Irish economy

Budget 2015: Government implements €1bn of tax cuts and spending increases

Davy View

Budget 2015 was broadly in line with expectations. A total package of €1bn was implemented, split between €420m of tax cuts and €630m of extra spending. The deficit is still expected to fall to 2.7% of GDP by 2015 and government debt to 110.5% of GDP by end-2014.

Government implements €1bn of tax cuts and spending increases

Budget 2015 was in line with expectations. Together, the tax (€420m) and spending (€630m) measures are worth €1bn. However, since Friday an additional €320m of non-tax revenues have been found; as a result, the impact on the general government deficit is just €585m, or 0.3% of GDP. This small loosening will leave the overall deficit at 2.7% of GDP in 2015. Irish government debt is expected to remain relatively high at 110.5% of GDP at end-2014.

The bulk of the good news on economic performance and tax revenue growth has been used to reduce the €2bn adjustment originally planned for 2015 into a small Budget giveaway. Recommendations for a more cautious approach from the European Commission, IMF and Irish Fiscal Advisory Council have been ignored. Clearly, the electoral cycle and traditional political pressures for pro-cyclical fiscal policy have re-asserted themselves. However, the Budget numbers are probably still conservative to ensure targets are met and do not pencil in any benefit from future sales of state assets in the banking sector.

On balance, household incomes will be left broadly unchanged. They have been pushed up by €458m in income tax cuts but offset by €300m in new water charges in 2015. Unfortunately, the 52% marginal tax rate remains in place, hurting the economy’s ability to attract highly skilled workers. A 1 percentage point cut in the top rate of income tax to 40% and paid at a higher €33,800 has been offset by the new 8% Universal Social Charge on incomes over €70,000. This is a little disappointing given prior commitments. However, Minister for Finance Michael Noonan did re-commit to reduce the marginal rate in the future. More encouragingly, the 0.6% pension levy will end in 2014, and the government is committed to eliminate the remaining 0.15% in 2015.

Concerns that spending discipline is being eroded, particularly in the Department of Health, will now grow. Effectively, the €500m budget over-run in 2014 is being locked into next year’s Budget estimates. There was also a €196m increase in Social Protection spending. Worryingly, Minister for Public Expenditure and Reform Brendan Howlin also appeared to argue that savings from falling unemployment should largely be recycled into Social Protection spending – currently inflated by the 11.1% unemployment rate. For example, this year will see a €5 per month increase in already bloated child benefit payments, granted irrespective of household income.

Government loosens budget by €1bn

Today’s Budget was in line with expectations. Together, the tax (€420m) and spending (€630m) measures are worth €1bn. However, since Friday an additional €320m of non-tax revenues have been found; as a result, the impact on the general government deficit is just €585m, or 0.3% of GDP. This small loosening will leave the overall deficit at 2.7% of GDP in 2015. However, the case for looser fiscal policy is dubious. Irish government debt is expected to remain relatively high at 110.5% of GDP at end-2014. The bulk of the good news on economic performance and tax revenue growth has been used to reduce the €2bn adjustment originally planned for 2015 into a small Budget giveaway. Recommendations for a more cautious approach from the European Commission, IMF and Irish Fiscal Advisory Council have been ignored. Clearly, the electoral cycle and traditional political pressures for pro-cyclical fiscal policy have re-asserted themselves. However, the fiscal numbers probably still encompass a degree of conservatism to ensure targets are met and do not pencil in any benefit from future sales of state assets in the banking sector.

/resimages/publication/Budget2015_14102014_002.png

On balance, household incomes will be left broadly unchanged by Budget 2015. They have been pushed up by €458m in income tax cuts and down by €300m in new water charges in 2015. Unfortunately, the 52% marginal tax rate remains in place, hurting the economy’s ability to attract highly skilled workers. A 1 percentage point cut in the top rate of income tax to 40% and paid at a higher €33,800 has been offset by the new 8% Universal Social Charge on incomes over €70,000. This is a little disappointing. That said, Minister Noonan did re-commit to reduce the marginal rate in the future. More encouragingly, the 0.6% pension levy will end in 2014, with a commitment to eliminate the remaining 0.15% in 2015.

Concerns that spending discipline is being eroded, particularly in the Department of Health, will now grow. Minister for Public Expenditure and Reform Brendan Howlin argued in his Budget speech that any savings from lower levels of unemployment should be largely recycled into other forms of social spending. For example, this year will see a €5 per month increase in already bloated child benefit. IMF and EC recommendations that social payments should be targeted towards lower income groups have failed to come to fruition in favour of universal benefits.

