Feature Article
Untitled article
 

Dear Deputy/Senator/Minister,

Britain is facing very serious economic challenges, but is responding aggressively. Ibec is advocating for far-reaching reforms of Ireland's business and personal tax code required to ensure we stay competitive and attractive to mobile investment and talent following the Brexit vote. We need to put in place a tax system for a strong, competitive economy, positioned to thrive in uncertain times.

Decisive moves to improve the UK's attractiveness to business need to be matched here. The sharp fall in sterling is already squeezing exporters. This demands a renewed focus on keeping costs under control, including labour costs. At the same time we need to plan ahead. Ambitious investment is required to ensure Ireland has the capacity to grow strongly into the future.

This update provides full details of Ibec's Budget 2017 priorities. I hope you find it useful.

Danny


NEWS ARTICLES
Budget 2017 - Key messages
 

Following the UK vote to leave the EU, improving Ireland's competitiveness must be a top priority in Budget 2017. View our five point plan for sensible yet ambitious budgetary measures.


1. Stay the course on fiscal policy

Ireland’s strategic interests must be prioritised while the post Brexit scenario remains highly fluid. This should involve policy choices which will solve strategic supply side problems and protect those industries most likely to be adversely affected by the immediate volatility. The Government should not deviate from plans for a modestly expansionary budget for 2017. This would include budget day measures totalling €1 billion and seeking derogation from the EU to invest a further €1 billion in social housing outside the current fiscal rules.


2. Send a positive signal through wise investment

Through investment in crucial economic and social capacity at home, Budget 2017 can send a message of confidence to the world during this period of uncertainty. In previous crises the first budget item to go was capital. This simply cannot be repeated if the scope for future discretionary spending diminishes. Given the low carry costs of debt, strong nominal growth rates, a primary surplus, and considerable infrastructure gaps, investment can be achieved while reducing the deficit in the prudent manner. Certain investments – not least those in housing – can replace inefficient recurrent spending with capital solutions. This will prove more effective and cost efficient over the longer term.

In the context of Brexit, there is now an increased urgency for the Government to negotiate flexibility in the application of EU fiscal rules which currently place inappropriate and unnecessary restrictions on investment. Irish business supports a pragmatic, rules-based approach to the management of day-to-day spending and taxation. However, spending on vital capital investment projects should be treated in a manner more akin to that which obtains in the private sector.


3. Create a level playing field with the UK for SMEs

A major objective of the upcoming budget must be the provision of support to those industries for which the immediate fall-out from Brexit is greatest. These include some of our largest employers – the SME community, manufacturing and tourism in particular. Helping these sectors maintain a competitive edge will be an important factor in overcoming the challenges that Brexit will pose. Budget 2017 must ensure that enterprises do not face any regulatory, labour cost or tax increases while the current period of uncertainty and exchange rate volatility persists. In addition, potential trade restrictions post Brexit and the more preferable tax treatment of SMEs in the UK raise the possibility of Irish SMEs servicing that market from within the UK itself rather than by exporting from Ireland. As such, the need to level the playing field in relation to the tax offering for indigenous business has never been more urgent. We show that this can be achieved by radically reforming our entrepreneurs’ CGT regime, along with improving our incentives for investment, innovation and upskilling in SMEs.


4. Align economic and social priorities through housing

In Budget 2017 the Government should seek a temporary derogation from the European Commission to spend €1 billion outside the fiscal rules in delivering an additional programme of social housing beginning in 2017. It should also introduce a new model of social housing provision based on that of the Northern Irish Housing Executive. In this submission, Ibec outlines proposals for a number of reforms in the housing sector which will better serve our requirements over the long term.


5. Retain Ireland’s edge for highly skilled workers

While Brexit is not the outcome Ireland would have wished for, Ireland remains well positioned to benefit from new investment opportunities. Since the advent of the OECD base erosion and profit shifting (BEPS) project, Ibec has drawn attention to the changing global environment where capital is following highly skilled labour. The positioning of Ireland in a post-Brexit world may mean an acceleration of this trend as multinationals, and not just those in financial services, look for an attractive home within the EU. Along with investment decisions, which will affect standards of living, including housing, access to education and public infrastructure, Budget 2017 must address key tax issues – particularly the treatment of share options – which currently make Ireland a less attractive location for more highly skilled workers.

