Feature Article
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Ibec CEO Danny McCoy with Ibec President Anne Heraty
Ibec CEO Danny McCoy with Ibec President Anne Heraty
Dear member,

This update provides a comprehensive analysis of how today's budget will impact your business. 

Budget 2017 includes a range of positive measures that will support growth, but the scale of the Brexit challenge is under appreciated. A series of additional reforms and initiatives will be required this year.

Tax reforms don't go nearly far enough towards levelling the playing field with the UK. Businesses exposed to the deepening currency crisis require additional support. An urgent, cross-departmental response, coordinated by the Taoiseach, is now needed and must involve the re-prioritisation of current resources and new spending.

The attractiveness of Ireland as a place to live and work remains an abiding concern for many business. Moves to increase education spending, boost the housing supply and make childcare more affordable are welcome. But these measures need to be closely monitored and quickly adjusted if they are not having the desired effect.

Changes to the taxation of entrepreneurs are welcome, if modest. The capital gains tax reforms and changes to the personal tax regime for the self-employed are sensible and send out the right message about the need to better support entrepreneurship.

Some additional capital spending was announced, but EU fiscal constraints mean that the resources allocated fall far short of what is needed. This remains one of the biggest economic challenges facing the country. Work at an EU level to secure more spending flexibility must remain at the very top of the political agenda.

These are uncertain times for many companies. Ibec will remain focused on representing the views of business over the coming weeks and months. I'll keep you updated.

Best regards

Danny McCoy
Ibec CEO

NEWS ARTICLES
Economic and fiscal context
 

Government expects the economy to grow by 4.2% in 2016 and 3.5% in 2017. But the budget has not fully appreciated the scale of the Brexit challenge. The recent sterling weakness was a late shock.


What is in the budget?
  • The Department of Finance expects the economy to grow by 4.2% in 2016 and 3.5% in 2017, driven by strong domestic demand. The technical assumption in the Department of Finance’s forecasts of euro/sterling of £0.85 in 2017 now looks unlikely. As a result the forecasts underplay the likely impact of Brexit.
  • The current side of the public finances is expected to be in surplus of just over €2 billion including interest payments in 2017. Before interest, the state is running a €8.3 billion current surplus. On the capital it is running a €4.1 billion deficit.
  • Including non-exchequer and one-off items the Government expects the budget to in effect be balanced, with the deficit falling to only -0.4% of GDP in 2017.
  • The budget saw total new policy changes worth €2.1 billion of which €900 million (Lansdowne Road pay increases, and demographic service pressures) had already been baked in. The budget saw the announcement of €1.2 billion of measure of which €905 million went to spending and €295 million went to net tax cuts.
  • The Government has set a new medium term target of debt-to-GDP of 45%, a full 15 percentage points below that required by the EU fiscal rules.


What does it mean for business?


The State is now taking in significantly more than it is spending on day-to-day items. Like any business it has a continuous investment cycle. Ibec believes that while the balance on the current side is about right, given the risks in the economy, there is still much left to be desired when it comes to capital spending. The Government has, however, been hamstrung in this regard by the unfavourable treatment of investment under the EU fiscal rules. It remains to be seen how a contingency fund and debt to GDP target of 45% will be appropriate if infrastructural pressures continue to mount. On the mix of tax and spending the government has hit most of the expected targets focusing on quality of life issues such as childcare, housing and education in line with Ibec priorities while making incremental changes to the tax system which will help entrepreneurs.

When it comes to both tax and expenditure the budget has not fully appreciated the scale of the challenge presented by Brexit, with the recent sterling weakness coming as a late shock. Ibec has been outlining for some time that the current change in currency value is structural, not cyclical, and has occurred following fundamental changes to the economic and business environment domestically and in the UK. The likely damage in terms of reduced export volumes and job losses is significant. It is important that this is addressed over the next 60 days in the form of a more comprehensive set of Brexit focused policy responses.
Personal taxation
 
Overall changes in personal taxation will be fairly minimal with cuts to the various USC rates being paid for by the non-indexation of the income tax system.
What is in the budget?
  • A reduction in the rate of USC by 0.5% across the three USC bands.
  • An adjustment in the entry point of the 5% rate to €18,772 in recognition of the 10c increase in the minimum wage.
  • A time limited (2019) first time buyer tax rebate incentive of income tax paid over the previous four years up to 5% of the purchase price of up to €400,000. The house must be a new build and applicants must take out a mortgage of at least 80% of the purchase price.
  • The introduction of a sugar tax in 2018 to coincide with the UK, following consultation.
  • The excise duty on a packet of cigarettes is being increased by 50 cents (including VAT) with a pro-rata increase on the other tobacco products and no increase in excise on alcohol.
  • Extensions to the foreign earnings deductions (FED), Special assignee relief (SARP) and start your own business relief schemes.