/resimages/publication/Budget2015_14102014_003.png

Tax cuts offset the impact of water charges with 52% marginal rate on income tax intact

On balance, household incomes will be left broadly unchanged by Budget 2015. Tax changes will offset the impact of water charges. However, it appears that the income tax system has become more progressive – leaving some taxpayers better off than others. There was a 1 percentage point cut in the top rate of income tax to 40%, which will now be paid above €33,800 (with the band raised by €1,000). However, the marginal rate remains at 52% for higher earners, accomplished by a new 8% Universal Social Charge for incomes over €70,000. Self-employed income in excess of €100,000 will now be subject to a Universal Social Charge of 11%. These tax changes are disappointing, especially given Minister Michael Noonan’s commitment to reduce the top 52% marginal rate of income tax, identified as potentially hurting Ireland’s competitiveness.

/resimages/publication/Budget2015_14102014_004.png

Excise duties are expected to raise €75m in 2015, specifically €53m from a 40c increase on tobacco and €25m from betting duty. Thankfully, the 0.6% pension levy will finally end in 2014. Minister for Finance Michael Noonan has committed to allow the remaining 0.15% levy expire in 2015. For now, the tourism industry has retained its 9% VAT rate.

Speculation prior to the Budget had largely focused on the prospects for the ‘double Irish’. Amid much grand standing from UK Prime Minister David Cameron and recent European Commission reports into Apple’s tax affairs, the pressure on Ireland to abolish the ‘double Irish’ has grown. However, the Department of Finance has taken an appropriately cautious approach, not pre-empting any future international agreement. Companies operating in Ireland will have ample time to avail of new tax structures, with the ‘double Irish’ phased out only by 2020. Moreover, the Minister for Finance indicated that the Irish government will now legislate for a new ‘Knowledge Development Box,’ which will have a competitive tax rate.

Finally, today’s tax announcements included a range of initiatives to help the construction sector. The most significant announcement was the removal of the 80% windfall tax on development land, now brought into line with the 33% rate of capital gains. This had been one action called for by the construction sector. However, there was no change to the rate of VAT on home construction. It remains to be seen how successful these measures will be in stimulating construction.

Spending measures worth €630m announced

Today’s expenditure announcements provide an extra €430m in current expenditure and €210m in capital expenditure over previous estimates. Table 4 breaks down the additional spending allocations by department. Overall, total gross voted expenditure will rise to €53.6bn in 2015 from €53.0bn in 2014. The headline measures largely include extra spending on Social Protection, Health and housing. These extra spending initiatives will be partly funded by the sale of Bord Gais Energy.

Figure 1: Breakdown of expenditure, 2015


/resimages/publication/Budget2015_14102014_005.png

Source: Department of Finance

/resimages/publication/Budget2015_14102014_006.png

An extra €5/month is to be added to the basic child benefit for each child, up to €135 per child from January 2015, at a cost of €72m to the Exchequer. We have consistently highlighted the frivolous nature of Ireland’s child benefit, which is provided to all families irrespective of income. Not surprisingly, there was no mention of any plans to introduce means testing despite calls from the IMF to target child benefit at those most in need. Worryingly, Minister for Public Expenditure and Reform Brendan Howlin also appeared to argue that any savings from falling unemployment should largely be recycled into social protection spending – currently inflated by the 11.1% unemployment rate. Other social spending measures announced included a back to work dividend on child supports for families and a rebate of €100 on water charges for some social welfare claimants. The total package of spending measures, costing €196m, is offset somewhat by savings from the Live Register. Total Social Protection spending is now expected to be €41m above previous estimates at €19.4bn, falling by €189m on the year.

Following last year’s unrealistic Health spending plans, the government has committed an extra €557m in current spending to the department’s budget, effectively locking in this year’s spending over-run of around €500m. Given the appalling track record of budget control in Health, it is difficult to have any confidence in these estimates. Uncertainty surrounds the eventual cost of free GP care for under-5s and over-70s to be introduced in 2015. But it may be that the new Minister for Health has bargained for more realistic budgets. However, the worry remains that structural spending problems in Health are not being addressed. Other measures announced included an extra €200m for the social housing initiative in 2015 on top of tax measures announced to stimulate construction in the residential sector. Extra spending is also allocated to Education (+€154m), Justice and Equality (+€141m) and Agriculture (+€54m), largely on extra capital expenditure.


Download full report with analyst certification and important disclosures

Oct 14 2014

Download