 

 

Economic context and fiscal space
 

In the current economic climate, resources are best focused on strategic priorities which expand the productive capacity of the economy – capital investment, housing, tax reform, education and innovation. 



The upcoming budget will be introduced in the shadow of a UK political decision which will have significant implications for Ireland and Europe over the medium to long term. Exchange rate volatility aside, as of now, little has changed in the Ireland-UK trading relationship. This year Ireland’s economy will still perform strongly on the back of the very positive first half of the year. We expect growth to remain in excess of 4% during 2016.

Expectations of a slowdown have emerged in the UK as businesses and consumers re-evaluate their position. While this means that the outlook for 2017 is now considerably more uncertain, it is still too early to tell what the full effect of Brexit will be, either domestically or internationally. This depends as much on the ability of the political system in the UK to engender confidence in consumers and business over the coming months as on any external factor.

Ireland is in a better position to weather the uncertainty of Brexit now than it has been over previous years. Our fiscal position has improved rapidly with debt ratios now reaching developed world norms and the State reaching a primary fiscal surplus in 2015. Given that the average interest rate on our outstanding government debt (3%) is lower than expected nominal growth rates of GDP, both the debt ratio and the relative cost of debt servicing should fall significantly over the coming years.

In a post EU Fiscal Compact world, limits on spending and tax decisions will be much more explicit and binding than in the past. This means that much more strategic choices have to be made in the future in relation to resource allocation. Ibec’s budget submission takes the view that in the current economic climate these resources are best focused on strategic priorities which expand the productive capacity of the economy – capital investment, housing, tax reform, education and innovation. This does not mean social goals must lose out. In many cases outlined in this submission – including capital investment, housing, education, training, childcare, share options and innovation – the two are aligned.

In its most recent Summer Economic Statement, the Government presented a gross fiscal space of €1.8 billion in 2017. This means that in nominal terms, government spending or tax cuts can amount in total to €1.8 billion in the absence of offsetting measures. From this the Department of Finance estimates that the State will need to spend almost €400 million to allow for demographic pressures in health, education and pensions – a further €300 million has been committed to public sector pay under the Lansdowne Road agreement. While at the time of writing the Department of Finance has confirmed the 2017 fiscal space will remain unaffected by Brexit, its impact on future years will be far more uncertain.



The Fiscal Advisory Council (IFAC) has reviewed this estimate and noted a number of things – not least that the estimates assumed no price push inflation in public sector spend or welfare payments, that it left no allowance for a successor to the Lansdowne Road Agreement post 2018 and that forecast demographic and spending pressure estimates are short of what will be needed to keep up with population pressure. IFAC estimates that around €10 billion of the total 2017 to 2021 fiscal resources of over €14.7 billion will be taken up by non-policy related spending pressure. This was a near €6 billion higher than the Department of Finance estimate of €4.5 billion.

Neither estimate takes into account indexation of the personal tax system – without which we face tax increases in real terms. For the personal tax system this would cost in the region of another €2 billion between 2017 and 2021. In total, keeping the tax and spending system at a standstill would cost up to 80% of the available additional resources over the coming years with the remainder left for tax measures or spending increases. In short, money will be tight. As such, a number of our priorities in this submission strive to either provide targeted solutions to pressing issues or to use existing resources in a more effective manner.




Personal taxation
 
Tax systems with a broad base and low marginal rates provide the best outcomes for employers, employees and the economy. The following section outlines our recommendations for achieving this in Budget 2017.

Ireland has an income tax system which looks like that of no other developed economy. This system is characterised by a narrow base and both very low and very high effective tax rates at each end of the income distribution. More workers in Ireland pay no income tax at all than any comparable country while, conversely, 50% of workers face losing 49.5c out of every €1 they get in a pay rise. This represents the worst of both worlds when it comes to building an efficient tax system.

Ibec supports the international evidence which shows tax systems with a broad base and low marginal rates provide the best outcomes for employers, employees and the economy. The following sections outline our recommendations for how steps towards this can be achieved in Budget 2017.