What does it mean for business?

Overall changes in personal taxation will be fairly minimal with cuts to the various USC rates being paid for by the non-indexation of the income tax system (i.e. not increasing the bands and credits in line with wage growth), which will drag more people into the top rate of tax. In inflation adjusted terms, the tax system will actually remain quite static.

On the consumption tax side the sugar tax is unlikely to achieve much in the way of its stated aims, even though consultation in its design is welcome. Increases to tobacco excise are unlikely to raise the planned revenues and indeed are more likely to result in exchequer losses as more trade moves outside the formal sector.

Brexit and business
 
On the test of being ‘Brexit proofed’ it is clear the budget fell short. Only around €50 million in new or improved measures aimed specifically at offsetting the impact on business were announced.

What is in the budget?

  • A cut in the CGT rate for entrepreneurs from 20% to 10% in gains up to €1 million.
  • Retention of the 9% VAT rate.
  • An increase in the earned income tax credit (EITC) for the self-employed from €550 to €950.
  • A commitment to introduce an improved tax treatment of share options for SMEs, subject to EU approval.
  • Additional funding for state agencies such as EI and the IDA.
  • A town centre regeneration fund.



What does it mean for business?

There are a number of budget measures announced which sounded the right notes, but the scale of the measures is disappointingly small given the enormous challenge the country now faces. On the test of being ‘Brexit proofed’ it is clear the budget fell short. Just over €50 million in new or improved measures aimed specifically at offsetting the impact on business were announced.

On the tax side, the retention of the 9% VAT rate, improvements to share options and the increase in the earned income tax credit (EITC) for the self-employed will be very welcome for indigenous business. The 9% VAT rate in particular will help the tourism industry weather a likely fall off in visitor numbers from the UK, which remains a key market. The largest disappointment was the Capital Gains Tax changes which although welcome, fell well short of expectations leaving a large competitive gap remaining between Irish and UK tax treatment for SMEs.

There were two important improvements from a spending point of view with both Enterprise Ireland and the IDA getting additional funding to ramp up their Brexit and regional agendas. The town centre regeneration fund had been previously flagged but the €13 million in funding received will make it a useful scheme and was in line with Ibec recommendations.

Investment and housing
 
The prioritisation of capital spending is welcome; 30% of all additional spending is in this area. Government spending on capital is currently at an all-time low, only accounting 1.5% of GDP in 2015.

What is in the budget?

  • 30% of total new expenditure was dedicated to capital.
  • €150 million for the delivery of additional social housing units in 2017.
  • €105 million extra for the Housing Assistance Payment.
  • Help to buy scheme for first-time buyers for newly built houses, this consists of an income tax rebate which can be used to fund the deposit.
  • Additional capital spending as follows: Education (€40 million), communications, climate action and environment (€45 million) and public transport (€55 million).



What does it mean for business?

The prioritisation of capital spending is welcome; 30% of all additional spending is in this area. Government spending on capital is currently at an all-time low, only accounting 1.5% of GDP in 2015, the lowest share of any European country. While this was partly due to the denominator effect of last year’s surge in GDP, capital spending is currently 60% lower than what was invested in 2009. The majority of what is spent currently goes towards depreciation and maintenance. The fall-off in capital spending is largely to do with the EU’s fiscal rules which are severely restricting capital spending. Ibec has been calling for these rules to be changed since early 2015.

One of the greatest pressures from underinvestment is in housing. This sector was prioritised in the Budget. The €150 million that was allocated towards social housing was needed.  However, the preferred method for the delivery of social housing in recent years has been acquiring existing houses as opposed to building new ones. Last year, the number of new social housing units was 1,160 but only 75 of these were new builds. If new units are bought instead of built, this reduces supply and puts more pressure on the rental market. This will do two things; firstly, it will cause rents in the private sector to rise, which will increase rent allowance payments and secondly, as the supply shrinks and rents go up, this will make more and more people reliant on social housing.

