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Budget 2015 Must Build on Recovery

September 18th, 2014

Budget 2015, to be announced on 14th October, is being awaited with a little less trepidation than has been the norm over the past number of years. However, the Government must use this opportunity to ensure sustainable economic growth for the future, writes Mark O’Mahoney of Chambers Ireland.

The generally positive performance of the Irish economy over recent quarters has allowed the Government some latitude in terms of the decisions it needs to take to move towards a balanced budget. Consumer sentiment has improved, receipts from consumption taxes have increased, and GNP forecasts are moving in the right direction. For the first time since the onset of the financial crisis in 2008, we may not have to face the prospect of an “austerity budget”. However, Ireland’s improved economic performance and a welcome increase in consumer confidence have distracted us somewhat from one important weakness in our budgetary arithmetic.

Despite increased activity throughout the economy and increases in tax receipts, Ireland is still reliant on external borrowings to cover the cost of its monthly outgoings. These borrowings are not insignificant, and are somewhere in the order of €800 million per month. To put this in context, securing European Commission approval for the early repayment of Ireland’s IMF debt obligations – a major diplomatic coup for Ireland – could save the country around €375 million per annum. Given debt levels of this magnitude, it is concerning to see some calls to further increase Ireland’s debt to allow for increases in public sector spending. It is Chambers Ireland’s view that, at this juncture, Ireland’s economic recovery is beginning but it is not yet self-sustaining. The Government must use Budget 2015 to build on this recovery, and ensure that the country’s economic growth is sustainable into the future.

Reduce Capital Gains Tax
We believe that a number of targeted tax reductions in Budget 2015 will generate increased economic activity and create new jobs. The rate of Capital Gains Tax currently stands at 33%. We feel that taxation at this level does not adequately reward the risks taken by entrepreneurs and investors. While many well established companies trading internationally have been somewhat insulated from the effects of the recession, the domestic economy has been stagnating. In order to stimulate a vibrant domestic economy, we need to encourage entrepreneurs to take a risk, start-up a company, and employ people in their locality. With any profits being taxed at 33%, the risk-reward analysis looks increasingly unfavourable for potential entrepreneurs. We believe a return to the rate of 20% CGT would provide the necessary impetus for the next generation of business men and women to drive the economy forward.

Improve Consumer Sentiment
There is very little point in creating a host of small businesses across the country if there is little or no consumer demand to sustain them. The recent improvements in consumer sentiment must be reinforced, and one way to do this is by putting a little more disposable income in people’s pockets. Whereas some commentators are calling for wage increases in certain sectors, we believe that a reduction in personal taxation would be a more equitable option and benefit a greater number of people. The USC has been highlighted as an area where a reduction could be considered given its impact on low to middle income families and their relative spending power. Again, an increase in consumer spending will get money moving throughout the domestic economy and help disperse the benefits of Ireland’s economic growth.

Re-examine “Windfall” Tax
We believe that the 80% “windfall” tax on re-zoned land should be re-examined. This is a somewhat anomalous tax instrument and, while it may not necessarily be having an impact across the country, it could well be inhibiting development in a number of urban centres. If the owner of a brownfield site is liable for 80% tax on any capital gains attributable to re-zoning, they are unlikely to sell the land for development purposes. While this may not have a major impact in many rural areas, in urban areas that urgently need the construction of new housing stock, it presents a barrier to development.

For the first time in many years, the Budget provides a genuine opportunity to fan the flames of growth in the Irish economy. A limited number of targeted tax reductions can help build on the current levels of growth, further increase consumer confidence and, importantly, create jobs. Achieving sustainable growth should be the overriding goal in the Government’s budgetary calculations.

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