Issue 1: Entry point to the marginal rate of tax

Ibec recommends


Irish workers currently hit the 49.5% rate of tax at less than the average wage, which is €36,500. The same figure for the 40% rate in the UK is now equivalent to €55,000. This is partly a result of their long-standing policy of automatic indexation of tax bands. In a similar fashion, Budget 2017 should see the entry point to the top rate of tax indexed to the rate of wage growth in the economy.


How Ireland will benefit

Half of Irish employees pay at the marginal tax rate handing over half of the benefits of any pay increase to the exchequer. Indexing the entry point to the top rate of tax to wage growth will prevent more employees from falling into the top rate over the coming years. This will make it easier for employers to give pay increases, increase real incomes for average earners and prevent Ireland’s labour market from suffering from fiscal drag. Failure to do so would represent a tax increase in real terms.



Issue 2: Taxation of stock options

Ibec recommends

In line with our recent submission to the consultation on the taxation on stock options, Ibec has a number of recommendations:

1. Reform of the operational constraints in revenue-approved schemes to be more flexible to companies’ reward structures.

2. Reduction of the income tax liability on unapproved schemes to the ordinary rate of tax along

with averaging it out over five years.

3. Removal of the USC and PRSI liability from revenue-approved schemes.

4. Introduction of an enterprise management incentive scheme for smaller firms.



How Ireland will benefit

These steps would encourage greater use of employee share ownership in Ireland which until now has been comparatively low and falling. The 2014 review by the European Commission’s DG Internal Market concluded comprehensively that “thirty years of research have confirmed that companies partly or entirely owned by their employees are more profitable, create more jobs and pay more taxes than their competitors”. There are also clear benefits from an employee point of view – the 2015 report of the Commission on Inclusive Prosperity, chaired by Larry Summers and Ed Balls, argued that profit sharing and employee share ownership were win-win policies given that they benefit employees at the same time as producing better outcomes for business.



Issue 3: Private sector pensions

Ibec recommends

Budget 2017 should see an increase in the standard fund threshold (SFT) for pensions from €2 million to €2.15 million and an increase in the earnings limit on tax relief from €115,000 to €125,000. There should be a commitment to indexation of these two measures to wages in future years.


How Ireland will benefit


Ireland’s record of pension coverage is demonstrably poor. In addition, recent years have seen the attractiveness of pensions reduce significantly as a result of a number of tax changes. It was the long-term practice that the tax treatment of pensions was indexed to wages. Since the reduction in the SFT in 2010 this has ceased. Given the return to wage growth in the economy this practice must return in Budget 2017 and future budgets.



Issue 4: Tax credit removal for higher earners

Ibec recommends

Using this policy lever in order to pay for the USC may work in a static analysis but it is unlikely to raise much money and will further damage companies’ ability to attract and retain highly skilled employees. No action should be taken in Budget 2017.


How Ireland will benefit

Ireland, despite being an outlier in terms of its low taxation on low income earners, surpasses the OECD average effective income tax rate at earnings of 120% of the average wage or just above €39,000. By 250% of average wage (€81,500) Ireland has the sixth highest average income tax rate in the OECD at 34.6%, five percentage points higher than the OECD average. Recent research in Denmark has provided clear evidence that mobile skilled workers are affected by marginal tax rates at the top of the earnings distribution (Kleven, et al, 2013). These high marginal and effective rates for similar workers in Ireland are making it increasingly difficult for companies to attract and retain highly skilled staff. If Ireland gets a reputation for an inability to deliver projects because of this, the negative implications for investment would be difficult to reverse.





Consumer taxation
 
View the Ibec stance on the proposed sugar tax, alcohol excise, the 9% tourism VAT rate and tobacco excise.

Issue 5: Taxation of sugar


Ibec recommends

No additional tax on soft drinks. Focus should be made on public health measures of proven efficacy such as product reformulation.


How Ireland will benefit

Jobs in the soft drinks sector will be protected and trade will not be lost across the border to Northern Ireland or to the grey/black market. Soft drinks companies will continue to invest in research and development on reformulation and new products which has far greater impact on public health than even the most optimistic projected impact of a soft drinks tax.



