Running quietly

Oct 15, 2018

Sunday Business Post, 14 October 2018
It looks like the machine used to make Budget 2018 was pressed into service again for Budget 2019 this week.  Did a machine ever run so quietly?

Budget 2018 tinkered with the 20% tax band and the USC rates.  So did Budget 2019.  Budget 2018 had one big idea to raise revenue – an increase on stamp duty on sales of commercial property.  This year the big idea was the reinstatement of the 13.5% VAT rate on the hospitality sector.  Last year's budget had one major device aimed at companies which was to limit tax relief on the income the company derives from intellectual property.  This year the anti-avoidance measure was an exit tax on some of the assets of companies leaving Ireland. 

This year however the budget manufacturing machine was using different raw materials.  This budget had to accommodate the concerns of two sets of negotiations; one set to keep the current government in power, and the other set being about the future post Brexit deal with the UK.

Confidence and supply permeates Budget 2019.  As in previous years, Paschal Donohoe stuck strictly to the terms of the confidence and supply agreement between his party and Fianna Fáil.  The Fianna Fáil priority of USC reduction was accommodated, alongside the Fine Gael priority of widening the 20% band.  There were no alarms and no surprises.  While Budget 2018 marked the second staging point in the agreement keeping the current government in place, Budget 2019 marked its completion with an option to renew.

But what of Brexit?  In October 2017, Brexit was still 18 months away and the initial negotiations between the UK and the EU were lumbering towards a fudged conclusion on a backstop arrangement, designed to ensure there would be no hard border in the island of Ireland.  Now Brexit is less than six months away, and there has been little apparent progress towards concluding a deal on the future relationship between the UK and the EU. 

In short, there was not enough in this budget to accommodate the disruption to trade and tax revenues which could ensue from a hard Brexit on 29 March next.  If a hard Brexit transpires during 2019 (and this I think remains a real possibility), a supplementary budget will be required to allow for the sudden changes to VAT and customs yields, and possibly to provide immediate support to the industries suffering the most disruption.  Agriculture and transport will be at the top of that list.  Although the Tanaiste has already seemed to rule a supplementary Brexit budget out we had to do something similar before.  The 2011 Jobs Initiative was to support our hospitality sector which was in crisis following the great recession by introducing a reduced rate of VAT.  There is an irony there, given that the same emergency support was revoked last Tuesday.    

The justification for only presenting modest Brexit measures in Budget 2019 may be the protection of a negotiating hand.  It is striking how none of the remaining EU27 countries have broken ranks in any significant way on the EU negotiation stance towards the UK.  Signalling any particular expectation of the outcome was never going to be an option for Ireland.  That’s even if we weren’t under the constraints of the Eurozone budgeting process which goes so far as to determine the day the budget must be presented.

This reticence may also partly explain the timing of the establishment of a rainy day fund.  It seems that this idea is subject to rolling rebranding.  One week the rainy day fund is for corporation tax receipt shocks, the next week it’s a Brexit buffer.  Either way it is worth bearing in mind that the rainy day fund itself was a component in the confidence and supply agreement.  Another box in negotiations is ticked.

All this however is deeply frustrating for business which has spearheaded the recovery and hoped for some additional support from this budget.  The only measure introduced which affects all employers is an increase in the employer PRSI rate to 10.95%.  It is correct of course to prioritise housing and social welfare issues, but business will feel rightly aggrieved.  Having weathered the worst of the financial storm and provided the bulk of the jobs recovery (some 2 million people are employed by companies in this country) there was little or nothing in the Minister’s offering for indigenous business; the hospitality sector would maintain it is even worse than that.  Even the earned income tax credit for the self-employed, though increased, is not on a par with the PAYE tax credit.

Next Thursday sees the publication of the Finance Bill, the detailed legislation which often addresses issues which didn't feature in the Minister's budget speech.  There were some issues flagged, such as changes to the current but largely unsuccessful KEEP system for providing tax relief on grants of shares to employees.  The Enterprise and Investment Incentive scheme, initially designed to fill a gap in the funding market for SMEs, is also up for review because quite frankly it doesn't work anymore for too many businesses.

There is no glamour in a slow recovery, with the current state of government stability negotiations, and Brexit negotiations in play.  I don't recall a budget which received such a muted response.  Politically at least, the greatest achievement of the 2019 Budget machine is noise reduction. 

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland