Hanover

8 Oct 2017

Budget day is upon us! When the Dáil returns tomorrow afternoon, the Minister for Finance, Public Expenditure & Reform, Paschal Donohoe, will deliver for the first time his pronouncements on what extra taxes, earnings, benefits and services the people of Ireland will enjoy in the year ahead. While it is uncertain, to a degree, as to what exactly we might see, one thing is clear; the Government’s room for manoeuvre in a giveaway budget is very limited. Even after the ‘old reliables’ are taxed, alongside some new property and IP tax adjustments, the scope for change will still be relatively minor.

As such, we’ve compiled a list of some of the ‘bigger picture’ questions that are dominating the agenda, which will have a bearing on the politics of Budget Day, as the Government and Opposition sets their stall in what will likely be the last national budget of before a general election in 2018.

1. The Brexit Buffer

It is widely accepted that Brexit will cause economic difficulties for Ireland, regardless of what post-exit agreement is struck up with our largest trading partner. There has been much talk and commitments about making Ireland ‘Brexit ready’, but little fiscal action to date. There is speculation that the Minister will provide funding, allocated over a number of years, to safeguard businesses from the full impact of Brexit (namely along the Border), focusing on areas such as upgrading IT systems, upskilling, diversification and market access. Equally, a retention of the tourism/hospitality VAT rate of 9% is likely to be retained, despite the clear targetting of the measure by several groups as an easy revenue boost for the Exchequer.

It is also likely there will be an allocation of additional resources to the Revenue Commissioners, by way of people and infrastructure, as the sheer practicality of policing a customs border with a non-EU country becomes fully understood.

2. Confidence & Supply Agreement

At Budget 2017, one could highlight passages of Ministers Noonan and Donohoe’s respective speeches where Fianna Fáil policies and demands were inserted, as a method of appeasement to sustain the Fine Gael – Independent minority government. With the wide expectation that a general election will occur in 2018, Fine Gael may be less inclined to heed the views of their ancient foe and produce a budget that appeals primarily towards their voter base.

In a move that may spell the end of the Confidence & Supply Agreement (or its meaningful influence) between the two powerhouses of Irish politics, Fianna Fáil is strongly resisting Government plans to widen income tax bands in Budget 2018 – labelling a move as a direct breach of their agreement – while Fine Gael appear sternly on course to introduce such a change.

Such a dispute may be more a point of principle than policy, but will either result in a compromise or a collapse of the Agreement altogether. At this point, compromise appears likely, with cuts to USC a possible compromise, however what is less clear is whether this ‘win’ for Fianna Fáil will prove a Pyhrric victory, as Fine Gael encroach further into their ‘squeezed middle’ election territory.

3. Banana Skins: Health OR Housing?

Health and Housing were the two key battlegrounds upon which the 2016 General Election was won and lost, however the realities of operating a tight budget will mean that both cannot be granted the major financial injection required to bring about substantive solutions in a short period of time.

It is likely health will lose out to housing in this zero-sum game, as a significant portion of new public spending goes towards ramping up social housing delivery and the increasing availability of affordable accommodation. Outside of new measures, it has been mooted that several changes to existing policies, including the Help-to-Buy Scheme, the vacant site levy, property tax and stamp duty on commercial property may be on the cards.

Regardless of the final decision, finding a meaningful solution to the property problem (that does not rely on the situation naturally correcting itself eventually) has proven difficult for the Government in recent years – Budget 2018 decisions will effectively put Fine Gael ‘on the clock’ to make an impact before the general election judgement day.

4. The squeezed middle:

The next General Election could easily be decided on whether the ‘squeezed middle’ (middle income earners with high tax / daily costs) gravitate towards Fine Gael or Fianna Fáil. Both parties are targeting the provision of some relief, through tinkering with USC/income tax, devising measures to address childcare costs, or expanding the inheritance / gift tax relief brackets

No matter how it is packaged however, the reality is that any relief to middle-class earners will be very modest – a €200 million income tax package to increase current tax bands, for example, would result in some real savings of some €200 per year for a single person earning €40,000 annually, according to the Irish Times. Against this, there is still the need to spread the savings across many sectors, namely the ‘grey vote’ who will expect an increase in their pension. The net result inevitably means that no major voting bloc will lose out, but equally few will feel overly satisfied with the outcome of the day.

5. Corporation tax regime:

Budget 2018 will contain few, if any, major announcements aimed at the financial services sector, highlighting the stability of Ireland’s tax regime for the sector. Endorsing the sustainability and transparency of the Irish corporate tax code and 12.5% rate arising from the Coffey Report sends a strong message to the international financial services market. However, with the departure of the UK from the European Union, unprecedented change awaits over the coming 12 months and it is in no doubt a critical year for sector engagement in order to ensure that the introduction of the EU’s mandated tax changes is considered in the right manner. All this, combined with the potential tax treaty progress and ensuring that Ireland is Brexit ready, means the year ahead could shape the financial services sector for a long time to come.