Robert Browning famously commented "Less is more". This is not a budget that will be remembered for having followed that advice, but there is never any shortage of other advice to the Minister for Finance, Mr McCreevy, and this year was no exception.
Indeed, the number of pre-Budget submissions was never greater - and the opinions offered never more detailed on how the Minister should manage the embarrassment of riches at his disposal.
Among the pre-Budget submissions there was virtual unanimity in expressing the standard rate of VAT to be too high. The Minister announced a one percentage point reduction, from 21 per cent to 20 per cent with effect from January 1st, and, while not as large a reduction as some commentators had predicted, this has benefits for the business community and consumers. While businesses that are fully taxable may benefit in cash flow terms only, those businesses that are either exempt or do not have full VAT recovery will see savings in real terms. Among the main beneficiaries will be financial institutions and insurance companies, educational establishments and even government departments.
The reduction is also a step in establishing the Republic as a centre for e-business, given the competition from jurisdictions with lower VAT rates. There are concerns in the business-to-consumer e-business sector that the relatively high rate could prove to be a significant obstacle to the efforts to establish the State as an e-business hub. Further reductions could be envisaged. While this reduction moves Ireland's standard VAT rate closer to that of the Netherlands (19 per cent from January 1st next year), it remains higher than in the UK (17.5 per cent), so the pressure will certainly be on Mr McCreevy to go a bit further next time round.
There was also much focus in pre-Budget submissions on taxation of share options and so-called gain-sharing arrangements. The Programme for Prosperity and Fairness provided for the establishment of a consultative committee to bring forward proposals to further encourage the financial participation of employees in the workplace. This is seen as a means of developing and deepening partnership and increasing performance and competitiveness.
The Minister has undertaken to consider carefully the outcome of the committee's discussions and has promised to examine this area when considering measures to be introduced in the Finance Bill 2001. Employee share incentive arrangements are now used extensively by employers, particularly in the high-tech, financial and pharmaceutical sectors, to attract, motivate and retain employees with the correct skills.
In the context of the Irish economy, where there is an acute shortage of suitably qualified candidates in certain areas, the Minister's announcement will be a very welcome and timely development. Share incentive arrangements have become a significant part of the reward package offered by employers and it is encouraging to see that the Government seems prepared to follow the growing international trend of encouraging these through favourable tax treatment.
It is hoped that the Bill will deal favourably with share option schemes as well as including provisions that will enable employees of private companies to participate in approved gain sharing plans.
These incentives to encourage greater employee financial participation will be welcomed and should deliver more tax effective, long term benefits to employees, potentially taking some surplus cash out of the growing economy while helping to contain employers' salary costs.
Legislation has already been enacted to reduce the rate of corporation tax to 12.5 per cent over the next two years (20 per cent in 2001, 16 per cent in 2002, 12.5 per cent from January 1st, 2003). Last year, the Minister announced that small companies - those whose income was £50,000 (€63,490) or less a year - would benefit from the 12.5 per cent rate from January 1st this year.
In yesterday's Budget, he increased the threshold at which companies would benefit from the 12.5 per cent rate to £200,000 a year, effective from January 1st next year. According to the Minister, only 13 per cent of companies would now pay corporation tax at the standard rate. However, a rate of 25 per cent has applied since January 1st last to the "passive" income of corporates, such as deposit interest and rental income. It is understood that the Revenue will be issuing guidelines regarding the determination of what is passive and what is active income and this distinction will become increasingly important as the rate of corporation tax on active income falls to 12.5 per cent.
A further helpful measure is the two-year reduction in the period over which businesses can claim capital allowances. From January 1st, capital allowances on new expenditure will be claimed on a five-year straight-line basis (20 per cent per annum). This includes allowances on cars.
And the sting in the tail? It must be the abolition of the employers' PRSI ceiling. This will increase employers' costs by £120 for every £1,000 earned by an employee above the current ceiling of £36,600. While some increase in the ceiling was expected, its abolition is a big shock