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Budget 2022: Responsible recovery, sustainable success

16 September, 2021

Budget 2022 will be set against an ongoing backdrop of significant economic, political and societal uncertainty. In addition to the continuing fallout from COVID-19, the unprecedented challenges we face include climate change, housing, healthcare, international tax reform as well as the scale of our fiscal indebtedness, one of the highest in the developed world.

But there are many positives that we should account for at this point in the fiscal year: the success of Ireland's vaccine programme, a rebound in economic growth, consumer spending and jobs increasing while exports continue to power ahead. Our economy is now firmly in recovery mode. This Budget will be an opportunity to set Ireland on a path to sustainable recovery and growth as Irish businesses seek to restart and recover, while investing in the things that matter for society as a whole. There are opportunities to use tax policy in new ways to support investment in targeted areas.

An aerial photo of a foot and vehicular bridge over a large body of water.

Aside from macro issues such as housing and health, there are 4 critical areas Budget 2022 should focus on to put our economy on a sound financial and sustainable footing creating real growth and jobs:

1. The domestic economy

Given that the Budget is a tool that impacts society at large, but is at its core a fiscal plan, we look first at the economic background. The State has borrowed €34 billion to date in additional funding to help us deal with the impact of COVID-19 and ancillary costs. The Government's Summer Economic Statement envisages big deficits right through to 2025, culminating in a budget deficit of €7.4 billion in 2025 (currently estimated to be €20 billion for 2021). As a consequence, our national debt is expected to be €282 billion by 2025.

Stabilising our national balance sheet will not be easy. We will need our economic growth rate to exceed our national debt interest rate to have a chance at reducing the deficit in the short term and the overall balance outstanding in the long term. It is welcome that the Minister has already indicated that 'the forthcoming Budget will be the first step in a two-part budget to reduce the deficit'.

We need to balance support and investment to the multinational sectors with support for the backbone to our economy, our SMEs and family businesses, to help with their recovery and renewal. Any tax incentives need to be fit for purpose and targeted as a result.

A key concern for business is the potential for an abrupt end to tax warehousing as this may result in some businesses being plunged into financial difficulty before they have an opportunity to trade their way out of debt. Hopefully the Minister can consider the extending of the Tax Debt Warehousing Scheme until at least 31 December 2022. Succession planning is another key area that needs to be more efficient to encourage the passing on of wealth and businesses from one generation to another. There are new ways to improve the transfer of assets and to spread out the cost of gift or inheritance tax over a long-term period.

2. International tax reform and FDI

One of the only bright points on an otherwise bleak economic tax outlook in the last 18 months was the continued strong performance of multinationals that export goods and services from Ireland. Certain sectors such as pharmaceuticals, technology and manufacturing of high-value goods have bolstered corporate tax receipts and maintained high-quality employment that supported strong personal tax income receipts for the country. This demonstrates the reliance that we place on foreign direct investment to directly and indirectly support a range of tax streams.

This is against a backdrop of international tax reform, led by the OECD, which threatens Ireland's ability to compete for FDI using our tax system. This international corporate tax reform could impact our tax take from corporations but also the PAYE that is supported by MNCs into the future. Ireland's position is clear in response to this threat – we will work alongside the OECD in reaching a global solution to the question of global tax reform but we want recognition that tax needs to be a lever available for small, open economies that cannot otherwise compete with bigger countries. Our 12.5% corporate tax rate is a cornerstone of our economy. We want fair tax competition, where the interests of small open economies and not just those of large market jurisdictions are taken into account.

We are looking at a "once in a generation" upheaval in the international corporate tax system and this should be used as a beacon to further review the Irish industrial and tax policy. Ireland needs to chart our path for long-term growth and this is the perfect opportunity to begin. FDI needs to be to the fore in this plan. The Minister is right in taking his time in assessing the impact of the OECD proposals with the full information to hand rather than being 'blindsided' by unexpected outcomes.

3. Digital or skills

PwC's CEO Survey 2021 revealed that over seven out of ten Irish business leaders are concerned about the availability of key skills and about the speed of technological changes. Digitalising and upskilling Ireland is a national objective and Budget 2022 is a key opportunity to continue to support this journey. We are seeing many companies digitising their businesses and people will require new skills to work in this new environment. The government should continue investing in those skills by providing support to allow people to retrain and to assist employers to provide training for their employees. This would also help improve our competitiveness as a country.

With more people working regionally post COVID-19, adequate infrastructure is crucial. Continuing the roll-out of broadband to all parts of the country will be critical. Additional tax credits and capital allowances for people working remotely would also be beneficial to support the digital and the green economy as well as tax supports for the development of regional hubs to create shared office spaces.

4. Boosting the 'green' recovery

The Climate Change and Low Carbon Development (Amendment) Bill introduced earlier this year charts our path to carbon neutrality by 2050 and is the most ambitious of any developed economy. Climate change is one of the greatest challenges of our generation, requiring wholescale transformation of every sector of our economy, unprecedented innovation and committed leadership. Tax policy can play a major role not only influencing behavioural change towards a sustainable economy (i.e., changing heating, transport and construction models, purchasing habits and packaging as we move towards a net zero economy), but also encouraging investment and creating jobs in the right areas while boosting a greener economic recovery.

The cost of tackling climate change will be phenomenal. It will take a long time and a huge amount of effort. It cannot be done without serious political will and the current government, the greenest in our history, has committed to meet this challenge head on. Budget 2022 will be a key opportunity to encourage private investment in the development of green energy and other technologies associated with this battle against climate change.

Conclusion

Budget 2022 needs to set in motion a strategy that will ensure a bright future for our country. This strategy needs to promote action in key areas while also allowing for agility and flexibility in addressing the moving parts. Ultimately it needs to maintain and support further growth in our national income by growing our key sectors, upskilling our people and getting them back to work in a greener environment. It will require targeted investment while ensuring that this investment is aligned to our broader industrial policies. Using the Budget day announcements in a thoughtful way can help make a real difference to our economy and our citizens.

Contact us

Susan Kilty

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 6740

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