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Budget 2021: A deep dive into Ireland’s biggest budget

 

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All pictures: Getty Images

All pictures: Getty Images

All pictures: Getty Images

Budget 2021 was one of the most anticipated budgets for many years as the public waited to see how the government would respond to the unique challenge posed by Covid-19.

The resulting budget has been described as the biggest giveaway ever, with Minister Paschal Donohoe and Minister Michael McGrath delivering an ‘emergency’ budget against the backdrop of a global pandemic. With a budget deficit of €21.5bn forecast for year end, this Budget saw the announcement of spending measures of more than €17bn to address a situation unlike anything the country has ever seen.

We spoke to Kevin McLoughlin, Head of Tax at EY to discuss the Budget and delve into what it means for individuals and the wider economy.

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Kevin McLoughlin

Kevin McLoughlin

Kevin McLoughlin

A changing focus

Analysis of previous Budgets has often focused on the bottom line for the average person but this year saw a greater emphasis on top-down thinking and the overall package of funding.

“If you think about Budgets in years gone by, the post-event analysis is always concentrated on what is the outcome for the individual,” explains McLoughlin. “How much more or less would they have in their pocket as a result of the measures announced.”

He points out that this year was different, with the response to Covid-19 dominating the public’s thoughts.

“The Budget this year looked to reassure people that there is significant levels of investment continuing to be made in the health service to insure that the health service doesn’t buckle under the weight of Covid."

In addition to announcing an extra €4bn for health services, it saw the Government double down on many of the temporary supports that were put in place to deal with the crisis. The extension of the Employment Wage Subsidy Scheme and the Pandemic Unemployment Payment provided longer term guarantees for those affected by the current crisis.

“At an individual level I think people probably did get reassurance from a financial support perspective that the taps wouldn’t be turned off if the situation doesn’t improve,” says McLoughlin.

It sent a clear message of a commitment to protect individuals, jobs and the provision of a safety net in the longer term.

“Fundamentally, I think this year it makes sense for people to look at the net impact of the budget from a broad services perspective, rather than the personal net impact of tax perspective .”

An emphasis on preserving jobs

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Another theme of the Budget was around the importance of jobs, especially from a recovery perspective.

“A lot of the measures around the pandemic support payments are about trying to keep people connected to their employers, so that ultimately when things recover, those links are there and are easily re-established rather than employers having to search for people and people having to search for work.

“There was a really clear message around the importance of maintaining current levels of employment and about positioning very strongly that re-employment of people was a key cornerstone of the recovery.”

The Government’s focus on job creation and retention was reiterated by its forecast that, while 320,000 jobs would be lost in 2020, it aims to offset job losses with a further 155,000 jobs to be added in 2021.

McLoughlin notes that there are echoes of the global financial crisis recovery here, when the contributions made in personal income taxes and employment PRSI contributions were a driving force in helping the country move from an exchequer deficit to a surplus and into recovery.

“I think there’s a recognition, maybe more implied than explicit here, that the Government would see that return to employment as a critical part of rebalancing the books from an overall exchequer perspective.”

Jobs creation and innovation

While much of the Budget was pitched to focus on the immediate challenges, the Government clearly had an eye towards the future economy and the critical role that innovation has to play in that.

The establishment of a new group that includes the Department of Business, Enterprise and Innovation along with the Ireland Strategic Investment Fund, the European Investment Bank, the European Investment Fund and Enterprise Ireland will allow innovation-rich businesses to tap into European sources of funding, which will then be matched by the government.

“I think that’s really good. It will certainly help fast-track investment to businesses that have the potential to create really significant value and significant employment in the process.”

The Budget also took steps to foster emerging industries with the announcement of new tax credit for the digital gaming sector.

“The proposal to introduce incentives for investment in the digital gaming sector was definitely welcome. That’s another area that has strong long-term potential to create value and create employment.”

The extension of the Knowledge Development Box Regime for a further two years will also see R&D-focused businesses continue to benefit from a lower rate of tax for Irish-based activities.

Support for arts, culture and hospitality

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The reduction in VAT from 13.5pc to 9pc for the tourism and hospitality sectors will provide some much-needed respite for an industry that’s under siege and provide it a degree of certainty about the future.

“The big difference between it and the earlier Covid measures is that it’s been flagged as something that will be in place for the next 14 to 15 months so it will go all the way through to the end of December 2021. That gives businesses in that sector a little bit of longer-term visibility for how they might plan to navigate the coming year.”