Issue 6: Alcohol excise

Ibec recommends

Irish excise taxes are among the highest in the developed world. It is unlikely that further excise increases will either significantly increase revenue or moderate consumption given the complicated and non-linear relationship between the two. If anything, Brexit may mean further excise increases will drive cross-border trade. The path toward reducing recent excise increases should begin in Budget 2017.


How Ireland will benefit


Excise is a doubly regressive tax in that it is charged regardless of income and it targets goods which are consumed in much greater quantities by lower income households. Ireland already has the highest alcohol prices in Europe and it is unlikely that increasing excise will raise significant further sums. In addition, alcohol use has fallen significantly in the past decade with further increases unlikely to change this but rather increase illicit trade.



Issue 7: The 9% tourism VAT rate


Ibec recommends

The 9% VAT rate should be retained as a permanent feature of the tax system. The tourism sector will need more support to ease it through a period which is likely to be particularly volatile.


How Ireland will benefit

The 9% VAT rate is a crucial support for an exporting industry which provides strong regional employment and is increasingly facing higher cost and competitiveness pressures from elsewhere.



Issue 8: Tobacco excise


Ibec recommends

No change in tobacco excise in 2017.


How Ireland will benefit

Irish tobacco excise is now beyond the point of diminishing marginal returns. Solid research and recent experience have suggested increasing it further will be at a cost rather than a benefit to the exchequer. Budgeting current spending increases based on increases in tobacco excise would represent wishful thinking at best.







Business and entrepreneurship
 
Taxation of entrepreneurs and small business is an issue which has received a lot of warranted attention in recent times.

Taxation of entrepreneurs and small business is an issue which has received a lot of warranted attention in recent times. The signals we send through our tax system, however, differ greatly from the rhetoric. Improvements were made in Budget 2016 but Budget 2017 must build on these.

Commitments need to be followed through; with changes to taxation the single biggest step the Government can make to encourage more people to go into business for themselves. With the higher rate of USC for the self-employed and the higher rates of CGT introduced in recent years, our tax system has gone in the opposite direction to much of enterprise policy. If we are truly serious about creating a highly-skilled entrepreneurial economy the level of recognition which has been given to the issue needs to be backed by action.


Issue 9: Taxation of the self-employed


Ibec recommends

The lack of an equivalent earning income tax credit (EITC) for the self-employed is not supported on any reasonable basis. The Government should commit to rectifying this situation over the medium-term. The Government should extend the modest EITC for self-employed persons in Budget 2017.


How Ireland will benefit

Entrepreneurs play a crucial role in the Irish economy. The Irish tax system, which today sends very mixed signals to entrepreneurs, must transition toward one which champions entrepreneurship. To achieve this, we need to see changes which make it more attractive for people to take on the burden of risk, expand their businesses and invest their time and money in the things which create jobs and wealth. Targeted tax reforms focusing on entrepreneurship can support a more dynamic domestic enterprise base. This applies not only to capital taxes but also to income taxes.



Issue 10: CGT entrepreneurs' relief

Ibec recommends

Without significant improvement in the treatment of capital gains relative to the UK, Ireland risks losing high potential SMEs to the UK. This is a particular concern in areas such as manufacturing and agri-food where reliance on the UK market is highest. The commitment in the Programme for Government leaving future changes for start-ups alone would be wholly inadequate in this context. Budget 2017 should see Ireland improve its offering significantly when compared with the UK by increasing the lifetime limit from €1 million to €15 million in Budget 2017 and reducing the rate under the relief to 10%.


How Ireland will benefit

Changes to the CGT entrepreneur’s relief in Budget 2016 provided some boost for growing SMEs but they did not go far enough. The outlook for high potential Irish SMEs has changed in a post-Brexit environment.



Issue 11: Seed Enterprise Investment Scheme (SEIS)

Ibec recommends

An introductory version of the SEIS scheme similar to its UK equivalent would remove a barrier to small start-up businesses, while also encouraging first-time investors into the market. A 50% income tax credit on investments in new or micro-firms on similar terms to the UK scheme should be introduced in Budget 2017.


