Budget 2017: the measures designed to soften blow of Brexit
Tax relief for small businesses and exporters, a farmer loan fund and retention of 9% Vat
A mock customs hut put up by Brexit protesters at the border town of Carrickcarnon: Ireland is heavily exposed to Brexit with about 16 per cent of our exports going to the UK, and 40 per cent of indigenous company exports going there. Photograph: Clodagh Kilcoyne/Reuters
At the Ibec president’s dinner in the RDS last month, Taoiseach Enda Kenny said the budget would ensure that Ireland was “Brexit-ready”.
It was a brave statement given that nobody is quite sure what Brexit will look like in the finish. Nonetheless, the Government made a stab at it in yesterday’s budget, with the Department of Finance also publishing a paper called Getting Ireland Brexit Ready.
This work began before the referendum result was known on June 24th, with the ESRI commissioned to do a scoping study on what Brexit might mean for our economy.
As a starting point, the uncertainty introduced by the Brexit vote prompted the Government to reduce its forecast for GDP growth for next year to 3.5 per cent.
Exports and imports
Ireland is heavily exposed to Brexit with about 16 per cent of our exports going to the UK, and 40 per cent of indigenous company exports going there. In 2014, the UK was our biggest export market, ahead of the United States.
Put into numbers, the UK accounted for just under €14 billion of Irish goods exported in 2014 and €20 billion of services exports.
In turn, Ireland is the UK’s fifth biggest export market. Over €1.2 billion of goods and services are exchanged between us on a weekly basis, which supports 400,000 jobs, split evenly between the two countries.
The UK accounts for 15 per cent of total exports for the food and beverage sectors and 9 per cent of turnover.
Of all materials used by traditional manufacturers here, some 22 per cent come from the UK.
Then there’s tourism, with the 17 per cent drop in the value of sterling after the referendum making it more expensive for British tourists to travel here. Ireland is highly dependent on UK tourism, with 3.5 million (or 41 per cent) of overseas trips to Ireland last year and a spend of nearly €1 billion.
In the round, the sectors most exposed to the UK are generally indigenous enterprises that are small, have high levels of regional employment (78 per cent of employment in food and beverage is outside Dublin), and relatively low profit levels.
So what has the Government done for them in Budget 2017? It is reducing capital gains tax for entrepreneurs, albeit that the lifetime limit remains at €1 million, something the Minister for Finance Michael Noonan has said will be reviewed. This isn’t Brexit specific, of course, but it is a help nonetheless.
He has also extended and amended the foreign earnings deduction to help Irish exporters diversify their export and import markets.
In addition, there was an extension to the contentious Special Assignee Relief Programme to help businesses relocate key staff to Ireland.
And an increase to the earned income tax credit for self-employed tax payers to encourage entrepreneurship, and the introduction of an income-averaging “step-out” in the agri sector to help with expected volatility in demand for food products following severe price fluctuations.
In addition, the 9 per cent Vat rate to help the tourism and hospitality sector has been retained to help with competitiveness.
For farmers, a €150 million loan fund will be developed in conjunction with the Strategic Banking Corporation of Ireland to improve cashflow management and reduce the cost of short-term borrowings.
The Government has also committed to a “rainy day fund” from 2018 and a new medium-term debt-to-GDP ratio of 45 per cent by the late 2020s (it is currently 76 per cent).
These are designed to ensure that the public finances can withstand any Brexit-related shocks down the road.
Chairman of the Small Firms Association (SFA) AJ Noonan has criticised the Government for not recognising the immediate crisis facing small firm exporters in the context of Brexit.
“Making our tax system competitive with the UK in areas such as CGT and employee share options must be done today, not in a year’s time,” said the SFA chairman. “We must make Ireland a more attractive destination for starting a business or investing in a small firm. Capital gains tax should have been decreased to 20 per cent across the board, to encourage transactions in the economy, and we strongly argue that this measure would have been self-financing.”
Fianna Fáil leader Micheál Martin said the budget was a “weak and directionless response to the Brexit vote” and that it should have included a number of specific scenarios for the impact of Brexit but instead was full of “repetition of small measures”.
“The negative impact of Brexit is not hypothetical, it is already hitting Irish exporters,” said Mr Martin. “The slow and partial response of the government is a direct threat to economic growth.”
Fianna Fáil spokesperson for Foreign Affairs Darragh O’Brien said the budget had “underscored the seriousness of Brexit and the threat it poses to Ireland”. He said Budget 2017 emphasised the need for a minister to be appointed to deal with Britain’s exit from the EU and that the Government was just “showing tokenism in light of the greatest threat to Ireland’s economy for many decades”.
“It is as though Minister Noonan has just labelled a number of small outlying budgetary items as “Brexit” and claims that it represents an actual plan,” said Mr O’Brien.
The Irish Business and Employers Confederation (IBEC) said the plunge in the value of sterling versus the euro since the Brexit referendum put thousands of export jobs at risk.
“It’s not a Brexit-proof budget and doesn’t look much different from what it would have been had Brexit not happened. They clearly have not done enough to help those companies that are most exposed,” said IBEC’s chief economist Fergal O’Brien.
There is also the issue of customs procedures relating to the movement of goods and services between the UK and Ireland. This will depend on the final shape of the deal between the UK and the EU.
The Minister wants to retain the common travel area but, again, this will depend on the final deal between the EU and the UK.
Unfortunately, there’s no silver bullet that will solve the issues raised for the Irish economy by Brexit. And there is no headline measure the Government can take to cure the problems facing businesses and the economy.
The UK has said it will trigger Article 50 by the end of next March, after which a two-year negotiation on its withdrawal will take place with the EU. The reality is that the trade negotiations will take a lot longer to conclude.
Amid all that uncertainty, the measures announced in the budget look like a decent start in addressing the issues thrown up by Brexit for Ireland. It is also reassuring to know that the Government is well advanced in its contingency planning, unlike in 2008 when the global financial crisis blew up in our faces.