BUSINESS OPINION:Issues of VAT revenue, property, banking policy and personal debt will be foremost this year, writes JOHN McMANUS

IT IS traditional in a column such as this to make some predictions about what lies ahead in the coming year. Doing so is foolhardy at the best of times – but in the current climate it is downright daft.

Tradition is tradition, however, and it is at least possible to identify a few issues that will loom large in the coming year – the outcome of which will have far-reaching consequences for the economy and business.

The first one is whether the Government’s big bet on VAT works out. Something in the region of two thirds of the additional €1 billion in revenue targeted for this year is expected to come as a result of the 2 per cent increase in VAT. The front-loading of the VAT increases specified as part of the assistance programme agreed with the troika of the EU, International Monetary Fund and European Central Bank troika in 2010 has allowed the Government to honour its election pledges to leave income tax and core social welfare rates alone. But it has rather turned the logic of the 2010 plan on its head, given the VAT increases were supposed to come as the economy returned to sustained growth.

Given the uncertain outlook for exports and the depressed level of consumer demand in particular, it is a big ask, and much will depend on whether people will go out and spend when they see that for the first time in three years their January take-home pay is the same as it was in December.

The optimist would predict that it might just work out that way. The pessimist would say look out for the mini-budget before the summer if VAT receipts are not on target come the end of the first quarter.

The other issue which will dominate the first half of the year is also related to Budget 2012 – whether or not the measures aimed at kick-starting the property market and the commercial property market in particular take root.

The stakes could not be higher, because at risk is the whole strategy behind the National Asset Management Agency (Nama) and its Government-guaranteed debts of €36 billion. To service and repay these debts, Nama needs to sell property and/or loans. The strategy to date has been to sell overseas assets and await a recovery in the Irish market before off-loading its Irish assets. Nama certainly has enough overseas assets on its books to keep going for 2012 and into 2013, but if the Irish market has not come back to life by then things will get sticky.

Hence the raft of measures announced in the budget, and also Nama’s own initiatives such as vendor financing and negative equity protection, due to come on stream this year.

It’s reasonably safe to predict some sort of pick-up in activity in commercial property in the next few months. Possibly also a pick-up in residential. But a sustained recovery will require the return of bank financing, and this brings us to the third issue which will dominate 2012: the Government’s banking policy.

The sad truth of the last three years is that banking policy has really been about staving off a collapse and keeping the ATMs working while the banks get a handle on their debts and the capital they need to deal with them.

This process is substantially complete, but the banks have not yet started to lend normally for a number of reasons. The most obvious is the continued dislocation in the credit markets as a result of the euro zone sovereign debt crisis. This is not a time for a bank to be anything other than massively overcapitalised, as the Irish banks thankfully are – thanks to taxpayers.

The general uncertainty over the recovery – which again is linked to the euro zone crisis – is another factor holding the banks back and suppressing demand for loans. Another factor at play is the fourth big issue that will play out over 2012: private sector debt.

Irish people have higher personal debts than pretty much anyone else in the euro zone, and combined with falling house prices and high unemployment this makes for a pretty toxic brew. The issue has been simmering away in the background for much of the past three years, with the focus very much on the Government finances and the banks. It is arguably just as big an issue as the others, but by its very nature cannot be dealt with in the same structured and cohesive way.

The first serious attempt to deal with it will be made this year when the Government introduces a new personal insolvency regime. A balance has to be struck between finding a solution for people with unsustainable debts and not providing an incentive for those who can afford to pay. Any new framework will have to ensure the problem is unwound at a pace the banks can cope with.

We are looking into what will be an interesting few months.