Jim Power: Hello and welcome to the Budget Briefing in association with EY. I'm Jim Power, and in this two part series, we're going to guide you through Budget 2024 and discuss the most significant and salient talking points for our Budget 2024 Preview. I'm delighted to be joined by EY Ireland Tax Partners Kevin McLoughlin and Michael Rooney. As we lumber up for the big, for the launch of Budget 2024, I guess there are strong economic and political imperatives at play here. The economy, while doing well, we've seen significant warnings from, for example, the SRB in recent days about the threats to the export performance, about the global headwinds that are blowing, and also about the domestic pressure on the consumer sector in particular. And we've had warnings from bodies such as the Central Bank of Ireland and the Irish Fiscal Advisory Council about the dangers of implementing a stimulatory budget in an environment where the economy is operating pretty close to full capacity. So that there's a lot of economic uncertainty out there despite the positive picture. But then we have the political element of it, and I think no budget can be seen in isolation from the politics. This is probably the second last budget before the general election, which is due by February 2025. Given the nature of coalition governments, it could well be the last, but it's certainly a budget that would be presented in the run up to an election. So obviously that is going to have a significant impact. Kevin, if I may start with you. You know, in broad terms, what do you think we can expect from budget 2024 next week?
Kevin McLoughlin: Yeah, I think the expectation, Jim, is is probably well, firstly, probably expectation would be that we would probably hear a lot of the measures in the days before the actual budget is released on Tuesday. That certainly be kind of that the pattern of the last number of years. So I don't think the expectation here is of, you know, very, very surprising moves. And as you say, it's a very interesting dilemma that the government has because as you say, we're in full employment. We're running fairly significant surpluses. At the same time, there is a need to invest more and more into infrastructure, into housing, and you've got an inflationary environment which the government would say is still exceptional there for a while, taking the advice of the Fiscal Advisory Council that they should stick to their limits. They would say, well, the limits were probably set at a time of relatively low inflation and therefore that justifies going a little bit beyond that. I think at its core, and there's a couple of things that are being considered, and I think it's already out there that in terms of the total so-called budget package, the expectation is that probably 6 billion of the total package of around 7 billion would be in the form of spending, and that would be a mix of of some permanent spending measures and probably some further targeted temporary measures about the tax element of that will be in the order of just over 1 billion, €1 billion probably primarily. And Michael can comment on the specifics, this probably primarily in the areas of individual taxation rather than necessarily kind of business taxation. And it worth bearing in mind we still run significant levels of public debt or up over 220 to 220 billion. I was going to say. And obviously the other kind of big environmental factor around this, you know, particularly over the last couple of days and was was called out by the yes or I report is the the the the continuing let's just say dependence on the the huge growth in corporation tax revenues as a proportion of the overall government finances and the extent to which they are largely responsible in a way for the surpluses that are being generated in the last couple of years and are expected to continue to be generated in the years ahead. And there are certainly questions, particularly after the releases of the the August and September Exchequer finance figures as to the corporation tax takes for both of those months actually fell a little bit short of a target. And does that send any kind of longer term signal that actually perhaps these receipts are a little bit more volatile than people might have considered? Is there anything that the government should be concerned about in terms of longer term forecasting along those lines?
Jim Power: Yeah. Kevin, from ask you, in relation to the corporation tax piece we saw from the Exchequer returns at the end of September that in the three month period, July to September, the corporation tax take was 23% down on a year earlier and I know a year earlier was exceptionally strong. But what do you think is happening there and does it concern you in terms of how this might look into the future?
Kevin McLoughlin: I think the critical moment, Jim, is going to be November. It's probably the biggest month of the year in terms of. Corporation tax payments. And that can really will be the litmus test, I think, in terms of whether actually that trend is something we should be concerned about, are actually whether they are at year on year anomalies. I think certainly when the August numbers came out, it seemed to be able to attribute that to two very specific, you know, facts and circumstances in the prior year. And early indications are that something similar would have happened September last year. But I think all eyes will be on November as the biggest month of the year, just to see actually whether there is anything to concern about. Our sense is actually that the probably isn't you know, from an underlying perspective, I think the expectation that we would have is actually that these receipts will continue, will actually to continue to grow, perhaps not necessarily at the same rates of growth that they have been in recent years, but that they will continue to grow nonetheless.
Jim Power: Thank you, Michael. If I may ask you. You know, Kevin outlined there that the budget package is going to be basically around 6 billion in core and one spending and just over 1 billion in tax measures. Do you think that balance is correct between expenditure and taxation?
