attempted to deflect the former criticism by obtaining the imprimatur of the Central Bank's Governor. However, insofar as the question of supply is concerned, the premise expressed by Mr Noonan that supply will automatically move to meet demand is questionable, given the already overwhelming demand for housing in Dublin and no clear sign of a resolution to the supply side of the equation.

A longer-term focus to the Budget was also evident in the measures dealing with climate change with various measures introduced or retained to promote energy efficiency, clean fuels and low pollution modes of transport.

Paschal Donohue also announced a €50m increase in funding for the Department of Communications, Climate Action and Environment to improve funding on matters such as the Renewable Heat incentive, Better Energy Homes grant scheme and electrical vehicles subsidies.

While these are all welcome measures, there are others, such as support tariffs for Irish solar and offshore wind development, which would arguably go much further in helping the country deliver on its EU 2020 renewable energy targets (and avoid potentially material EU fines in the process).

Budget 2017 is a cautious, focused Budget, designed to address very specific issues in the economy. Only time will tell if the measures announced do enough.

Mike Hayes is a Partner of KPMG Ireland

Irish Independent

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