Temptation to overheat economy has been avoided
At a time of considerable macroeconomic uncertainty (Brexit, US tax reform, EU tax reform) Finance Minister Pascal Donoghue has produced a (virtually) balanced budget and has avoided the temptation to overheat the economy through tax cuts, writes
In fact, a quick analysis of the taxation measures announced shows:
- Total tax revenues raised — €855m
- Total tax foregone — cost €336m
So from a tax perspective, the net impact is over €519m being taken by the exchequer in incremental taxes which are then being used to fund significant investment in housing, capital infrastructure, health, education and social welfare.
With the exception of the well-flagged removal of the reduced rate of Vat on the hospitality sector — reverting back to a 13.5% rate from the 9% rate in force over the last few years — the only other significant revenue-raising measures announced relate to tobacco, betting duty and an expected €50m additional yield from PAYE Compliance Interventions — resulting from Revenue’s well-heralded PAYE Modernisation Programme, which kicks in on 1 January, 2019.
A further 0.1% increase in National Training Fund, (originally announced in Budget 2018) though small in percentage terms, is also expected to contribute a further €77m cash to the exchequer on a full year basis.
The 9% Vat rate remains for newspapers and sporting facilities and is extended to digital publications such as e-books and electronically supplied newspapers (but apparently not magazines — we await details in the Finance Bill).
Much to people’s surprise, there were no changes announced in Stamp Duty, which is welcome given the major market uncertainty resulting from the manner in which Budget 2018 stamp duty measures were introduced.
On the personal tax side, there are some relatively minor adjustments, which roughly equate to adjustments in line with inflation such:
- Minor reduction in USC rate — full year cost of €123m
- €750 increase in standard rate band — full-year cost of €161m
- Increase in Earned Income credit for self-employed — full year cost of €48m
- Increase in Home Carer tax credit — full-year cost of €24m
- Increase in class A CAT threshold — full-year cost of €8m
What these numbers show is the tremendous impact — in terms of tax revenue foregone — arising from relatively modest changes in USC / standard rate band.
These numbers starkly demonstrate the challenge facing any minister for finance seeking to eliminate USC and/or achieve a significant increase in the standard rate tax band in future years.
From a carbon tax perspective, there is an additional 1% VRT surcharge on 2019 registrations of diesel cars, the proceeds of which are being used to fund a VRT rebate and BIK exemption on electric vehicles.
Changes in the emissions measurement system are estimated to add between 2% and 4% via VRT to the cost of new cars when fully introduced in 2020.
The SME sector sees some changes to the KEEP share option scheme, aimed at increasing the level of take up, which was somewhat less than expected.
These represent a move in the right direction and should assist this sector in competing for talent — particularly as the country moves towards full employment.
And on the agribusiness side, we see the usual and now expected continuation of stock relief and young trained farmer reliefs, and the extension of income averaging — which assist in income smoothing in times of volatile commodity prices and lower the tax cost of transferring land from one generation to another.
To summarise, the minister has chosen to use what financial headroom he has in terms of investing in the economy — in housing, in education and other important public services — while increasing his overall tax take into the exchequer.
While most readers will benefit slightly, one could not call it an election budget — and the minister is to be commended for resisting that temptation.
