Why did Paschal Donohoe hinge his budget on a transitory tax?

Since taking up office, Paschal Donohoe has made several grand speeches about learning from the mistakes of the past; about not accelerating capital spending too quickly so as to avoid overheating the economy; and perhaps most importantly, about not tying spending to transitory taxes, a practice that left a crater in the public finances when everything went belly up.

And yet in his first budget in charge, he has tied a significant chunk of the adjustment to the likely, or unlikely as many pundits see it, tax yield from a 4 per cent hike in stamp duty on commercial property transactions.

Nobody, outside of the commercial sector, seems to have had a problem with the target rather it’s the assumption the move will generate an additional €376 million in annual revenue for the exchequer.

The projection seems to be based on the €9.4 billion worth of transactions recorded in the sector last year. The 2016 numbers, however, were inflated by the sell-off of assets by Nama and the banks, which generated an unusually large number of high-value transactions.

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For instance, four out of five of the State’s largest shopping centres exchanged hands in 2016.

The problem is: this level of activity is unlikely to be repeated. Based on the nine-month figures for 2017, commercial property consultants CBRE is predicting the value of transactions for this year will be around half last year’s number. All of which poses a risk for the Minister’s main tax-raising measure, and begs the question why are we still tying budgetary spends to transaction taxes, which jump around depending on the underpinning level of activity.

The sage economic advice is to target things like residential property or water use, but, of course, this is politically difficult for governments. Minister Donohoe also argues that he was just returning stamp duty to its pre-crash level after a temporary reduction to aid recovery in the sector.

He might be using the same argument next year to justify removing the reduced rate of VAT enjoyed by the hospitality sector, which successfully used Brexit to thwart any such move this year.