Too soon to say how ‘Brexit-proof’ this Budget is

Budget only one step in an ongoing narrative and a potentially tumultuous 2017 may bring yet more intrigue

Minister for Finance Michael Noonan.

Minister for Finance Michael Noonan.

In what has been a tumultuous year to date – an inconclusive general election result in February, the shock of Brexit in June, and then the judgment in the Apple case at the end of August – last week’s Budget arguably posed the biggest challenge to date to the minority Government and the much vaunted ‘new politics’.

Insider senses a feeling of relief, and even a degree of satisfaction on the Government side in particular, as the day passed off without much drama, and in the circumstances may even be seen as a minor success.

For all the talk in recent months of the Budget being a huge hurdle for the Government, the reality is that all of the major parties had a vested interest in ensuring it passed. Quite simply, the present state of Irish politics is such that continued co-operation will be required from FF, FG, and Independents for the foreseeable future, and failure at the first hurdle was not an option.

In these circumstances, getting a Budget passed was perhaps not the obstacle it appeared to be. The real question then is, what is the quality of the Budget passed? As one former finance minister commented to Insider last week, the real test will be whether we get "a Finance Bill with teeth" and the detail of the measures enacted in that piece of legislation. The jury is therefore out for a few weeks, but in the meantime Insider has some observations.

Insider recently commented that we would likely see something of a fudge and a damp squib of a Budget with very few concrete measures. To a degree this is what materialised – there was no real spark of excitement before, during, or after the Budget speech – but there were a few interesting measures nevertheless.

Housing - the right actions taken?

Housing Sold

The new package for first time buyers went far further than Insider expected, potentially allowing for tax rebates of up to €20,000 on the purchase of a new home. The Government has three objectives in mind here: 1 ) to assist first-time buyers, with the rebate effectively acting as a deposit-assist scheme in light of the new Central Bank restrictions on lending; 2 ) to give a stimulus to the house-building sector – note how the scheme will only apply to purchases of newly built homes; 3 ) by stimulating house-building this will lead to a greater supply of homes generally, thereby helping other sectors of the housing market, and helping to reduce high rents and homelessness.

It is nevertheless a high risk move. We have seen previously how property-based incentives have distorted the market and ultimately backfired, at a great cost to citizens. The Government was either brave or foolish to introduce such an elaborate scheme. On the other hand, one of the moods Insider sensed during the General Election campaign was that there was too much deference being shown to economic theory at the expense of human interest.

It is one thing to say we will not allow the housing market to run out of control again, but when it reaches the point where homelessness is rampant and young adults are unable to access the housing market, a more nuanced, balanced, approach is called for. The Government had to be seen to act.

However, there are some potential flaws with the scheme. There will be some resistance to its being restricted to newly built homes – Insider would caution that we must ensure the new homes are built in the right areas, and in particular, that they are close to the necessary amenities and services. Many people also feel the upper limit for the scheme is too high at €600,000 and that it should be targeted at a more modest level. Insider expects to see a lot of debate, and possibly changes to this scheme, in the coming weeks, in particular in light of the noises emanating from FF.

Childcare

Katherine Zappone

There are a number of Independent ministers in this Government, but with her childcare package Children’s Minister Katherine Zappone outshone them all last week, in terms of publicity in any case. Again it is important to note the Government had more than one objective in introducing these measures – one being to assist under-pressure families but another being to encourage more parents back into the workforce.

Whatever about the housing measures, Insider thinks it is far too soon to make a judgment on the childcare package. The basics of the scheme are reasonably straightforward – universal support for the early years, followed by means-tested assistance up to age 15 – but the actual workings of the scheme are unclear, as indeed is the ability of the childcare sector to cope with the demand. There have also been complaints from some stay at home parents – shades there of the outrage over Charlie McCreevy’s ‘tax individualisation’ measures of 1999 – but Insider tends to think these are overblown. Over the coming weeks, as the relevant legislation is enacted we should keep a close eye on the fine detail.

Spending versus tax cuts - who gets the credit?

A dominant theme in much of the discourse has been the ratio between spending increases and tax cuts. Minister Noonan himself calculated them to be three to one in favour of the former. This is a reflection of the General Election result. FG went into that campaign pledging to eliminate the USC – a very big tactical blunder, Insider felt, as it punctured their image as the party of financial responsibility. FF on the other hand – as regards rhetoric in any case, even if its manifesto did not really back it up – focused heavily on the need to restore spending in key areas. FF is therefore very much claiming a win on this one.

We have seen FF and FG both jostling to claim credit for social welfare increases – FF got the pension increase it demanded but FG then went and extended it to all social welfare recipients.

Another measure that will be welcomed in Galway is the spending commitments made to the arts sector. This is addressing another area of weakness for FG – the party has earned itself a reputation in recent years as one that does not value the arts. The 1916 centenary commemorations were widely seen as a success however, and the Government is keen to build on them. The party’s three Galway TDs will all be especially pleased about this one.

Brexit ‘proofing’ and politics

Great British Pound

A dominant theme throughout Minister Noonan's Budget speech was the desire to counter the potential negative effects of Brexit. Such is the lack of clarity coming out of both Brussels and London on what Brexit means however, that it was difficult to know what measures to introduce.

There is a sense in Government circles that, so far, Brexit is a bigger worry in rural areas – Minister Seán Canney recently commented that it was the sole biggest issue that came up as he toured rural and provincial Ireland during the summer recess. This is largely based on a sense that while the bigger cities, especially Dublin, may be able to withstand the worst effects – potentially benefiting from businesses in the financial sector relocating from London for example – rural areas will not be so protected. In particular industries such as tourism and agriculture may be very vulnerable.

This partly explains the focus on agriculture and tourism, two of Ireland’s traditional industries, in Budget 2017. For example, a new loan scheme, which the Government promises will be flexible and low-cost, is being set up for farmers. For tourism, the special reduced VAT rate of nine per cent is being continued for another year. At a supposed cost of €620 million per annum, this is a costly subsidy to an industry that has done very well in recent years – witness the price of hotel rooms in Dublin and Galway city for example – and the rationale for extending it is highly debatable. Also, it is too soon to make a call on how ‘Brexit-proof’ this Budget is.

Insider will turn to the politics of the Budget at a later date. There is however a lot at stake. There was much talk of ‘the centre holding’ but a key battle will be between those centrist forces. FF has been like the cat that got the cream in recent months but has had the pep taken out of its step in recent weeks as polls show any further gains will be hard-won. In particular the lead FG has built on economic competency has, despite everything, not gone away, and FF is still struggling to regain lost ground among middle class voters and in Dublin. There is still much work to be done to regain top dog status.

The Budget then was only one step in an ongoing narrative and a tumultuous year may bring more intrigue yet!

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