Storm clouds over Budget 2018 are yet to blow over

From the perspective of the minister for finance, in particular, and the Government in general, the arrival of Storm Ophelia on Monday very quickly took Budget 2018 off the news agenda, and particularly a couple of its more controversial elements.

Notwithstanding these controversies, the budget has been generally well received, with most sensible people accepting that in the context of the very limited resources at his disposal, the minister managed to deliver a fairly balanced package that addressed the key issues in the economy — housing supply, health, education, law and order, and an extremely modest easing of the tax burden facing middle income workers.

A little bit of progress made, but considerable progress could be made in the medium term if a similar budgetary strategy were to be applied over the coming years. That, of course, would be a big ask, given the nature of Irish democracy. The two aspects of the budget that have proved quite controversial are the increase in the stamp duty on non-residential property from 2% to 6%, and the ongoing unfair treatment of the self employed.

The increase in the stamp duty rate has, unsurprisingly, elicited a negative reaction from those in the property sector. But, Ireland’s rate of stamp duty is incredibly low by international standards and was not sustainable, particularly given the massive windfall gains made by funds who have been flipping commercial property at will in recent times. The Government believes that the category of building and construction investment, that includes commercial property, is approaching its pre-crisis share of gross national income and, as such, is at risk of overheating.

In addition, the Government is clearly concerned that the hot commercial property sector is diverting much-needed resources away from residential development. The demand for commercial property development is still incredibly strong, and in the context of Brexit, looks set to get even stronger. The big problem is that we lack the capacity to deliver all of the construction output that is currently required.

As well as those involved in the commercial property sector, farmers are also not terribly happy. Putting aside those totally predictable negative reactions, the biggest issue with the change is if the trebling of the rate will actually deliver the extra €376m that is targeted.

Stamp duty receipts are forecast to increase by €473m, in total, next year.

The problem is that it would require commercial property transactions valued at around €10bn to raise the extra €376m targeted.

The market has been totally inflated in recent years by Nama’s activities, but this does not represent the norm.

Property experts suggest that such a level of transactions will be impossible to deliver, but only time will tell.

Meanwhile, the largest single revenue-raising measure in the budget, which helped fund the overall budgetary package in a significant way, is looking extremely risky.

The self-employed are still being treated in an unfair and discriminatory manner in the tax system. The decision to increase the earned income credit by just €200 to €1,150 still leaves the self-employed at a distinct disadvantage relative to their peers who are employees.

In addition, self-employed income over €100,000 attracts a USC rate of 11%, which is effectively a surcharge of 3%.

Discriminatory treatment of the self-employed might have had some justification back in the days when the Revenue Commissioners were a lot less effective and the self-employed were in a position to side-step tax, but it is a very different world today. This anomaly in the tax system needs to be adjusted as quickly as possible in order to accommodate new workplace realities and particularly the growth of the gig economy.

For the business sector, the PRSI increase in the budget, which comes alongside a 30c per hour increase in the minimum wage, is not what is called for in an environment where the SME sector, in particular, is under serious threat from Brexit.


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