A pre-budget analysis from Limerick Chamber
As Budget day looms, Limerick Chamber gives some insights into what might be in store as the country faces its fifth year of tough austerity measures despite the country emerging from recession toward the end of last quarter.
By Limerick Chamber Economist, Dr. Órlaith Borthwick
While the Chamber lobbied for a move of budget date to ease the impact December budgets were having on consumer spending, the change of date for Budget 2014 brings complexities for the Minister. Budget 2014 will have to be based on financial returns to September year-end, resulting in a two month information void. This is a unique and one-off challenge, particularly as figures from the first three-quarters of the year are sending mixed messages.
Let’s return to basics, a country’s economic viability and health is measured by its GDP, or output. This is driven by four primary indicators: consumer expenditure; investment; net exports; and government expenditure. If we examine each of these in isolation, what is blatantly obvious is that export growth has driven any form of positive economic performance in the Irish economy over the last number of years. Consumer expenditure has been eroded through a mix of direct and indirect taxes. The resultant impact of reduced disposable incomes is clearly reflected in ever declining retail figures. While those who have money are saving it, this does little to stimulate economic activity; on the contrary, such leakages out of the circulation of money further dampened consumer spending. Private investment as a percentage of GDP is projected to increase slightly from 8.6% in 2012 to 9.1% in 2013 and 9.3% in 2014; similarly public investment also shows positive projections with a marginal increase from 1.6% in 2013 to 1.7% by 2014. Export growth has been (and remains) strong with projected growth of 1.8pc in 2014. However, the pace of growth in this sector has slowed, and while goods export volumes rose 2.3% q/q in Q2 2013, merchandise exports fell by 7% y/y in Q1 2013, mainly driven by pharmaceuticals, a trend which is set to continue. Government expenditure continues to decline and by the end of 2013, cumulative fiscal consolidation effort of €13.1 billion, equivalent to 8% of GDP, will have been implemented under the bailout program.
Minister Noonan has indicated that Budget 2014 will be a mixture of tax hikes and expenditure cuts and confirmed that the adjustment will amount to €2.5 billion. While this is a reduction on previous indications of €3.1 billion, under our bailout agreement the government is committed to decreasing expenditure by a further 2.9% of GDP over the period of 2014-2015. To meet our targets, just over 60% of adjustments are expenditure measures, with the balance coming from taxes. Where these additional monies will come from in 2014 will be interesting to see. There is a consensus that the route of indirect taxes on households has been well and truly utilised at this stage, property tax has been rolled out in 2013 and water charges will be billed from 2015 onward.
So, what do we know? On the one hand, to the end of September tax revenues have increased and are running €4million ahead of expectations; VAT receipts and corporation tax were up 3.9pc and 7.1pc respectively year-on-year. Perceptions are also shifting: the latest KBC Bank Ireland/ ERSI Consumer Sentiment Index jumped to 73.1 in September, the highest in six years. Seasonally adjusted unemployment figures are also heading in the right direction; with a fall in the standardised unemployment rate to 13.3pc. However, while the figures might be trending in the right direction, a serious and real threat to sustainable growth is the fact that 58pc of those currently on the live register are long term unemployed.
Other long term threats continue to bubble under the surface, as highlighted in the IMFs eleventh review published last week. The report highlights not only the problems associated with government borrowing – gross public debt is projected to peak at 123% of GDP by year end, but there is also the issue of household debt. The percentage of non-performing loans on primary dwelling homes in arrears over 90 days continues to increase, running at 17% to the end of Q2. While the banks have begun to engage with mortgage holders the framework for resolutions must run more effectively.
There are measures which the government can introduce which would act as a catalyst for economic recovery, business expansion and employment growth i.e. through adequate supports for the entrepreneur and SME. The sector accounts for 99.5% of all Irish enterprises, employs 72% of the Irish workforce and contributes 52% of the gross value added of the economy. But there remains a weakness of SME financing, the stock of bank credit to SMEs has declined at rates of 5 to 6% y/y in recent quarters, with a fall of €1.5 billion (0.38% of GDP) in the year to June 2013. Budget 2014 needs to put robust and tangible measures in place to assist SME cash-flow issues: the threshold for cash basis VAT returns needs to be doubled from €1.25m to €2.5m; the Seed Capital Scheme should be expanded to become more attractive for the self-employed; and the high income earner restriction needs to be removed from the Employment and Investment Incentive Scheme.
The costs of employment must remain static. This means cross-departmental cooperation and cohesion is necessary. While Minister Noonan introduced a ’10-point-plan for SMEs’ in Budget 2013, The Department of Social Protection rendered many firms devoid of sustainability with the transfer of redundancy obligations. In this regard, there can be no increase in employers PRSI or transfer of sick pay obligations in Budget 2014.
If government is serious about labour market activation measures, then efforts to unleash SME job-creating potential must be more focused in their delivery. SMEs can only expand and generate employment if the regulatory and tax framework enables it to do so; for example the Chamber suggests that start-ups should be enabled to offset corporation tax against other taxes due over a five year period; a differentiation between a speculative investor and an entrepreneur must be made and capital gains tax for the entrepreneur halved to 16.5%, as is the practice in other jurisdictions such as the UK and US; and incentives to increase net headcount could be introduced, examples of which are used in Portugal, Spain and the UK and targeted deductions toward staff up-skilling such as that operated in Austria.
The SME sector not only employs people, but it generates revenues for government. Budget 2014 must address serious challenges and constraints facing this sector. Introducing supports to assist the expansion of the SME sector benefit all: job creation leads to increases in disposable income and consumer expenditure, results in less people reliant on social welfare supports while generating revenue for the exchequer. If government is serious about accelerating and supporting growth in the Irish economy, then Budget 2014 must be focused on the backbone of the Irish economy, our entrepreneurs and SMEs.
A full copy of Limerick Chambers Pre-Budget Submission 2014 is available here
ENDS
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