5 minute read 8 Oct 2021
Accountant using calculator on Budget 2022

Why certainty and stability must come front and centre in Budget 2022

By Kevin McLoughlin

EY Ireland Head of Tax

Tax leader, Cyclist and music fan

5 minute read 8 Oct 2021

In the second pandemic Budget, decisions are made in a positive environment, but challenges must be addressed, and clarity is required as to how the books will be balanced.

In brief
  • Businesses are seeking certainty around the role of the Government as an economic actor in the years ahead.
  • Clarity is needed around broadening the tax base.
  • Budget 2022 will be framed against a contrasting backdrop with considerations around debt sustainability and where taxes will come from on the one hand, and on the other the strength of a resilient national economy.

Like a well-crafted mystery novel, the Irish budget each year is often more about clues and subtle hints rather than a big reveal. Ostensibly about the year ahead, the Budget when distilled down to its core elements is about what services the State is going to supply and who is going to pay for those through what taxes.

But for businesses, reading those hints and clues is all important as businesses value long-term stability over short term volatility. This means that Minister for Finance, Paschal Donohoe, can make a significant contribution to Irish budget policy making by providing as much predictability and stability as possible in his forthcoming budget.

Businesses realise there is a lot of change happening right now and a lot of noise. Each week brings new headlines about governments worldwide ‘living beyond their means,’ about debt sustainability and about future costs fast approaching due to ageing, climate change and the residual costs of the COVID-19 pandemic. As a result, businesses - and the wider public - are seeking certainty about what role the Government will play as an economic actor in future years. The good news is the backdrop is reasonably encouraging, the word austerity has been politically shelved, and Ireland weathered the COVID-driven downturn reasonably well.

But that doesn’t mean challenges are not present. Debt levels are high when measured as a percentage of national income, and spending is elevated in a number of areas, understandably health among them. With austerity off the political table, growth is the only alternative that remains to bring spending and revenue into balance. But even growth is somewhat influenced by the underpinning tax and spending choices.

As a result, these are the areas, unsurprisingly, where the most clarity might be provided in the forthcoming Budget. To be fair to Minister Donohoe, his officials and his Government colleagues, some clues on these areas are available. For example, we have a clear path as to how carbon taxes will increase to 2030, but the Minister might usefully provide detail on whether the pacing and scale of these adjustments might change due to the need for Ireland to accelerate its journey towards carbon neutrality, and indeed fears about fuel poverty which have emerged in recent weeks as a result of the upward trend in energy costs. Equally broadening the tax base is another objective of Government, including on property. Additional houses are now in the Local Property Tax (LPT) net, but greater clarity on what changes in LPT might look like in future would also bring welcome clarity. But there is still a need for an even wider discussion on revenue raising in Ireland, which the Minister might lead via his Budget presentation and indeed afterwards. That discussion is around what level of government services should be provided and how they should be funded.

To be fair, no one person or organisation can lead that discussion alone. But there is good solid, technical work being done in this area by the Commission on Taxation and Welfare. It has been tasked by Government to independently consider how best the taxation and welfare systems can support economic activity and promote increased employment and prosperity. While Commissions in various areas come and go, there is a need at this juncture in particular, to consider these issues. While they are partly about political choices, there is also a lot of deep technical knowledge and data to be chewed over before arriving at a set of recommendations - after that it is over to the politicians to make the choices on all our behalf.

There is much broad agreement out there. Most agree that a broadened tax base that can withstand short term instability is required, as is a path to debt sustainability that indicates how the current (and future) level of government services will be funded. These weighty questions are never easy of course and the emerging signs of some inflationary pressures won’t necessarily make these discussions any easier. The actual personal tax changes in this Budget are likely to be modest in our view, which makes the necessity to have this larger, more long-term, conversation more urgent.

Yes, there are tax raising options for the Minister in the political air at present - for instance some have commented on the low rate of employer’s PRSI when measured against other jurisdictions and as ever there is considerable discussion around how early some wage earners enter the higher band of tax. Ireland has shied away from talking too much about tax policy recently, but in the UK the debate is alive and kicking, with national insurance and corporate tax rates rising.

This latter tax rate is a subject of great public interest due to the controversy of recent years over Ireland’s tax offering. Ireland has now agreed to alter its 12.5% corporate income tax rate, to align with the global drive for countries to meet a global minimum of 15%. While this is a significant change, Ireland will remain a low tax and competitive location for international investment even with this adjustment, as many competitor states retain higher effective rates than Ireland. The move towards 15% and the deletion of the accompanying language around 'at least' 15% was a major win for the Irish Government, in a challenging policy landscape, as was the ability to retain the 12.5% rate for the vast majority of indigenous businesses. It also means Minister Donohoe's Budget speech in that area will be a lot easier to deliver, with much uncertainty removed. Clearly our broad competitiveness and the preservation of other parts of Ireland's FDI offering will now assume greater importance, and items such as the R&D tax credit look likely to be strongly protected following the recent OECD-led talks.

Overall, the Budget for this year will be framed against a contrasting backdrop. On the concerning side there are those questions about debt sustainability and where the taxes will come from, but on the other hand we are living in a low interest rate environment, with a national economy that has shown an amazing ability to survive the pandemic which at the outset resembled a once-in-a-generation economic threat. Thankfully the Irish public finances proved resilient during this period and will no doubt prove to be similarly durable in future.

Summary

Budget 2022 will be framed against a contrasting backdrop of positives and challenges, with clarity needed around key areas.

About this article

By Kevin McLoughlin

EY Ireland Head of Tax

Tax leader, Cyclist and music fan