More broadly the services sector which has been significantly impacted by the Government’s ‘living with Covid’ plan and associated restrictions received a much-needed cashflow boost in the form of the new Covid Restrictions Support Scheme (CRSS). The scheme will provide businesses negatively impacted from level 3 and above Covid restrictions to receive a weekly cashflow benefit up to an amount of €5k.

The scheme, which will be administered by Revenue, takes the form of an advanced tax deduction on future operating expenses of impacted businesses. The amount is calculated by reference to a business’s 2019 turnover and will be capped at an amount of €5k pre week. The scheme will run to March 31, 2021, and the first payments are expected to be made by Revenue from mid-November.

The arts and culture sector also received a boost, with Arts Council funding increased to €130m.  

“There are very direct support measures announced which really are intended to provide a degree of subsidy to businesses whose business model - given the restrictions on the numbers of people that can attend concerts, shows, plays etc - is so restricted by Covid that their ability to make money now becomes really, really difficult.”

Green shoots?

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Many of the environmental measures had been well flagged prior to the budget but there was significant investment in transport infrastructure as well as the bus and rail network. An increase in the carbon tax was anticipated but McLoughlin notes that it included a useful outline of what the future holds.

“What was positive in this budget  was rather than waiting every year to hear where is this going, the minister set out his stall very clearly, telling us that the aim is to get the carbon tax up to €100 per tonne by the end of 2030. I think that is positive in the sense that it gives clarity, both for people and for businesses as to the direction of travel and he’s mapped out a consistent rate of increase over the course of that period to get there.”

There was a clear indication that a move to renewable energy and low carbon alternatives would benefit businesses. Although the Government hasn’t banned the buying of diesel cars like other countries, McLoughlin notes that consumers will have no doubt about which way the wind is blowing.

“They’ve made it very clear to people that if they continue to buy petrol or diesel cars, it’s going to be much more expensive than if they move towards more environmentally-friendly models.”

Farming has often found itself in the crosshairs of environmental campaigners but this Budget didn’t address environmental concerns in the sector.

“There was no reference to agriculture; perhaps it’s a sector to leave untouched at a moment where food security, Brexit etc. are all circling.”

Brexit takes a backseat

With Brexit looming, it might have been expected to have a bigger role in proceedings but McLoughlin believes that the Government might argue that it had already addressed many Brexit concerns and infrastructure requirements in previous budgets. Like so much else, it was somewhat overshadowed by the pandemic.

“Unquestionably for me, Covid dominated the Budget, it dominated the thinking up to the Budget and I think it’s likely to dominate the thinking for the foreseeable future until the health situation comes under control.”

What next?

One of the big positives from this Budget was the fact that it shows how far we have come as a nation since the global financial crisis in terms of our ability to address the emergency that we’re currently experiencing.

“We’ve come a long way over the last 10 to 12 years to be in a position where we can borrow in our own right, and we can borrow at low levels of interest in order to try and get through this,” adds McLoughlin. “Ireland clearly has credibility in the debt markets and that’s a really positive thing.”

While he sees it as a positive budget overall, questions remain about how the country is going to fund this spending and ultimately address the deficit.

“There is an open question in that while we continue to run deficits, to what extent is the government looking at taxation in terms of how it might bridge that gap? Again, there was no discussion of that in the Budget.

“The Minister had made it really clear in the run up to the Budget that he had no intention to increase personal tax at all – so income tax, USC, PRSI were all going to remain untouched. So the question remains, ‘What levers does the Government have to address the deficit when you look at the main tax areas here?’”

He questions whether there is much room to increase income tax, while the rate of corporate tax is a cornerstone of government policy and an increase in indirect taxation won’t be enough on its own. There is also a question of whether some of the spending announced in Budget 2021 is Covid-specific or of a more permanent nature.

“There are obviously significant spending measures in the Budget that are not purely Covid-related so there’s an open question as to how much we permanently bake those costs into future budgets and to what extent does that put further pressure on deficits in the future.”

It raises the spectre of uncomfortable political decisions for future governments in an effort to reign in the deficit, give the limitations on its existing means to do so. Previous attempts to broaden the tax base with contentious proposals like water charges will still be fresh in the minds of many politicians.  

“When you contemplate how you bring your finances into line, obviously raising taxes is one of the things you think about but costs and cost reduction are the other things that spring to mind. Both of those can be politically contentious so it’s difficult to see that the government isn’t going to have to think about either or both of those measures going forward.”


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