2015 – the year of the Business Budget?

Opinion Piece

 

While predicting the future is something best left to clairvoyants, it appears almost certain that personal tax reform measures will be introduced in Budget 2015.  The debate is now focused  on how these will be introduced; whether through a widening of the bands on lower income,  a percentage cut to the rate or indeed the reformation of the blunt instrument that is the USC. Whatever the tool used, the need for an outcome – which will lower the tax burden on ‘middle-Ireland’ – cannot be disputed. Here, Limerick Chamber Economist & Acting CEO, Dr Órlaith Borthwick outlines why businesses, the ultimate job generators, must remain a core focus of tax reforms and fiscal policy shifts introduced in Budget 2015 if sustainable economic prosperity is to be delivered.

 

“At the heart of any country’s macro-economic prosperity are a number of key variables: net exports, government spending, consumer expenditure and investment. While Ireland continues to deliver export driven growth, this is a volatile market which is dependent on a plethora of externalities over which Ireland has no control; the patent pharma ‘cliff’ which impacted export figures last year is just one example.

 

“Government spending increased in real terms by 1.4% in 2013, but projections indicate that these levels will be reduced by 1.6% in 2014 and by a further 1.1% in 2015 to meet criteria established within the current Stability Programme. With monetary policy dictated by Europe fiscal opportunities for government to ignite growth depend entirely on changes which can return confidence to consumer spending and create a more pro-business environment to drive investment.

 

“Exchequer reliance on personal taxes has soared to unsustainable levels in recent years; from 29% in 2008 to 43%. Ireland had the 9th highest marginal personal tax rate on wages out of 34 OECD countries in 2013. Coupled with the drastic increase in indirect taxes which have also been introduced in recent years such as the local property tax (projected to yield 1% of total tax revenue, or €500m for government in 2014), the case for an easing of pressure on workers is well founded.

 

“Any changes to the tax regime will have a two-fold positive impact on business. Firstly, higher levels of disposable income will drive consumer expenditure. Despite continued policy measures to penalise savings, the leakage from the circular flow of money through savings – which are at historically high levels – is having a detrimental and direct impact on retail sales, but is indirectly affecting and reducing demand for business across all industries and sectors. Improved levels of disposable income will encourage consumers to demand more products and services. Injections of consumer spend increase the supply and velocity of money and ultimately generate business to business transactions along the supply chain. Changes to levels of personal taxes would be a welcome move in Budget 2015 and something, as a business representative organisation, Chambers’ have lobbied for.

 

“Lowering the marginal rates of tax will also drive Ireland’s competitiveness internationally and improve our position as an attractive location in which to invest and do business. But much more needs to be done if government is serious about improving the environment for entrepreneurs and investors to do business in Ireland. Currently investment spending in Ireland (as a percentage of GDP) is running at 14%; this needs to increase and move closer to 20% if we are to benchmark toward international best practice standards for an economy which is growing sustainably year-on-year. While measures such as the home renovation scheme initiative introduced in Budget 2014 increased the spend on home improvements, and non-residential construction had a year of growth, investment is a less reactionary and more strategic decision by businesses. The tax and policy environment is a key influencer of these decisions. In this regard, government needs to utilise Budget 2015 to introduce measures which drive the attractiveness of Ireland as a place to do business, invest and create jobs.

 

“Entrepreneurs and start-ups are the backbone for any economy; but the Irish taxation system penalises rather than rewards this vital employment sector and this system is in need of a serious overhaul. Despite a 65% increase in the rate of capital gains tax (CGT) in the last five years, the total yield to the exchequer has continued to decline; from an excess of €3,000m in 2007 to less than €500m in 2013. Ireland is completely out of sync with our neighbours in regard to our regime. CGT for entrepreneurs in the UK is 10%; this compares to an uncertain 33% in Ireland. The Entrepreneur’s Relief which was introduced in Budget 2014 is a cumbersome, overly complex system which goes nowhere near the system required to allow Ireland compete internationally for this type of investor and investment.

 

“Other pro-business job support measures could also be rolled out and previous commitments delivered. For instance, our tax system cannot continue to discriminate against the self-employed.  The additional 3% USC that applies is nothing short of ludicrous in a country which claims to be pro-innovation and must be allowed to expire at the end of 2014. Similarly, the 0.6% pension levy must cease, as promised in 2014, with no additional levies beyond the 0.15% for 2015. Government needs to reverse PRSI Class A changes introduced last year, while certainty needs to be given to the hospitality sector in regard to the very successful 9% VAT introduced to support jobs in that industry.

 

The priority for government is moving people into employment and in doing so lowering the demands on exchequer funding. However this can only be delivered if a business environment which encourages and supports start-ups and entrepreneurs is created. Anecdotal evidence from Limerick Chamber members suggests that many business are ripe for expansion but the appetite for investment has been dampened in recent years due to uncertainty and fear. If Ireland is to return to positive sustainable growth levels, where businesses invest and create additional jobs, then Budget 2015 must reverse the anti-business measures which have been introduced over the last number of years and address the serious disparities that exist in our system to encourage and reward entrepreneurs”

 

Ends 

Back

Share On.....