Focus on export drive and reassertion of low corporate tax rate to be well received by many

PAUL KRUGMAN once wrote that the US Great Depression was ended by a massive deficit-financed public works programmme known as the second World War. Thankfully Michael Noonan has proposed no such solution. Mr 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 euro zone economy will perform poorly and may contract year-on-year. It went as far as saying that the current situation contained elements “reminiscent of policy during the Great Depression” and that without decisive intervention the euro zone would be seriously constrained. However, for those of us who believe the glass is 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 a 2 per cent VAT hike the big-ticket item to start bridging the income/expenditure gap.

The now 23 per cent rate means we now have the joint highest standard rate in the euro zone; the 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.

Will it work? VAT receipts are currently somewhat “soft” and there is a feeling 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 per cent – 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 a significant increase with the rate of tax on capital gains, interest income and inheritances being equated at 30 per cent. Although significant, one would have to question the amount to be raised by this. 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 per cent to a flat rate of 2 per cent 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.

Mr Noonan has targeted economic growth with a focus on the export sector. He suggested a foreign earnings deduction to support the export drive by aiding companies seeking to expand into emerging markets in the Brics countries (Brazil, Russia, India, China and South Africa). A key point is to ensure that we have the necessary skills 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 Assignee Relief Programme are to be welcomed. While not going as far as business would like on the RD 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 corporation tax rate of 12½ per cent will also be well received given Nicolas Sarkozy’s hint last week that this could be subject to further scrutiny. The rate has 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.

Feargal O’Rourke, head of tax, PwC