Without growth, Budget 2015 spells trouble

IT IS hard to imagine a budget in the history of the State that attracted more attention from abroad, or at home for that matter.

To put yesterday’s budget in context, this is the first time since 2008 that a finance minister did not address the Dáil to announce either tax increases or spending cuts.

Instead, there was roughly €400m in tax cuts and €600m in spending increases. This is a sharp turnaround from the previous six budgets, which had the cumulative effect of taking close to €30bn or 20% of GDP out of the economy.

From a purely economic perspective, Budget 2015 is a disaster. Ireland is a highly indebted country. The national debt is roughly 116% of GDP. More importantly, the country is still borrowing over €100m a week just to fund basic services.

In that scenario, it would have been much more prudent for the Government to introduce €2bn in consolidation measures, which would have accelerated the move towards a balanced budget. Only then would Ireland be in a position to start paying down the mountain of debt.

This was precisely the view of the Irish Fiscal Advisory Council and, more importantly, the European Commission.

VISIT OUR DEDICATED BUDGET 2015 SECTION FOR MORE NEWS AND ANALYSIS

However, the political perspective was much different. Roughly 50,000 people who marched through Dublin last week to protest at the water charges. Overall, the new water tax will raise €300m — a relatively modest sum compared with the scale of cuts over the past few years.

Imagine if the Government signalled that there was going to be another €1.7bn in consolidation added to the water charges in this budget? Austerity has reached breaking point for the electorate.

The political landscape has become increasingly unstable. The odds have shortened on the Government falling before the next election.

And this is where the EU Commission and IFAC should be careful what they wish for. The main opposition forces in the next election will be Sinn Féin and Independents loosely formed around the Anti-Austerity Alliance. Both have committed to unravelling the property tax and water charges, as well as increasing the level of spending in key areas such as social services, health, and education.

Ireland has committed to reducing the budget deficit below 3% by the end of 2015 and maintaining a structurally balanced budget from 2018 onwards.

Mr Noonan said that, unless growth collapses, the Government will reach a budget deficit of 2.7% next year following the impact of yesterday’s budget. If it doesn’t and the deficit exceeds 3%, then in theory the EU Commission could impose a fine of up to €300m for ignoring its advice and missing the agreed target.

The ability of Ireland to stay within the terms of the fiscal stability treaty in the future hinges on having a government that is committed to maintaining fiscal discipline for the foreseeable future.

Of course, the EU commission was not just interested in the arithmetic of yesterday’s budget. There was also the very contentious issue of the corporate tax regime. Ireland has come under increasing pressure over the past few years to scrap the complex tax mechanism known as the ‘double Irish’.

Companies are able to set up companies incorporated in Ireland, but not tax resident here, to route billions of profits stemming from royalty payments to tax havens such as Bermuda.

The mechanism attracted major negative publicity in June 2013, when it emerged during US Senate hearings into Apple’s tax affairs that the company had reduced its corporate tax rate to 2% using the double Irish.

New companies setting up in Ireland after next January will have to be tax resident here as well. For existing multinationals, they will have to comply with the new regulations over a five-year timeframe.

In many ways, it was the best possible solution to a problem that has dogged Ireland for the past number of years. Ireland was seen to be pro-active, which will appease the EU commission, the US government, and other aggrieved stakeholders. However, the fact that it is being phased out over the next five years means it will not destabilise the existing stock of foreign direct investment.

Moreover, Mr Noonan announced the introduction of a ‘knowledge box’, similar to the ‘patent box’ in the UK. This is a very favourable tax regime for research and development activities. Clearly it is aimed at ensuring Ireland’s tax competitiveness is not diminished following the removal of the double Irish.

Overall, the tax measures were aimed at maintaining growth in the economy by reducing the burden on labour taxes. The parties to the left of the political spectrum claim the tax adjustment was not progressive enough and it favours the better off. Business groups claim the labour taxes are still far too high and act as a disincentive for work.

Again, spending was aimed at health, education, and social housing — measures that again attracted criticism from the opposition.

Has there ever been a budget that pleased everybody?

The answer to this question is yes. It happened under the watch of Bertie Ahern, when the income tax wedge was lowered and spending was ramped up, ultimately with disastrous consequences. There is no doubt that this budget was prepared with one eye on the election.

Whether it works hinges on growth.

VISIT OUR DEDICATED BUDGET 2015 SECTION FOR MORE NEWS AND ANALYSIS


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