Michael Rooney: Yeah, it's really interesting. I think, you know, what they're really aiming for here is to put more money into as many people's pockets as possible. And if you look at it, I think it's trying to get the balance right and trying to have really kind of some targeted measures. If you look at it, you know, it's not a lot in terms of kind of like trying to spread it amongst about 3 million people. So, you know, I think really what we're looking at here is, is as Kevin has alluded to here, I think is where we probably will see this is U.S. cuts is is what they would really focus on. And if you look at the kind of you that, as Kevin said earlier, it's been with us since about 2011, I think it's obviously it's here to stay. You know, it gets it generates about 5 billion for the Exchequer per year. So it's a really significant amount of of of tax take that comes in. If we look at where they're going to target this, there are a number of different rates of U.S. If you look at bringing down, say, the four and a half percent rate to three and a half percent, the cost of that would be about 550 million. So it is a kind of significant part of what that budget will be. If you think about bring it down, really the kind of the the 0.5% rise to 0% that costs about 158 million. So I think, you know, they will really look at USC because it really kind of hits a large proportion of the population. What they will really focus on there, and I think after that will be really kind of increasing the standard rate band. So last year there was a significant increase that went up from 36800 to 40000. So that was really kind of significant in terms of of reducing the amount of tax that the people would have to pay. I could see that increasing again this year, probably going up to about by about 1500. The cost of that would be nearly 400 million as well. So those would be, I think, the kind of the two significant parts that that will play in terms of what that kind of like tax cuts will be and maybe, I think as well increasing the kind of pay the tax credit, if that went up by about, say, €50, that would cost about 127 million. So you can see they're between a little bit in terms of the decrease in USC, a little bit in terms of the standard rate band increasing and maybe a little bit of the piece of credit you have here. 1 billion there already that's that's used up in terms of tax relief. I I'm sorry, Jim, just in terms of the kind of the the the welfare side of this and this is, I think, the most significant part of it. You remember last year, the energy credits was a significant part of this. There was three different tranches of energy. Energy credits, €600 in total that was given out. I probably foresee that this will they will continue as well this year, but probably at a reduced rate. So maybe three tranches of €100 or maybe two of 150 that will come through. We also have the renter's tax credit that was provided for last year. That may increase as well. That's currently at €500 in terms of maximum relief for a single person. That may increase to 800 as well. So I think they will be targets again like they were last year. There will be significant increases as well in terms of your your usual welfare payments. So for for pensioners, for people with disability, we are thinking they would probably go up by 10 to €12 as well. So there's a number of packages there that will be targeted at different parts of the population.
Jim Power: Michael, In relation to the U.S., and this is probably not a very popular view, but I tell it from one of the virtues of the U.S. when it was introduced was that it addressed a serious problem in the Irish tax system, which was the narrow base from which we collect the tax. So I always ideologically believe that's. Tax base with headline rates as low as possible, was the most economically advantageous position in recent budgets. We've seen, you know, a gradual reversal of that. U.S. rates have been coming down. The number of people paying us has been declining. And do you do you think that's a retrograde step in terms of tax reform from a longer term perspective?
Michael Rooney: Yeah, there is a lot of discussion about this, and I think it is obviously it's quite politically sensitive as well. We've heard especially even cynical, saying they want to they want to remove U.S. in the future. It was brought in and we did think it was going to be a temporary measure. But as I've said, you know, it's so important to the economy now as well that it does bring in in more than kind of like 5 billion. I do see that. You know, as I said, it is very progressive in nature. So you obviously pay more depending on your earnings. However, I think, you know, it's it is it does complicate the fact that we have income tax. We have U.S. as well. You know, there are lots of talks about reform happening. In the last budget, they announced that we're going to look at Russian reform in more detail. I do think we haven't seen that yet, but I think it it'll really probably happen in the next kind of 12 to 18 months that it will look to reform it.
Jim Power: Okay. And Kevin, if I may bring you in there in relation to the business sector and I guess particularly SMEs, but not necessarily just the business sector generally. I'm going to put this question in two tranches, if I may. What would you like to see happening? What do you think should happen? What do you think is likely to happen?
