‘The end of austerity’

Budget 2015 was billed by the Government yesterday as marking the end of austerity. With water charges on the way and most of the tax increases imposed since 2008 still in place it is a triumph of Government messaging that the media have all picked up and highlighted the “end of austerity” message.

As the opening line of The Irish Times editorial notes:  “For the first time in seven years the Government’s budget has reversed the familiar formula of cutting spending and raising taxes”.

The central message from the Government yesterday was that this is the start of a process of restoring after-tax income and that there is more to come.

The biggest business story was the much-expected ending of the “Double-Irish” tax scheme which has attracted much international criticism.  It has been skilfully replaced with a series of other measures, notably favourable treatment of profits from commercialisation of R&D, designed to continue Ireland’s attractiveness to international investors.

Below we give a brief summary of the initial response from media and interest groups to measures in the areas of corporate tax, construction and development, pensions, agriculture, health, tourism, the drinks industry and small business.

The Director of our London Office Andrew Sharkey also gives a summary of the view from the UK.

Corporate tax

The Irish Times editorial says the ending of the “Double Irish” was inevitable because of international pressure, while the Irish Independent cites UK pressure.

Coverage focuses on the new elements, notably the “knowledge development box” offering a lower rate on the commercialisation of research.  The Irish Times notes that the Government is awaiting the views of the EU and OECD on this and that it is hoped to introduce it in 2016. The loosening of the rules around the R&D tax credit are also reported widely.

The Irish Independent reports that the markets seemed to shrug off the news.  While the “Double Irish” was “toxic” and had to go, we will now get a softer tax regime for companies that rely on intellectual property.

The changes are welcomed broadly this morning.  Mark Redmond of the American Chamber of Commerce says the range of tax changes ensures “Ireland will continue to attract new jobs”. Fergal O’Brien of IBEC says the Government “got the balance right”. The head of Google in Ireland, John Herlihy said “It’s for Governments to decide the law and for companies to comply with it.”

Construction/Development:

The Government plan to build 10,000 social housing units by 2018 involving a €2.2 bn capital investment is highlighted across media. The end of the windfall tax on profits from land rezoning is the other measure receiving prominence.

The social housing plan is described as representing the first major State investment in housing since before 2009.  €1.5bn is to be contributed by the Exchequer, PPPs are expected to bring a further €300m while an “off-balance sheet financial vehicle” would bring €400m. A broader social housing strategy will be announced in a few weeks.

Housing action groups including the Peter McVerry Trust are very positive about the announcement in this morning’s papers. Environment Minister Alan Kelly is quoted as saying it had been a “mistake” for local authorities to get out of house building, and we needed to return to that model.

The announcement comes as planning laws are being drafted which are expected to oblige developers to include a 10% social hosing component in each new development.

Another measure welcomed across media this morning is the extension of the Home Renovation Scheme to rental property which will allow for a tax credits. According to the Irish Times the scheme could bring currently uninhabitable properties to the market in Dublin and will help boost refurbishment and renovation activity.

Coverage this morning also focuses on the abolition of the 80% windfall tax on land rezoned from agriculture to development. “The tax was introduced to halt property speculation and to remove a key factor in planning corruption”, suggests The Irish Times. Now such gains will be taxed at the normal 33% CGT rate, a move which has been sought in recent weeks by the Construction Industry Federation and Property Industry Ireland.

On the other hand the special Capital Gains Tax relief on home purchases since 2012 is being removed from the start of 2015.  This also reverts to 33%.

The difficulties faced by potential first-time buyers arising from the Central Bank’s new rules requiring them to have a 20% deposit before borrowing have been acknowledged in the introduction of DIRT refunds for those first-time buyers saving for a deposit.

“Lost opportunity” is how the response of the construction sector is summed up in the Irish Independent.  While pleased at the abolition of the windfall tax on rezoned land, CIF Director Tom Parlon says there are 25,000 housing units needed annually while all the Government had addressed was the provision of 2,500 social housing units. “Boom era” local authority levies on home building had not been addressed, he said, and the Institute of Professional Auctioneers and Valuers repeated their concern about the new Central Bank lending rules.