How Ireland will benefit

The SEIS scheme has the advantage of being more attractive to small-time investors who can invest up to £100,000 in a single tax year over a number of companies. They receive a 50% tax credit on their investment which is sufficiently attractive to bring new investors to small firms with limited avenues of funding half of the investments in the UK were of less than £10,000 showing the scheme’s ability to attract non-traditional investors into the market in small sums. This is partly due to the fantastic branding of the scheme and its ease of use. A similar angel investment tax incentive would boost non-traditional financing for start-up firms and micro-enterprises in approved sectors.



Issue 12: R&D tax credit administration

Ibec recommends

Previous changes to the legislation which allowed companies to show the credit ‘above the line’ greatly improved the attractiveness of the scheme to many businesses at no extra cost to the exchequer. The change in accounting treatment meant that businesses could use the credit more effectively when competing for mobile R&D projects on a pre-tax assessment basis with other jurisdictions.

The Government should now build on this progress by changing the R&D legislation to provide companies with an option to claim the R&D tax credit at 37.5% ‘above the line’ while foregoing the associated corporate tax deduction at 12.5%. This would lead to a 50% increase in the potential ‘above the line’ credit.

The denial of a corporate tax deduction at 12.5% on qualifying R&D expenditure means that the proposal is a cost neutral one from the exchequer perspective, and will result in the same level of overall tax payable as is presently the case under current legislation.


How Ireland will benefit

Neither change would incur any exchequer cost and would substantially improve the operation of the scheme from a business point of view.



Issue 13: R&D tax credit and SMEs

Ibec recommends

The administrative costs associated with the R&D tax credit are too burdensome for smaller firms to participate with the credit. A pro-forma R&D tax credit should be introduced to help smaller firms overcome these costs and engage with the credit. This would include the use of pro-forma templates for R&D project management, recording R&D activity and calculation of eligible costs and revenue benefit associated with the credit. Simple online calculators demonstrating the benefit and eligibility rules of the credit would be a useful resource for SMEs and would also greatly improve awareness and promotion of the scheme.


How Ireland will benefit

The R&D tax credit has been a successful model in encouraging Irish companies to invest in R&D and create value in the economy. In line with international research, an Ibec study showed that for every €1 given in tax credit to participating firms they spend in the region of an additional €1.25 on R&D over and above what they would otherwise have spent. Recent studies in the UK show this additional expenditure is much larger for SMEs (Nguyen & Van Reenan, 2016) at €2.60 while others suggest that it could rise as far as €3.60 in the long-run.



Issue 14: Management training incentives

Ibec recommends

Incentives for staff in SMEs to take on management training should be extended. A targeted management training incentive aimed at the point of transfer of family business in the first instance should be introduced. This would be achieved by relieving from capital acquisitions tax completely (currently 90%) the transfer of a business where the recipient of the business has taken part in approved management training schemes.


How Ireland will benefit

Management and skills are key components of business growth in any economy. Research has shown internationally that improved management skills can improve sales growth, market share growth and lead to higher productivity. Indeed, recent research (Bloom et al, 2016) shows management skills account for up to 50% of the productivity differential between developed countries and the US.



Issue 15: Town centre regeneration

Ibec recommends

The establishment of a competitive tendering process open to towns and cities around the country that would give access funding to support the regeneration/development of their town/city. This funding could in turn support the resource requirement which exists in such towns/cities in the form of a Town Centre Manager who would have responsibility for encouraging the development of commercial centres in towns/cities. Such an initiative could be run in conjunction with the roll out of a Town Centre Strategic Development Plan as devised by a sub-group of the Retail Consultation Forum.


How Ireland will benefit

The regeneration and revitalisation of our towns and villages will make them more attractive places to live and work and enhance their potential to provide employment, commercial opportunities, social and cultural facilities into the future.

Investment
 

We have the fastest growing population in Europe, but the third lowest level of investment in the EU. We must ensure the country has the transport, education, housing and broadband infrastructure it needs to prosper. This will require a major new commitment on investment spending, far beyond current plans.


