Ireland’s Spring Economic Statement has been saved
Ireland’s Spring Economic Statement
Steady as she goes with a tailwind behind us
Irish Minister for Finance, Michael Noonan T.D., delivered Ireland’s spring economic statement on 28 April 2015. The overall theme was one of consistency of approach and a steady hand guiding the ship of state in advance of an Irish general election later this year.
Some of the key messages in the Minister’s statement are outlined below.
There is good news on the economic front, with strong Irish GDP growth for 2014 of 4.8 per cent and the Department of Finance forecasting 4 per cent GDP growth this year on the back of both exports and domestic demand. A total of 95,000 net new jobs have been created since the height of the financial crisis and the government expects all jobs lost during the recession to be replaced by 2018. Significantly, unemployment rates are projected to fall below 9 per cent by the end of this year. Strong first quarter growth in the eurozone, supported by the decline in energy prices and a weaker euro, should continue to support economic growth in Ireland for the year ahead.
Debt and deficit
A key accomplishment highlighted by the Minister is the significant progress Ireland has made in reducing its fiscal deficit and accumulated debt burden. The general government deficit has fallen from a peak of 11.5 per cent of GDP in 2009 to an estimated 2.3 per cent of GDP this year. In addition, net debt was about 90 per cent of GDP at the end of 2014, while gross government debt is expected to fall below 100 per cent of GDP in 2017. The government expects both net and gross debt to decline over time as it disposes of its interests in the Irish banks, currently valued at over €15 billion, while ensuring that the taxpayer recovers the full value of this investment through exit by the Irish government.
The government has reiterated its commitment to a growth-friendly tax system. As part of this it has acknowledged that labour and corporate taxes can have a significant impact on economic growth and has signalled that a rebalancing of the Irish tax mix towards other, less-harmful taxes, such as consumption and property taxes, may be beneficial. Despite this acknowledgement, no specific measures were announced in the statement, but the Minister indicated that certain measures will be included in the forthcoming Budget in the autumn. The Minister also pledged that with the fiscal space available, the Department of Finance will be guided by a principle of devoting 50 per cent to tax cuts and 50 per cent to spending increases.
On the topic of corporate taxes, the Spring Statement was clear in affirming Ireland’s absolute commitment to the 12.5 per cent Irish corporation tax rate. Specifically the Spring Statement said, “The tax rate is settled policy and Ireland remains completely committed to the 12.5 per cent corporation tax rate. This will not change.”
While outlining a general principle that the tax system should only be used in limited circumstances where there are “demonstrable market failures” and where it can also be shown that a tax-based incentive is more efficient than a direct expenditure intervention, the Minister nevertheless said that there can be a role for carefully targeted tax reliefs (e.g. the reduced rate of VAT in the hospitality sector, the Special Assignee Relief Programme (SARP) and CGT incentives for the property sector). The government aims to continue examining sectoral tax supports in a manner consistent with the tax expenditure guidelines to ensure that supports are underpinned by a convincing economic rationale, are fit for purpose and are cost effective.
The Minister noted in his statement that the international rules governing tax policies are changing. In particular, the ongoing BEPS process currently being undertaken by the OECD, is one that Ireland will need to keep a close eye on, as this will have implications for future Finance Bills.