Budget 2013 Commentary

By Eoin Fahy, Wednesday, 5th December 2012 | 0 comments
Today’s Budget was very much as expected, both in its overall shape and as regards the detailed changes in it.  The modest stimulative measures aimed at the SME sector are helpful, but are very unlikely to have an immediate measurable impact on the economy, though they were probably a political necessity to show that the government is “doing something” to deliver economic growth.  The budget deficit will still be 7.5% of GDP next year, or €15.4bn, so more austerity is a certainty for at least the next two budgets, but the good news – such as it is - is that Ireland is perhaps 85% of the way through the austerity programme, if economic growth holds up as expected.
Very often, the main focus on Budget commentaries and media coverage is on a small but highly controversial measure.  This year, it seems probable that the new property tax will hog many of the headlines, but this new tax will raise far less than 1% of total tax revenue next year, and makes up less than 10% of the total austerity measures in this Budget.   So while the introduction of a property tax is noteworthy, it is also important to focus on broader and more relevant budgetary issues.

Tax Rates Unchanged

On broader issues, the government kept its commitment to avoid raising income tax rates, despite some suggestions that the Labour Party was pushing for a steep 3% increase in the Universal Social Charge rate for higher earners.  Marginal tax rates are important: too high a rate will discourage entrepreneurship in an economy and thus stifle economic growth, so the abandonment of this plan is to be welcomed.  Other measures such as pension tax relief restrictions will hit higher earners, of course, and all earners will be hit by the abolition of the weekly PRSI allowance, but these measures are a better way to raise revenue than an outright increase in the marginal rate of tax. 

Most social welfare rates unchanged.

On the spending side, a further cut to child benefit is one of the largest spending cuts, as expected.  Despite many years – even decades – of debate about whether and how to tax child benefit, or to means-test it, governments continue to avoid doing so and continue to pay this to all parents, regardless of income.  As expected, other basic rates of social welfare were unchanged – a key promise by the Labour Party, but money was saved in other ways, for example by reducing the length of time that non-means-tested unemployment benefit can be claimed. 

Impact on growth to be real, but limited

It is always difficult to be too precise about the impact of any budget on economic growth (though that doesn't stop many people trying!).  That's because the impact of the budget on sentiment and confidence is often more important than the actual impact on people's pockets.  If, for example, a budget was to reduce total take home pay by (say) 1%, but on the other hand it gave consumers and business people some confidence that we are turning the corner and getting out of the economic morass we are in, then consumers might actually spend more than last year, despite getting somewhat less income.

However, it would not be possible to say that Budget 2013 achieved that.  Yes, the Minister started off his speech with a recitation of the genuine achievements, in economic and funding terms, this year.  But it is hard to believe that this positive rhetoric will lead to consumers rushing to the shops, filled with confidence that the crisis is over!

Nonetheless, there seemed to be far fewer apocalyptic leaks in advance of this Budget, speculating about this that or the other savage spending cut or massive tax hike.  This has helped to mitigate the negative impact on consumer confidence that is often seen around this time of year.  And of course the budget did keep income tax rates and basic social welfare rates unchanged, and many of the tax changes were less "visible" than has been the case in the past, which again will help to reduce the negative impact.  All told, there is no requirement to cut our economic growth forecast for the year ahead as a result of the budget, but of course certainly there is no case to raise our forecasts either!  

Deficit remains very high at €15.4bn

As a result of the budget's tax increases and spending cuts, the government expects that revenue will amount to €42.3bn and spending to €57.7bn next year, so that the deficit will be €15.4bn, or 7.5% of GDP.  That compares with an estimated deficit of €16bn for this year (though a straight comparison is not valid due to certain technical factors including the treatment of the infamous Anglo promissory notes).  As always, reaching the deficit target will be dependent on achieving the expected level of economic growth (the government is forecasting real GDP growth of 1.5%, which seems reasonable) and on the ability of the government to ensure that spending does not grow more quickly than forecast – something it was not able to do in the Department of Health this year.

While the ultimate target is to eliminate the budget deficit entirely, the more realistic goal is to get it down to 3% by 2015.  Excluding bank bailout costs, the deficit peaked at 11.5% in 2009.  This means that by the end of 2013 Ireland will have achieved close to half of the necessary reduction in the deficit (the deficit has fallen to 7.5%, almost half way between the peak of 11.5% and the target of 3%).  That is not to say, however, that only half of the necessary austerity measures have already been seen, as over the next couple of years a good deal of the expected deficit reduction is forecast to come from a resumption of (modest) economic growth rather than from further austerity measures.  

Some small comfort?

Current plans indicate that the budget for 2014 will have tax increases and spending cuts of €3.1bn, and the 2015 budget equivalent number will be €2.0bn.  That compares somewhat favourably to this year’s figure of €3.5bn (and due to carry over effects, there will be a need for only €500m of new tax increases next year).  

Another way of looking at the scale of what has already been done versus what remains to be done is to compare the total amount of austerity measures since 2008, which is €28bn, with the amount remaining to be done after next year of €5.1bn.  Measured that way, 85% of the austerity measures have already been announced.  This will provide some small comfort to consumers, perhaps, on a difficult day.

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