Budget concessions to business appropriate

Economics:  In its pre-Budget submission Ibec called for an "anti-inflation" Budget.

The Irish Small and Medium Enterprise called for the full implementation of the recommendations of last summer's Small Business Forum and Chambers Ireland called on the Government to support risk-takers and enhance labour market flexibility.

As the dust dies down, how did they fare last week?

Despite "buoyant present conditions", the macroeconomic outlook for business is uncertain. A slew of recent numbers on output and export growth underlines the challenge to the traded manufacturing sector, with Alan McQuaid, chief economist at Bloxham stockbrokers, predicting that output from that sector will grow by only 3 per cent next year.

On non-traded and service sectors of business, Chambers Ireland pointed out in its submission that "buoyant present conditions" were overly reliant on the construction sector.

On the macro policy side of things, the Budget didn't help matters much. Inflationary pressure has come from two directions: strong public spending growth and benchmarking of public sector pay have, respectively, pushed demand beyond what businesses can supply and so have contributed to wage inflation. Interest rate and energy cost increases continue to hamper the small business sector.

Thankfully, things look a lot better on the micro side. The average standard tax threshold was increased by about 6 per cent.

More might have been done had the Government not increased the threshold below which no income tax is paid, a step taken in response to the 12 per cent rise in the minimum wage some weeks before the Budget. Nonetheless, the threshold increase announced was enough to almost reverse the effects of the failure to index the standard rate band in the first three budgets of the present Government.

Widening the standard rate band in this way will help Ireland's tax wedge - the gap between employer costs and take-home pay - to remain the second lowest in the world. In doing that, it will contribute to keeping unemployment at levels other countries envy.

We might note in passing that - seen from this point of view - the argument for widening bands over cutting the top rate of tax is very strong. However, much lower rates reward those who want to work more, the position of tax bands is more important in determining the level of unemployment we end up with. (Arguments exist for cutting the top rate of tax instead of raising tax bands, but maintaining low unemployment is not one of them).

Following the recommendations of the Small Business Forum, Vat registration turnover thresholds were increased from €27,500 to €35,000 per annum for services and from €55,000 to €70,000 for goods.

Compared to the thresholds prevailing in 2002, the jump more than compensates for accumulated inflation since that time.

Other helpful measures included a rise in the Vat cash accounting threshold for small firms from €635,000 to €1 million. Now why any firm should have to pay Vat on an accrual accounting basis to fund a Government still running its accounts on a cash basis is one of the divine mysteries. But the measure at least gives some cash flow relief to firms that need it most. Exempting start-up companies from paying preliminary tax was a small step forward.

As with the issue of cash accounting thresholds, why anyone should pay preliminary tax is a mystery.

The upping of the small companies' liability turnover threshold for corporation tax from €50,000 to €150,000 was not before time.

But there is less need to qualify praise in relation to other measures. The Business Expansion Scheme - due to expire on December 31st next - has now been extended until 2013. The ceiling on investment which companies can avail of under the scheme has doubled to €2 million, while individual investor contribution thresholds rose to €150,000 - almost a five-fold increase.

Keeping the best until last, the Government has decided to further enhance Research and Development (R&D) tax credits. One of the Government's more inspired policies, the credit nonetheless suffered from a serious flaw - the base for which the credit was calculated was defined as being three years before the year in which the credit for R&D investment was claimed.

The result is that R&D investment requiring more than three years to mature into income streams did not receive the full degree of credit.

By shifting the time horizon to six rather than three years, the Government has let more types of R&D investments into the net.

Somewhat disappointingly, the definition of R&D remains wedded to traditional and not always relevant notions of science and technology, ignoring the valid contribution of R&D in developing the value added proposition in the fields of product design.This contrasts with the approach taken in the hotel sector, where the Government introduced the deductibility of hotel accommodation expenses incurred in conference attendance for the purposes of Vat.

On Vat the Government could have gone further and adopted Chambers Ireland's recommendation to standardise the rate at 18 per cent.

Aside from the changes to income tax bands, the total cost of measures aimed specifically at business amounts to at least €330 million (the costs of making hotel accommodation expenses Vat deductible remain to be fully costed).

This is about one-third of the almost €1 billion that went in spending increases on social welfare.

Given that the business sector creates the jobs that keep people off welfare, the concessions to business appear to be at least appropriate.

It now only remains for the business lobby to focus the attention of Government on what really matters: the chronic - and largely State-driven - increase in the cost of living and doing business in Ireland.