Budget 2016 – Chambers Ireland’s Perspective
Yesterday Government published its much anticipated budget for the coming year. Budget 2016 is the first expansionary budget since the onset of the recession with Government indicating in advance that it would have €1.5bn to spend.
In our pre-budget submission we recommended government to focus on four key areas based on feedback received from the Chamber Network:
- Supporting our entrepreneurs and small businesses
- Supporting local economic development
- Investing in physical and social infrastructure
- Enhancing efficiency in our public service
Under each of the headings above, we outlined concrete proposals for Government to consider. We have repeatedly called for the implementation of all of these proposals in our engagement with Government representatives throughout the year as well as in our PR activities.
We were pleased to see that many of our recommendations indeed were included in the budget, in particular the recognition of entrepreneurs and businesses as being drivers of economic growth.
The table below provides an overview of our recommendations against the content of the budget.
| Chambers Ireland’s Pre-Budget Submission | Budget 2016 |
| Ensure equity in the USC treatment of owner-directors and self-employed | Not addressed. |
| Reform the tax system for owner-directors and the self-employed by introducing a similar tax credit to PAYE workers | A €550 tax credit on earned income introduced in 2016 with a view to increase this to €1650 as resources allow. |
| Introduce social protection for owner-directors and self-employed people | Not addressed. |
| Reduce the marginal tax rate to below 50% | Marginal tax was reduced to 49.5% for workers earning less than €70,044 |
| Merge income tax and USC into a single income tax | Not addressed but Government indicated that it would abolish USC in time. |
| Align employee remuneration with company performance by incentivising employee share schemes | Not addressed. |
| Allow investors who use the Employment and Investment Incentive to claim full relief up front | While up-front relief was not granted, the limit for raising finance was doubled to €10 million. |
| Reduce Capital Gains Tax to 20% for non-passive investments | Entrepreneurs who sell businesses and stakes up to a limit of €1 million will benefit from a 20% CGT. |
| Remove restrictions on the CGT entrepreneurial relief and align it more closely with UK model | Not addressed. |
| Incentivise Local Authorities to ring fence a portion of commercial rates for local economic development with matching funding from the Exchequer | Not addressed. |
| Develop state supported crowd-funding programmes to fund social investments | Not addressed. |
| Make childcare affordable by introducing direct public subvention and reforming the ECCE scheme | The ECCE scheme will be extended to cover a second year and funding has been allocated for after-school care services. |
| Refocus the National Training Fund to up-skill those currently in employment | Not addressed. |
| Ensure affordability of health insurances by calculating the Risk Equalisation Scheme Levy as a percentage of the value of the plan rather than a flat fee | Not addressed. |
| Temporarily reduce VAT on the construction of residential properties from 13.5% to 9% and suspend development levies for a period of two years in strategic areas | Partly addressed – instead of VAT reductions NAMA will be tasked with building 20,000 residential units by 2020. |
| Prioritise investment in infrastructure to ensure we can support our future economic growth | The Building on Recovery €27bn investment plan was published on 29 September. |
| Continue the reform of the public sector and examine the potential benefits of appropriate outsourcing to the private sector | Not addressed. |
Good for Business, Good for Consumers, Good for Families
Overall, Chambers Ireland broadly welcomes the budget. In particular, we welcome the first step towards putting the self-employed on an equal footing with the PAYE workers and the decision to reduce USC on income up to €70,044. These important measures will help businesses in all regions of the country and will ensure that people have more money in their pockets to spend which will support our indigenous economic development.
We also commend the decision to extend the ECCE scheme to cover a second free year and to allocate funding for establishing after-school care in existing schools. While it will take years to fully tackle the affordability and accessibility of childcare services, these moves are important first steps that will provide relief for parents all over the country and will make it easier for them to remain active in the labour market. (Our full list of childcare recommendations can be seen here).
… But the job is not yet done
Despite some important steps in the right direction, we believe there are a number of areas where the budget did not go far enough.
- The threshold of €1 million for 20% CGT is very low and will not significantly encourage new investors and should therefore be raised.
- Self-employed people earning above €100,000 remain liable for a 3% USC surcharge above their PAYE counterparts. We would like to see some movement in this.
- Obstacles remain within the tax system which disincentivises employee share ownership models which are proven to boost productivity, company profits and staff retention rates.
- No real solutions to the lack of supply of housing were presented. In some ways it is positive that the budget did not see a knee jerk reaction that might further distort the market in the future. Nonetheless, we had sought a reduction to 9% in the rate of VAT applied to residential housing. A reduction in this could have ameliorated some of the problems of lack of affordability until longer term supply side solutions are introduced.
There are also notes of caution around not repeating the mistakes of the past and excessively erode the tax base or set unrealistic expectations for the future. Ireland cannot afford to forget that we are hugely exposed to external shocks. We are heavily reliant on ongoing growth in international markets and we are still borrowing to fund current expenditure. Neither of these is a problem so long as international confidence is high, and interest rates are low. This is not a scenario that can last, because at some point in the future, the Irish economy will be hit by an exogenous shock.
The changes to USC in the budget removed a further 42,500 people from being liable for the tax. Maintaining as broad a tax base as possible will, however, be important for the sustainable management of public finances in the years to come. It is estimated that a total of 700,000 income earners will not be liable for USC at all from next year. By further eroding the base of taxpayers the State is left exposed at a time when we are still facing external risks to the economy, and this measure feeds into the pro-cyclical habits of the past.
In conclusion, we will therefore focus our coming year’s lobbying activities on the remaining issues above with a view to see these being addressed in Budget 2017.
