Jim Power Budget 2022 Assessment - Crowe Ireland

Budget 2022 analysis by Jim Power

A budget that had something for almost everybody

13/10/2021
Jim Power Budget 2022 Assessment - Crowe Ireland

Speaking the Crowe Budget 2022 Briefing webinar, economist Jim Power delivered a comprehensive assessment of this year's budget. The following is his follow up analysis and his presentation can be downloaded below.

Budget 2022 was framed against a much better background than a year earlier. The economy is recovering from the worst effects of Covid-related restrictions. It was essential that the budget helped the economy deal with the issues in a post-Covid economy, while bearing in mind the risks, challenges and opportunities facing Irish business and the general economy in 2022. 

As expected, the budget focused on a gradual unwinding of Covid supports; measures to alleviate cost of living pressures; housing; climate change; labour force participation; and a significant social welfare package. 

As outlined in the Summer Economic Statement in July, the budget-day package was €4.7bn. This was broken down into €4.2bn in expenditure measures and a net tax reduction package of €500m (revenue raising measures totalling €230m were announced). The €4.2bn expenditure package contained €1.45bn in new measures.  

The budget spread a lot of resources thinly over a lot of areas. Most people will be slightly better off as a result of the budget, but few if any will be significantly better off. That is typically the nature of budgets, which generally have more to do with politics than economics.

The bottom line is that Ireland has a very high level of debt; there are numerous domestic and external challenges facing the country; significant State spending has been committed to into the medium term, so we must hope that Government borrowing costs remain low and that international market confidence in the country remains strong. 

The fiscal background to Budget 2022

In Budget 2021, the Department of Finance targeted a deficit of €20.5bn (5.7% of GDP) in 2021. In the Estimates of Receipts and Expenditure for the Year Ending 31 December 2021, published ahead of Budget 2022, the Department of Finance is now projecting a General Government Deficit of just €13.1bn for 2021. Following the budget-day measures a deficit of €13.2bn is projected. This is still a significant number but is considerably better than anticipated. The strong economic recovery and the buoyancy of tax revenues are the key drivers of the improved fiscal situation. 

On the fiscal front, the public finances have moved into significant deficit since March 2020, but this is due to increased expenditure related to COVID-19, rather than a decline in revenues. In fact, tax revenues have held up remarkably well during the pandemic. In total, it is estimated that the State has had to borrow €34bn more than it was planning to deal with the COVID-19 crisis.

In the first nine months of 2021, an Exchequer deficit of €6.2bn was recorded, but on a 12-month rolling basis, the deficit was €9.1bn. Total tax receipts in the first nine months of the year were 15.9% or €6.3bn higher than the equivalent period of 2020. Income tax receipts were 19.5% higher; corporation tax receipts were 7.9% higher; and VAT was 26% higher. 

The strength of tax receipts reflects strong profitability in the multi-national component of the economy; a strong rebound in consumer spending; and the highest earning and highest tax-paying element of the labour force was not significantly affected by COVID-19. The very progressive nature of the Irish income tax system is ensuring that income tax revenues are remaining buoyant. The strong performance of multi-national profits is ensuring that corporation tax receipts are also buoyant. 

Table 1: Tax Receipts (Jan-Sep 2021)

 TAX CATEGORY  €m % OF TOTAL YOY CHANGE
 Income Tax  18,445 40.2% +19.5%
 VAT  12,439 27.1% +26.0%
 Corporation Tax  8,057 17.6% +7.9%
 Excise  4,075 8.9% +7.4%
 Stamps  1,144 2.5% +22.3%
 Capital Gains Tax  332 0.7% +11.2%
 Capital Acquisitions Tax  229 0.5% +19.7%
 Customs  355 0.8%  +91.7%
 Motor Tax  719 1.6% -1.8%
 Other  70 0.1%  -
 Total  45,865 100.0% +15.9%

Source: Department of Finance
On the expenditure side, the pressures are still high. Total gross voted expenditure in the first nine months of the year amounted to €60.7bn, which is 3.9% higher than the first nine months of 2020. Gross voted current expenditure accounted for €56.3bn of the total, and was 4.9% up on the same period in 2020. 

