Budget 2012 - Where to now? with Feargal O’Rourke, Head of Tax & Legal Services, PwC

Paul Krugman once wrote that the Great Depression in the US was ended by a massive-deficit financed public works program known as World War II; thankfully Minister Noonan proposed no such dramatic solution to the current economic position in Budget 2012! Minister Noonan’s response was a pro business budget.

However the outlook in the global economy is reminiscent of certain aspects of the 1930s. The recently published ESRI Quarterly Economic Commentary notes that output in the Eurozone economy will perform poorly and may contract year-on-year. It went as far as saying that the current situation contains elements “reminiscent of policy during the Great Depression” and that without decisive intervention the Eurozone would be seriously constrained. However- for those of us who look at the glass half full - the ESRI’s report did note that Ireland’s fiscal targets set for next year remain achievable.

But are they? Yesterday’s Budget was fairly well flagged. No increases in income tax – an election promise that probably wasn’t expected to last the traditional “examination of the books” – with the “big bet”, to start to bridge the incomeexpenditure gap, being a 2% increase in VAT. The 23% rate makes our standard rate the joint highest in the Eurozone and 4th highest in the EU. The Programme for Government indicates that this is it for the life of this Government, so this has to be left alone. So although, an individual’s after tax income may remain unaffected, his or her purchasing power will be reduced as a result of this year’s budget.

Will it work? VAT receipts are currently somewhat “soft” and instinctively there is a feeling that the numbers for 2012 under this tax heading might be optimistic. Harbingers of doom predicting traffic jams in Newry as people head north are a little wide of the mark. The UK VAT rate is 20% - not a massive differential – and it is exchange rate divergences as opposed to their VAT equivalents that will drive consumer behaviour. An increase in domestic demand is an essential ingredient to Ireland’s recovery so only time will tell on the impact of this VAT measure on what is still a fragile retail market.

This budget saw the tax base broadened through the introduction of a levy on every home in the country of €100 with few limited exceptions. The taxation of investment saw significant increase with the rates of tax on capital gains, tax and inheritances and interest income being equated at 30%. Although significant, one would have to question the amount to be raised by the capital taxes measure. That said, the property sector saw some welcome change with a reduction in the rate of stamp duty on commercial property from the top rate of 6% to a flat rate of 2% from midnight last night. A welcome exemption from Capital Gains Tax was put forward by the Minister for property purchased from midnight until the end of 2013 and held for seven years.

In a very much pro-business budget, the Minister focussed on economic growth with a focus on the export sector. The Minister suggested a Foreign Earnings Deduction to support the export drive by aiding companies seeking to expand into emerging markets in the BRICS countries. A key point is to ensure that we have the necessary skills here to drive recovery. Irish rates of taxing income have increased since 2008 and as such remain a significant disincentive to attracting and retaining people with such skills. The Minister’s suggested improvements to the Special Assignment Relief Programme (SARP) are to be welcomed. While not going as far as business would like on the R&D credit, his changes of increased credit will be well received by many. As always, the devil is in the detail which will be seen in the Finance Bill.

The reconfirming of the 12½% rate of Corporation Tax by the minister will be well received given Mr. Sarkozy’s implication last week that this could be subject to further scrutiny. Our Corporation Tax rate has always been a cornerstone of Ireland Inc’s international offering and it is only right that this is a “red line” item for this government.

This was a pro-growth budget. Fingers crossed.