The  Programme for Government commits to spending an additional €5 billion on capital over the term of the current Capex plan. It also commits to bringing a review of the plan forward to 2017 in order to effectively target appropriate capital projects. These are both welcome developments but are unlikely to be sufficient in order to head off the real risk the economy faces following a decade of underinvestment. Averaging 2.2% of GDP per annum, even with added expenditure, the Exchequer contribution to the new capital plan will be the smallest on record (since 1970) and likely its smallest in the post-war era.

Ireland has a relatively weak public infrastructure, as witnessed by our international rankings, and the fastest growing population in Europe. At the same time our average level of investment has been half that of our European competitors - many of whom have spent between 3 and 4% of GDP over decades on public investment. Over the long-term this investment will be a key driver of competitiveness. As such Ireland should be spending at least the equivalent of 4% of GDP on public infrastructure.


Issue 16: The capital budget

Ibec recommends

Under the fiscal rules it will be difficult to enhance public investment sufficiently in order to meet the demographic or economic pressures Ireland will come under. Increases in capital spending under current plans will be backloaded until 2019 – with most projects unlikely to be completed before 2022 at the earliest. By this time, it is likely Ireland will have critical infrastructure deficits across a number of areas – having seen over a decade of underinvestment relative to any international or historical norm. In the face of the potential impact of Brexit it would be a mistake for the Government to row back on existing funding allocated to public investment from 2018 onward.

Where fiscal space dissipates it should come from the €3 billion in funding currently earmarked for the rainy day fund with other sources used to put together a reserve cash fund. This is the only prudent course at a time when interest rates are at an all-time low (allowing for the cheap carry of debt financed cash reserves) and when the State has significant liquid value built up in both cash, ISIF and the retained value in the pillar banks (cumulatively worth in the region of 15% of GDP). Budget 2017 instead should see some provision made in order to aid fast tracking of planning and procurement for key projects.


How Ireland will benefit

During previous slowdowns the first budget item to lose out was the capital budget. Ireland’s experience both in the early 1990s and in recent years is that the cyclicality of our investment spending only exacerbates downturns and stores up major infrastructure shortages for the recovery. The consequences of these mistakes are clear in our housing and key infrastructure – they should not be repeated.



Issue 17: Investment under the fiscal rules

Ibec recommends

Ibec supports the fiscal rules for day to day spending and taxation. However, conventions in government accounts, which would be considered non-standard in any other setting, mean these rules bias against sensible long-term investment. The fiscal rules should be reformed to include a separate capital account more in line with its corporate treatment. This would include spreading the fiscal cost of assets over their lifetime.

Concerns about these changes allowing excess build-up of debt could for example be overcome by limits on debt financing of capital expenditure or by setting targets for capex or interest on capex as a proportion of tax revenue. In either event it should be kept in check by the current debt rule.

To ensure better value for money for the taxpayer from these projects it would be sensible to establish a National Infrastructure Advisory Council reporting to the Oireachtas which would advise on appropriate projects and the efficiency of public spending.


How Ireland will benefit

Ireland and Europe would benefit by allowing a greater proportion of strategic investments to be made by recognising that their capital cost is not the same as a recurring cash flow or operational cost. In the long-term, removing this barrier – by operating under more generally accepted accounting principles – could save European States money by reducing the need for otherwise sub-optimal current expenditure.

 

Housing
 
Housing is now among the top labour market issues employers are facing and is posing a serious challenge to our competitiveness. At a fundamental level we need to reform how we deliver social and affordable housing in Ireland.
Issue 18: Social housing

Ibec recommends

In their recent joint statement on Brexit, President Hollande, Chancellor Merkel and Premier Renzi noted that Europe must strengthen in areas where both economic and social priorities overlap. In Ireland there is no one policy which provides a better opportunity to address both objectives in tandem than that of housing. Within this context, the State should seek derogation from the European Commission in order to borrow €1 billion outside the fiscal rules for the purpose of social housing. This borrowing would be backed by existing social housing assets as outlined in issue 18.