Current spending on social protection totalled €23.1bn and accounted for 41.1% of total gross voted current expenditure. Current spending on Health totalled €14.6bn and accounted for 26% of total gross voted current expenditure. 

Table 2 shows the medium-term fiscal projections following the measures contained in Budget 2022. 

Table 2: Fiscal Projections 2021-2025 (Budget 2022)

   2021 2022 2023 2024 2025
General Gov. Balance (€m)  -€13,225 -€8,260 -€1,080 -€270 €875
 General Gov Balance (% GNI*)  -5.9 -3.4 -0.4 -0.1  +0.3
 Gen Gov Debt (€bn) €236.7 €238.7 €246 €250 €250.2
 Gen Gov Debt (% GNI*)  106.2 99.2 96.7 93.3 89.5

Source: Department of Finance, Budget 2022, 12 October 2021

The objectives of Budget 2022

The key issues that shaped Budget 2022 include: 
  • The economy is recovering, but there is a very pronounced dual economy. The indigenous component of the economy is lagging the very strong multi-national component of the economy. The provision of support to the SME sector in particular is important. 
  • COVID-related financial supports are being wound down. However, some of the worst affected sectors of the economy now have a significant debt legacy, and will require ongoing support for some time. 
  • Labour shortages are evident in many sectors of the economy, so it is appropriate to incentivise labour force participation to the greatest extent possible, and ensure that apprenticeships are expanded. An immediate ending of the PUP scheme would have been appropriate and a significant investment in childcare.
  • The public finances will have to be brought back into balance over the coming years. This will necessitate tight control over Government expenditure and the maximisation of tax revenues. The objective is to eliminate the high level of borrowing that had to be put in place to deal with COVID-19 by 2023. 
  • The threat to future corporation tax receipts from international tax developments means that the public finances will have to be manged as prudently as possible. There is no guarantee that the current record levels of corporation tax will be sustainable, so it is important to plan for the eventuality of a possible reduction at some point in the future. Basing future expenditure plans on a tax base that may not be sustainable would be a risky strategy. This is what happened in the years leading up to 2008. 
  • Housing is the biggest economic and political issue at the moment. It is essential to narrow the gap between supply and demand from an economic and political perspective. The next general election is likely to be fought on the housing issue. 
  • Addressing climate change and ensuring the necessary incentives to change consumer behaviour are in place will be very important. This is particularly relevant for the transport sector. 

The key elements of Budget 2022

As expected, the total budget package is worth €4.7bn. This includes a tax package of €500m and an expenditure package of €4.2bn. 

In 2022, €87.6bn will be allocated for public expenditure. €80.1bn of this will be made available for core expenditure, an increase of over €4.2bn or 5.5% on 2021, with capital spending increasing by more than twice the rate of current spending. There will be €69.2bn for core current expenditure – an increase of 4.6% on 2021. €11.1bn will be made available in 2022 under the National Development Plan, a 14% increase on the capital allocation in 2021.