Agriculture

The newspapers note that the package of farming measures are designed to support young farmers and in particular those who don’t own their own farms, but who are in a position to lease land.

The new measures “are all designed to get land moving out of the hands of inactive farmers into active ones and to help young farmers to get established”, says Alison Healy in The Irish Times. Nearly 54,000 farmers lease land, while just 0.5% of the national stock of farm land is sold each year, Minister Noonan noted yesterday.

Previously landowners got tax relief on their first €7,000 of income from land leasing.  Now this rises to €18,000. So the landowner can get more money, while those leasing on long leases can plan ahead, said Minister Coveney.

This is clearly something Minister Coveney is committed to.  The Independent reports that in his post-budget briefing he noted:  “A significant proportion of the land inherited here every year is by people who have no interest in farming it.”

The young farmers group Macra na Feirme cheered the Minister on yesterday. Its President is quoted as saying this would make a big difference to his members.

In the Irish Examiner IFA President Eddie Downey also welcomes the move. Elsewhere the ICMSA and the Irish Cattle and Sheep Farmers Association wanted respectively special treatment for inter-family leases, and greater support for collaborative farming arrangements.

Other measures noted in the press include Income Tax, Capital Acquisitions Tax and Capital Gains Tax exemptions.  The additional funding for the horse and greyhound fund, as well as the additional €5m in capital funding to invest in racecourses were also positively received.

Small Business

The new Strategic Banking Corporation of Ireland, which will be launched at the end of this month, will “increase the availability of loans of longer duration coupled with more flexible conditions and potentially lower costs,” according to the Minister for Finance.

This along with a number of other measures including the Start-Up Relief for Entrepreneurs Scheme, improvements to the remit of the Credit Review Office and the extension of the three year Corporation Tax were all welcomed this morning.  However there has been a mixed response to measures announced for SMEs with ISME criticising the Government’s lack of measures to tackle the tax levels for self-employed people. Mark Fielding, head of the Irish Small and Medium Enterprises (ISME) organisation, is quoted in today’s Irish Independent saying that "Not alone are self-employed entrepreneurs refused a tax credit but we also pay income tax at a higher rate than the rest of Irish society." 

Fergal O’Brien, Head of policy and chief economist at Ibec is quoted in today’s Irish Times saying “that indigenous business will benefit from the enhancements to investment schemes and a boost to consumer spending”.

Pensions

The announcement of the end of the pension levy – though not fully implemented until the end of 2015 – has been widely welcomed.  The industry and its pension clients got an unpleasant surprise when the levy was extended in the last budget, despite a commitment that it would be abolished.

The 0.6% levy was introduced in 2011, with 0.15% being added to it last year.  Now the 0.6% element will end this year, with the 0.15% element ending at the end of 2015.

Mercer partner Joyce Brennan is quoted in The Irish Times saying that  “now is the time to implement an auto-enrolment system to improve pension coverage across Ireland”. Peter Fahy of Eversheds tells The Irish Times: “Pension schemes can now start the recovery process from this damaging tax”.

Alcohol

The lack of change in excise duty is noted in all the press.  The Restaurants Association of Ireland says the price of alcohol when dining out is one of the main reasons tourists will not return to Ireland.  It wanted excise duty cut.  Otherwise the move is welcomed by the Licensed Vintners Federation and the Vintners Federation of Ireland.

Mircobreweries were very positive about the lifting of the ceiling for excise relief on microbrewery production by 50pc. Since 2005, microbreweries have received a rebate of 50pc of the excise duty they pay on production under two million litres. Yesterday the Minister announced that this will increase to three million litres.

Oliver Hughes, co-founder of the Porterhouse microbrewery, is quoted in the Irish Independent saying microbrewers can now “put themselves into a bit more of an expansion mode".

Health

The “cycle of cuts in the health sector is at an end,” Minister for Health Leo Varadkar said after the Budget yesterday.  However, while several of the measures contained in his speech were positively received, many commentators this morning are questioning whether the Minister can deliver the services promised within the funding allocated.  It is a question Mr Varadkar’s predecessor was familiar with each year.