Kevin McLoughlin: Yeah, I think, you know, the budget generally, you know, the profile tends to be very much focussed on individuals and there tends to be then some quite specific measures directed to business. I think the biggest issues that businesses are looking for, for I would say assurance are reassurance on will be around the fact of cost pressures. So we still have higher than historic levels of inflation. We still we are, as you said earlier, we're at full employment. So there's still a fair degree of wage inflation. Some of that obviously exacerbated in the last year or two by by add by inflation more generally. And I think you've got huge pressures on infrastructure, housing cost, competitors of businesses and large Irish businesses are generally actually quite export led to that need to be competitive in trading in the international markets in which they operate, I think is really important. And so I actually think those are issues that I think business will be looking very closely at in terms of where spending measures are directed and not just kind of the one off short term. And some of those from an energy perspective were helpful in the last year or so. They're probably much more interested in the investments in infrastructure that will be necessary in order to keep Ireland competitive, because I think a lot of the focus, for example, on the the levels of corporation tax returns is very much of corporation tax take. And actually underlying all of that is probably a risk of a dependence on a relatively small number of of FDI businesses in Ireland. There there, you know, willingness to stay here is fundamentally dependent on the competitiveness of Ireland as a location to bid to do business taxes, becoming a I will say it's a lesser issue. It's important. The international tax landscape is changing quite dramatically. I'll come back to that in the second. But competitiveness more broadly actually, I think is probably the biggest issue that business is looking for comfort. And there are specific calls, again, I think from an innovation perspective to look to increase the amount of the research and development tax credits currently sits to slightly higher number. That's actually quite an effective credit as things stand with Turkey in order to keep them competitive internationally. There have been calls to to to to up the rate of relief there. I probably do. The thing I would say is that kind of almost in the background, you have a really significant set of changes that are going to land in Ireland probably in the next week or two through the finance bill, which is going to deal with these fundamental changes that are happening from a broader international tax policy perspective so that the increase to an effective rate of 15% from 12 and a half percent, this whole BEPS Pillar two agenda, which again is Ireland, is very much in the middle of as is the rest of the world. So so I think at a certain level, businesses generally are looking very much at measures that enhance Ireland's competitiveness. I think at the bigger end, multinational businesses, both Irish and and and and FDI very much have an eye to how Ireland is going to implement these new measures. And one of the things that I think has been a huge positive for Ireland over the years is stability. Ireland signalled early that it will go with this kind of global minimum tax rate strategy, I think as part of the stabilising message. But I think it will be really important in terms of how these measures are implemented in the weeks and months ahead that it's all very clear that it's all aligned with what how businesses have been told these measures will be implemented in order to maintain that stability going forward, because as I say, that's been a huge advantage for us relative to, say, instability or volatility and fiscal policy in the UK and even in the US, where with significant elections next year, again, there's there's very significant questions as to the direction of travel there as well.
Jim Power: Yeah, Kevin, I've just you mentioned comparisons a few times there and clearly global tax developments are going to remove some of Ireland's relative competitive position vis a vis taxation. So what do you think are the other other elements of competitiveness that are essential for continued strong foreign direct investment into the economy? Because at the end of the day, train of 1000 people employed by IDA supported companies at the end of last year, 57% of corporation tax coming from ten companies. So FDI is a very important part. Where do you think the focus needs to be in terms of other elements of competitiveness?
Kevin McLoughlin: Yes. So I think on the tax side, at least, you know, if there is a convergence towards an agreed minimum rate that does. Take some of the relative competition out of this, albeit there are other jurisdictions that are outside of that framework that still would look to be very, very competitive on tax. I think when you take tax out of the equation, it is you know, it is labour cost and I could speak very knowledge of the about the importance of the ability of Ireland to continue to be able to attract talent into Ireland as a way of, of bringing top talent to support existing operations and to attract new operations. And that gets us into politically sensitive areas like the SERP, which is the Strategic Signing Relief program, which Michael is more expert than I am in. But but I think cost of labour is critical, especially in a full employment economy like Ireland's. Therefore, that need to continue to tap into into overseas talent to help kind of staff staff employment that we have. I think housing and I think broader infrastructure and transport I think is actually what business is far more interested in now than necessarily particular particularly specific tax issues.
Michael Rooney: I think sorry, Jim, just to add on that, I think I think it is important to be competitive from an individual income tax perspective as well. We look at it here and as Kevin has pointed out, sorry, does really kind of equalise it a lot more. We have a really high rate of tax. If you look at 52%, you compare that to the U.S. and you're talking about a kind of like a highest federal tax rate of 37%. So having staff there really does kind of like really kind of equalise it a lot in terms of kind of like attracting talent in here as well. So I think that's that's obviously going to be in place till 2025. You know, companies like to have certainty. They like to see kind of like what is the long term outlook. So, you know, maybe having that kind of like around for a little bit longer may just help in terms of that competitiveness that we need to have.
Jim Power: Okay. And Michael, finally, can I just ask you about housing specific measures? You mentioned an increase in the renters tax relief. Anything else possible?
Michael Rooney: Yeah, I think renters tax credit is one that that we see that may happen, obviously, just because it is already in place and there may be an increase in it. There has been some talk about mortgage interest relief. Obviously, I think if that was to come in place, would need to be very, very targeted. You know, if you could see that was that was open to kind of anybody with a qualifying loan who wants it to look at their having a new swimming pool or tennis court as well. Back in 2004. But we need to look at, you know, targeted measures that are really going to help people who are really facing the pressures brought on by, you know, kind of high interest rates. So I think mortgage interest rates is definitely one that that that tax relief that we could see happening as well. I think that would be really welcome for people are really struggling with with the high cost of mortgages at the moment.
Jim Power: Okay. We're up against the clock, so I will wrap it there. Folks, thank you very much for participating in the budget briefing in association with e! Y. That's all for episode one. Make sure you join us next Wednesday for our review podcast, where we will look and analyse the key elements of Budget 2024 and talk about what's included as and I guess more importantly, what's not included and what we'd like to see in the future. So thank you very much and I look forward to talking to you again next Wednesday when we can talk with greater knowledge about Budget 2024.