How Ireland will benefit

Securing this derogation would be a crucial step to allow for a structural reform of how we deliver housing in Ireland. Importantly, it would be more beneficial in the long-run both economically and socially but also fiscally. How we currently deliver housing has not served the State or its citizens well. This derogation would provide an opportunity for a structural break in Irish social housing provision which is not possible within the constraints of the current fiscal rules.



Issue 19: Reform delivery of social housing

Ibec recommends

Housing associations and third-sector bodies are currently a relatively small provider of social housing as a proportion of overall supply. Much of this is due to a number of capacity constraints related to the disparate number of these bodies and their small individual size. Less than 6% of the approved housing bodies have income streams of more than €1 million and only two have net assets (including housing stock) of more than €10 million.

Currently there are private sector funds which have the potential to benefit the sector. This private funding to off-books public sector or voluntary sector funding should assume a much greater role in the provision of social housing in Ireland; as is the case in much of mainland Europe (including France, Germany, Netherlands and Sweden). However, there are a number of important issues which must be overcome:


  • The current provision is fractured with a lack of scale – as a comparator. Table 1 shows the number of housing bodies, the total number of units they manage and their average number of units across a number of other EU countries.
  • Most of the Irish housing associations are managers rather than builders with weak institutional structures and governance.
  • There are serious capacity and skills constraints when it comes to using private funding and housing delivery.


How Ireland will benefit

It is time to look at different models of social housing provision. This requires a renewed approach which involves transferring existing social housing stock out of local authorities and into a central provider of social housing which can work with housing associations and avail of external finance and expertise. This body could help build scale that would be attractive to institutional investors and/or a Government backed body to help guide funding to them. In the longer term, if operated on a commercial basis, it could take funding of social housing in the main off the Government’s balance sheet completely. In recent years funding provisions came from the proceeds from cyclical upturns in revenues. These funding streams will be limited in the future with the consequent need to structure social housing provision in a manner which can access sources of external finance in an acyclical manner.



Issue 20: VAT on student accommodation

Ibec recommends

VAT currently cannot be claimed back for student accommodation projects because it would not be possible to pass the cost on to students and is instead treated as a cost of development. Other countries, such as Australia, have tackled the problem of increasing private sector rents through targeted reform of the tax base of the student accommodation sector. Government should introduce a time limited (3 year) reduced 9% rate of VAT for student housing in Budget 2017.


How Ireland will benefit

Introducing a time-limited 9% VAT rate on these developments for the period of three years will assist in closing the supply-demand gap in student housing. This would also have the dual benefit of having little attached cost (due to the current low scale of construction in the sector) and being targeted at urban areas where pressure on housing and rents are greatest.


Innovation and the labour market
 

Ireland is currently benefiting from achievements made in previous years with one of the best educated workforces in the EU. To maintain this advantage we need to continue investing in third level education, up-skilling, career guidance, R&D and apprenticeships.

 



Issue 21: Third level funding

Ibec recommends

In order to address this problem, the Government should increase capital spending in third level by €10 million as this area has suffered the most. This will avoid running the asset base down further. Government should also adopt more innovative approaches for capital funding such as PPP’s.

Part of the €400 million of fiscal space dedicated towards demographics will be used to increase current spending at third level. However, due to significant cuts in recent years, an additional €5 million should be allocated towards this funding. The Cassells report has recommended a number of sustainable funding stream options for the future of third level education. Ibec holds that the most effective way of doing this is to implement a fees and loan scheme.


How Ireland will benefit

Ireland’s high skilled labour force has played a key role in its economic success. The proportion of the population with third level qualifications has doubled in the past ten years with 52% of those aged 30-34 with such qualifications. This has meant that Ireland has the highest level of educational attainment in the EU. This asset will be threatened if funding issues are not addressed soon. In the next five years, the number of people who are of college going age will increase by 25%. In order to keep our current attainment levels constant, this would mean that an additional 26,500 students would need to be catered for at third level.



Issue 22: Fuding for up-skilling

Ibec recommends

Funding is needed to broaden the types of apprenticeships on offer to meet the skills needs of industry while providing real choice for potential workers. A ring-fenced fund should be established to support the development of new apprenticeships and traineeships.