Among the positive measures broadly well received were the extension of Breastcheck screening to women aged between 65 and 69 years of age (it is currently offered to women aged 50-64), the ring-fencing of €35m for mental health services and the additional €25m to deal with delayed discharges.  The decisions receiving most criticism this morning, apart from the overall budget allocation, include not reducing the prescription charge and the fact that no additional money has been allocated for the Fair Deal scheme.  One interesting element is that while the previous Minister for Health James Reilly had advocated for a sugar tax, this did not feature in yesterday’s budget. 

Tourism

The retention of the 9% VAT rate for the hospitality sector was received very positively by the industry with the Irish Hotel Federation and Restaurants Association of Ireland welcoming the move.  Fáilte Ireland also welcomed the retention of 0% air travel tax.

The Irish Hotels Federation is quoted in the papers describing the VAT rate as “one of the most successful job creation initiatives in modern times”.  It said it had supported the creation of more than 33,000 new jobs since it was introduced in 2011.

The Restaurants Association of Ireland also pointed to the new jobs created and said this had saved the exchequer €699.72 million in the past three years, largely in social welfare payments. The RAI criticised the high cost of alcohol, however, saying the decision not to reverse excise on alcohol was “a missed opportunity” to create further jobs and increase overseas tourism.

Fáilte Ireland CEO Shaun Quinn also welcomed the move, saying tourism is a sector “that can generate jobs like no other - if the conditions are right.”

 

The view from the UK from Andrew Sharkey, Director of Murray’s London Office

Normally the Irish budget would receive only minor coverage in the UK’s broadsheets. However, the fact that the UK government has consistently attacked Ireland for what it sees as unfair practices which harm the UK’s tax take and international competitiveness, has meant that this year’s budget has received more - if still limited - column inches. 

The abolition of the controversial "Double Irish” tax scheme has been the focus of coverage and it was mentioned on national BBC radio news broadcasts - given a ten second slot - throughout yesterday evening.  

National newspapers this morning use headlines and phraseology that leave the reader in no doubt that (from the British perspective) Ireland has been forced to make the move following international pressure.

The Guardian headline says: Ireland to abolish controversial 'double Irish' tax arrangement.  It says the arrangement “has drawn the wrath of the US Senate as well as the Republic's EU partners".  It goes on: “Bowing to pressure from international criticism, Irish finance minister Michael Noonan confirmed during his budget speech to the Dáil on Tuesday that the tax arrangement would be ended fully within four years."

And the Daily Telegraph has thoughtfully embedded a video on its website giving a "one minute guide to inversions" which explains how "this tactic has become a symbol of the flaws in the international tax system, creating tax inversions that can cost the US up to $90 billion in lost revenue each year".

The Financial Times has a front page article on Dublin bowing to pressure, but has an analysis saying FDI will stay in Ireland despite the changes. Referring to our “cherished and controversial corporate tax regime” it says Minister Noonan was “uncompromising yesterday in defence of the 12.5% headline rate, saying it was not and never would be up for discussion”.  It notes “his simultaneous announcement that Ireland was developing a ‘knowledge development box’, similar to the UK ‘patent box’ reassured investors and US multinationals based in Ireland that the tax regime remained competitive.’

The fact that the budget was presented as the first post austerity announcement gets some mention but is well down all stories and of secondary importance to English eyes.

Having said that, the reporting is, in the main, factual rather than overly crowing – with less jingoistic comment than there might have been given the UK Government’s antipathy to the unpopular Double Irish.​

Useful Links:

Deloitte’s perspective and analysis can be viewed at:

http://www2.deloitte.com/ie/en/pages/budget/topics/budget.html

 

Davy on Budget 2015 and the economy:

https://www.davy.ie/research/public/article.htm?id=Budget2015_14102014.htm

 

Davy on Financial & Life Planning Insights: 

http://davyprivateclients.newsweaver.com/FLP/1wnlnjutwwzwhjwurz241b?a=1&p=48005927&t=28059819

 

Mercer pension analysis:

http://www.mercer.ie/insights/point/2014/MerceranalysisofOmegaPharma1.html.html