Budget 2018 – Optimistic but with an eye on risk and challenges ahead
Minister Donohoe presented Budget 2018 against a backdrop of extremely positive economic data.
Growth was projected to be 4.3% in 2017 and 3.5% in 2018 and reference was made to unemployment falling to its lowest level since 2008.
Encouragingly, there was little grandstanding over these figures and the focus quickly turned to the need to tackle some of the risks to Ireland’s enviable position at the top of the European growth charts.
Budget 2018 undoubtedly has an eye on risk, whilst recognising opportunity and building for the future.
Additional spending in health and education sets out to ameliorate some of the hardship of the recession years and the Minister proposes that infrastructure spending is ramped up gradually to not overheat the construction sector.
It was telling that the sequencing of the budget statement was housing and infrastructure first, then public services and tax.
Though commitments were made to retaining the Corporation Tax headline rate and tweaks were made to personal tax bands it was interesting that these announcements were demoted behind the need to invest in improving Ireland’s competitiveness.
Was it enough?
Budgets always bring to mind the textbook definition of economics – ‘unlimited wants and finite resources.’ Budget 2018 was no different. There were plenty of areas in which interested parties would wished to have seen the Government go further.
However, the Minister correctly pointed out that Ireland’s debt levels are still high and this means any future crisis cannot be resolved by loading up on more government debt, so a more cautious approach is required. Such is the demand in the Dublin market that the measures on housing and infrastructure are unlikely to quell the rise in prices but they are a step in the right direction.
The ‘Ireland 2040’ plan becomes even more critical and there will be a need to encourage development and prosperity to be spread across the country to avoid spiralling costs in Dublin.
Perhaps the most challenging of the tax rises, the commercial stamp duty hike, is the most concerning from a regional perspective with a number of markets likely to find this harder to cope with than the booming Dublin market.
From a business perspective, the main news is in the commercial property sector, with a significant increase in the rate of stamp duty on commercial property transfers, subject to a partial refund for property that is developed for residential use within a three-year period.
From this increase, the Minister projects a yield of €376m. Working backwards from this figure, property transactions in the region of €9.4bn would be required in 2018 to produce a yield at this level.
Commercial real estate investment in Ireland in 2016 was €4.5bn, less than half of the level of investment that would need to be made to reach that projection. Given that there was already significant investment in real estate in 2016, to assume a doubling of that level would be both over-optimistic and unsustainable.
The Stamp Duty increase on commercial property is probably justifiable in the context of the Dublin market. If an economy close to full employment, enjoying strong demand and healthy investor interest cannot afford this increase, at this point it is hard to imagine when it could. However, where there is more reason for concern is in many of the labour markets elsewhere in Ireland in which commercial demand is not as strong.
Admittedly, prices are lower and therefore the impact is less in money terms, but this is still likely to adversely affect places already struggling. It could be worthwhile for the Government to consider a lower or tapered rate for smaller projects - for example, a 3% rate for transfers up to €2m and 4% for transfers up to €5m. This might particularly help projects outside of Dublin where values are lower.
Joe Bollard, EY Tax Partner & Head of International Tax reacts the Budget 2018
Minister Donohoe reiterated his commitment to Ireland’s core offering – maintaining an open, transparent and stable corporation tax regime built on the cornerstone of the 12.5% corporate tax rate. It’s important that Ireland’s strategy continues to strive to deliver tax stability and certainty to domestic and international investors.
Ireland has a proven track record of success as an investment location, leveraging our highly qualified workforce, infrastructure and tax regime. As business wrestles with the unprecedented breadth and pace of change in the international tax environment, Ireland’s long-term stability in our tax regime can be a significant differentiator in winning investment both from domestic business and FDI.
Personal tax and entrepreneurship
The main new initiative in the personal tax sphere is the introduction of a favourable regime for share options issued by small and medium businesses. The Government’s new Key Employee Engagement Programme (KEEP) is a tax efficient share-based incentive relevant to employees in SME unquoted companies.