How Ireland will benefit

The returns from investing in education mainly accrue in the medium and long term. This investment needs to happen today, in order to reap the benefits in the future. Investing in skills will help transform the kinds of employment on offer, as employers will find it easier to recruit new workers with the necessary skills, who in turn will improve the quality of work. In order to bring long-term unemployment back to its previous levels, re-skilling is needed to equip these workers with the skills needed to re-enter the workforce.



Issue 23: Focus of the National Training Fund

Ibec recommends

The National Training Fund currently only allocates one fifth of total funding to training for those who are currently in employment. However, given that unemployment has fallen significantly in the past few years at least half of this fund should be used for in-work training. This would enable the restoration of funding to up-skilling programmes, such as Skillnets, with a proven track record of robust training needs analysis, curricula designed in collaboration with employers and work-based training.


How Ireland will benefit

During the crisis it was necessary to re-direct more of the funding into re-activation programmes which helped people get back to work. However, a new approach is needed so that the recent fall in unemployment is reflected in how these funds are allocated. Allocating a greater share of the current budget towards in-work training will help address skills gaps which have already started to emerge. We need to focus on the sustainability of existing employment by improving our competitiveness through up-skilling and re-skilling.



Issue 24: R&D spending

Ibec recommends

In order to prevent us moving further away from our targets and to keep Government spending at 0.4% of GDP an additional €150 million would need to be allocated to R&D.


How Ireland will benefit

The benefits from investing in R&D are long term and a key factor in driving sustainable economic growth. Success is complimentary and for every €1 the Government invests in R&D, industry spends €2. Given that Ireland is a small open economy, it is essential that we remain an attractive place to conduct R&D as well as facilitating the emergence of indigenous firms and encouraging innovation in key sectors.



Issue 25: Cyber security voucher scheme

Ibec recommends

In order to improve this area, the Government should assist SMEs through a €2,500 cybersecurity voucher scheme similar to the current trading online voucher scheme.


How Ireland will benefit

To enable a competitive economy, we must encourage continued digital innovation and investment in innovative digital products and services. Ireland’s digital economy is a major driver of growth and we have the potential to be a global leader in this area. However, to make this a reality we must ensure that we have an environment that adequately protects personal data and IP, while providing the conditions for businesses to invest in the creation of innovative products and services.



Issue 26: Childcare

Ibec recommends

Child benefit payments should be means tested so that they remain the same for low income households but taper off gradually for higher income households. This has the potential to save the Government €200-€500 million depending on the cut in point for tapering. These savings should then be redirected as follows:

  1. Extension of the Early Childhood Care Education scheme.
  2. Implementation of a formal after-school care system.
  3. Continued professionalisation of the early years’ service. In addition to the higher capitation grants, the ratios (i.e. workers per child) should be relaxed if the worker in question has a level 7 qualification or above. This would provide a greater incentive for providers to encourage workers to obtain these qualifications.


How Ireland will benefit

Current childcare costs are a huge deterrent for parents with children of these ages to continue working. Female participation rates are relatively low in Ireland and the differential between male and female participation is much wider than in other European countries. The employment rate for women aged 25 to 49 in Ireland is almost eight percentage points lower than their UK counterparts. Child benefit payments are poorly targeted, with €330 million going towards households who earn more than €100,000 a year. If this money was redirected towards childcare services it would improve the financial incentive to work, increasing our labour force and the productive capacity of the economy.

Improving the quality of existing services will also bring benefits.The level of qualification of practitioners in early year settings has long been acknowledged as an important contributor to and indicator of quality service provision and while it doesn’t guarantee high quality it is the best measure for the sector. The EPPE/EPPSE study (Sylva et al., 2012) among others has shown that the benefits of high quality early care and education persist to at least age 14 in relation to both academic outcomes (especially maths and science) and social-behavioural outcomes (e.g. motivation, self-confidence, empathy, impulsiveness, anti-social behaviour).


Budget 2017 - Five things to deliver
 
Increasing the productive capacity of the economy by investing in infrastructure, housing, skills, education and innovation is crucial. View a summary of what the Irish business community reccomends the Government to deliver in Budget 2017.


Ibec economic and taxation team
 
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
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