The main reason for the low level of construction is that building costs are still at peak levels, while house prices are much lower, reducing margins in the sector. The new scheme for first-time buyers will help those people saving for home deposits and will also give greater market confidence to house builders which will in turn help boost housing supply.

 

Education, childcare and labour market
 
The increased funding for third level (€35 million) is an important and positive development. This is a sector that has been put under huge pressures in recent years.

What is in the budget?

  • €35 million in supports for higher education funding.
  • Increased state pension by €5 per week.
  • 30% increase in funding for the Training Networks Programme (Skillnet).
  • No change to ECCE childcare scheme.
  • €35.5 million for a new Single Affordable Childcare Scheme.

What does it mean for business?

The increased funding for third level (€35 million) is an important and positive development. This is a sector that has been put under huge pressures in recent years and the extra funding will go some way towards alleviating this. Total spending is 30% lower than it was in 2009 while student numbers are 21% higher. Student numbers are expected to grow even further in the next few years which will put further pressures on the system. It was also announced that a consultation would be initiated on the design of a new Exchequer-Employer investment mechanism for higher education. The risk with this proposal is that it becomes decoupled from an income contingent loan model. Given the scale of the funding requirements, a fees and loan model must form part of any overall funding solution. Ibec asked for a rebalancing of national training fund resources in favour of increased Skillnets spending and this was delivered.

The main change to childcare in Budget 2017 was the introduction of a Single Affordable Childcare Scheme which will come into effect in September 2017. The new scheme consists of two separate subsidies. The first is a means tested subsidy for children aged between six months and 15 years. Caution should be given to the means tested subsidy and it should be designed in such a way that it does not reduce the work incentives of second earners. If it is the case that where a second earner takes on a new job or extra hours  ends up paying much more than they previously would have on childcare, this could actually reduce female participation.

An additional universal subsidy will be put in place for those who are too young to qualify for ECCE (six months to three years). It is no coincidence that Ireland has one of the lowest female participation rates and one of the highest childcare costs in the EU. These new measures to address this challenge are welcome. Given that the total cost of both schemes will only be €35.5 million it is unlikely that this will bring our childcare costs down to European level norms. Ibec will campaign for this scheme to be extended in future budgets.

For more information on our childcare policy please see: Ibec- Labour Market Participation of Women.

Ibec's economic and taxation team
 
Supporting your business: The Ibec economic and taxation team of Fergal O'Brien, Gerard Brady and Alison Wrynn.

The Ibec economic and taxation team represents and informs members on a broad range of economic and taxation issues providing three core services:

Publications

Our regular research documents such as the Quarterly Economic Outlook provides in-depth analysis of the most recent Irish and international economic developments as well as Ibec’s forecasts on economic growth, inflation and employment.

Policy

Ibec economists engage with policy makers at a national and international level on issues of importance to business. We make submissions to government departments and state bodies on economic and taxation issues including the budget, taxation, investment, public expenditure, wages and broader economic and business issues.


Services

In addition to our extensive policy engagements and published information, Ibec members are welcome to contact us directly. We can help you find economic information relevant to your business planning and budgeting needs, including inflation, GDP growth, wage comparisons and other economic data. We will also provide bespoke in company briefings on economic and taxation-related matters.



Fergal O'Brien
fergal.obrien@ibec.ie
Gerard Brady
gerard.brady@ibec.ie
Alison Wrynn
alison.wrynn@ibec.ie
EVENTS
This Friday at 8am join us at the Ibec Budget 2017 briefing
 
This Friday at 8 am Ibec will host the latest Policy+Business briefing on Budget 2017. Join us for an update on Ibec’s response to Budget 2017, what the Government’s proposal means for business and next steps. 

Policy + Business: What Budget 2017 means for business

At this post-Budget event Fergal O’Brien, Ibec's Chief Economist will brief attendees on Ibec’s response to Budget 2017 and what the Government’s proposal means for business. Kara McGann, Ibec’s labour participation expert will also provide an analysis on female participation in the labour market and how Budget 2017 has affected this.

Date:     Friday 14th October 2016
Time:     7.30am breakfast, 8am start, 9.30am close
Venue:   Ibec, 86 Lower Baggot Street, Dublin 2

To book your place click here.

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