This new incentive should support the attraction and retention of key personnel to the SME sector. Gains arising to employees of share options awarded under KEEP will be subject to capital gains tax on sale, in place of the current liability to income tax, USC and employee PRSI. This will be welcomed by entrepreneurial business, as share awards are an attractive means of incentivising and retaining employees.
They represent a PRSI saving to the employer and can act as a retention mechanism by aligning employees’ individual performances to those of the company. However, it was disappointing that there were no new proposals for entrepreneurs to improve on existing reliefs despite huge focus in this area in pre-Budget submissions.
With Brexit on the horizon, it’s absolutely essential we don’t lose sight of our competitiveness when it comes to attracting the best talent to the country. Currently, Ireland’s personal tax regime is uncompetitive and inhibits job creation, with a marginal tax rate that continues to be one of the highest in the OECD.
While it was positive to see the introduction of the new KEEP scheme announced in the Budget this week, it was disappointing that no reference was made by the Minister to address marginal tax rates.
It is important that attention is paid to reducing the top marginal tax rate in Ireland so we can attract key talent and inward investment to our economy post Brexit.
This is an area where innovation in our tax policy can assist the overall competitiveness of Ireland as a location of choice for sustainable investment.
Infrastructure and capital investment
The focus given to infrastructure and capital investment in Budget 2018 is encouraging, including the commitment to build an additional 3,800 social homes next year. The positive connection between investing in productive infrastructure and economic growth is well established and globally recognised.
Expenditure in Infrastructure is a direct means of stimulating an economy, driving job growth and economic activity while simultaneously encouraging inward investment – all the more important in a pre-Brexit environment.
It will be important that the forthcoming infrastructure plans give more clarity on how investment can help improve the desirability of labour markets without the overheating pressures so evident in Dublin.
Naturally, measures announced today to assist the agri-sector are welcome given the significant risks that the sector faces amid Brexit uncertainty, and we would expect the announced loan finance scheme to be oversubscribed.
However, whatever favourable terms are available, borrowers will need to remember that any loan taken will need to be repaid. Agri-businesses will continue to face uncertainty over investment decisions, difficulties with tariff restrictions with the UK and exploring alternative markets, among other challenges.
It’s hoped that the additional resources being made available to the Department of Agriculture, Food and the Marine will include provision of expert resources to assist with such matters.
The changes announced to preserve Capital Acquisition Tax agricultural and business relief in situations where part of a farm is converted to leasing for solar energy generation are likely to be welcomed by farmers currently considering conversion options.
The Coffey Report and IP
Budget 2018 brings forward a number of the recommendations outlined in the Coffey Report. The Minister announced the re-introduction of the limit on use of capital allowances for intellectual property acquired after Budget day so as to smooth corporation tax receipts over a longer period.
Government has also allocated further funding in 2018 to build high level technical capacity to tackle complex tax avoidance and transfer pricing cases and to support the Competent Authority role, including MAPs which is required to protect Ireland’s tax base and contribute to additional yield.
The Minister also announced a public consultation, implementing recommendations in the Coffey Report, on Ireland’s implementation of the EC Anti-Tax Avoidance Directive and various transfer pricing matters. The consultation runs until the end of January 2018 which is not a lot of time considering the highly technical nature of the subjects involved.
These changes have relevance to all international businesses and we look forward to actively participating in that consultation.
A need for optimism
Presented with enviable growth rates many governments would have spent much longer congratulating themselves and it was extremely encouraging that this was not the tone set. But the fear of Brexit was palpable – evidenced throughout Minister Donohue’s speech, as well as through explicit Brexit mitigation measures, including the ‘rainy day fund.’
Recognising the challenge presented by Brexit is of course necessary, but it is important the Government continues to focus on the known problems facing Ireland, in particular the challenges to global competitiveness from rising prices.
Heading into 2018 the Government is spending more, business is spending more and with more consumers in work they too are spending more. This is a healthy position from which to face any challenge, even one as great as Brexit.