  • The standard rate income tax band was widened by €1,500 and the personal tax credit, the employee tax credit and the income credit were widened by €50. These measures aimed to keep pace with the cost-of-living increases.
  • Over €60m is being made available to extend the commercial rates waver for business, which ran out at the end of September. It will be targeted at hospitality, arts and certain tourism related sectors. 
  • The Employer Wage Subsidy Scheme (EWSS) will remain in place in a graduated form until the 30 April 2022 – that is six months after the lifting of most public health restrictions and two months after the PUP ceases. There will be no change to EWSS for the months of October and November; businesses availing of the EWSS on the 31 December 2021 will continue to be supported until the 30 April 2022; across December, January and February, a two-rate structure of €151.50 and €203 will apply; for March and April 2022, the final two months of the scheme, a flat rate subsidy of €100 will be put in place. The reduced rate of Employers’ PRSI will no longer apply for these two months; and the scheme will close to new employers from the 1 January 2022.
  • The 9% VAT rate for the hospitality sector will remain in place until the end of August 2022. 
  • An income tax deduction amounting to 30% of the cost of vouched expenses for heat, electricity and broadband in respect of those incurred while working from home, which will be formalised in legislation through the Finance Bill.
  • A €90m package for the aviation sector to help rebuild connectivity. 
  • An extra €89m is being given to the tourism recovery package. This will include €50m for further business continuity supports and €39m for Enhanced Tourism Marketing and Product Development. 
  • There is a social welfare package of €558m. This includes a €5 increase per week in the state pension and other welfare payments, including the fuel allowance.
  • The national minimum wage has been increased by 1.9% from €10.20 per hour to €10.50. The ceiling for the second USC rate band increased from €20,687 to €21,295 to prevent minimum wage earners from moving into the higher USC tax rate. The exemption from the top rate of USC for all medical card holders and those over-70 earning less than €60,000 will continue to apply. 
  • The childcare scheme is being expanded and will have a record €716m allocated in 2022. 
  • The annual yield from the bank levy has been approximately €150m to-date. It is being extended for a further year. However, as Ulster Bank and KBC are leaving the market in 2022, they will be excluded from the charge. The remaining banks will pay the same amount in 2022 as they did in 2021; this equates to approximately €87m in total.
  • There will be €34m made available for apprenticeships. 

In relation to climate change:

  • The carbon tax is being increased by a further €7.50 per tonne to €41 a tonne. This is set to reach €100 by 2030. 
  • There is a modest tax disregard in respect of personal income received by households who sell surplus electricity that they generate using micro-generators back to the grid.
  • From January 2022 a revised VRT table is being introduced. The 20-band table will remain in place with an uplift in rates, as follows: 1% increase for vehicles that fall between bands 9-12; a 2% increase for bands 13-15; and a 4% increase for bands 16-20.
  • The €5,000 relief for Battery Electric Vehicles is being extended to end 2023.
  • The BIK exemption for battery electric vehicles will be extended out to 2025 with a tapering effect on the vehicle value. This measure will take effect from 2023. For BIK purposes, the original market value of an electric vehicle will be reduced by €35,000 for 2023; €20,000 for 2024; and €10,000 for 2025.
  • Accelerated Capital Allowance scheme is been extended and amended to include hydrogen fuel vehicles and refuelling equipment.
  • There is €202m in funding for retrofitting grants and schemes to improve the energy efficiency of homes.

On the housing side, the Government’s Housing for All strategy targets the delivery of 33,000 new houses per annum on average out to 2030. In relation to housing, some initiatives were announced in Budget 2022:

  • A Zoned Land Tax will be introduced to encourage the use of land for building houses. The tax will apply to land that has been zoned suitable for residential development and is serviced, but which has not been developed for housing. The rate at the outset will be 3%. There will be some exclusions and a two-year lead-in time for land zoned before January 2022, and a three-year lead-in time for land zoned after January 2022. 
  • The Help to Buy scheme is being continued at current rates for 2022. A full review of the scheme will take place during 2022.
  • The relief for pre-letting expenses for landlords will be extended for a further three years.
  • More than €200m is allocated to retrofitting in excess of 20,000 homes, with half to be spent on 4,500 free home upgrades for low-income or energy-poverty households. 
  • Over the next five years €20bn will be made available for housing, with €6bn being allocated to the Department of Housing, Local Government & Heritage. It is planned to deliver 4,000 affordable homes and 9,000 new build social housing units in 2022.  

Contact us:

Grayson Buckley, Partner, Tax - Crowe Ireland
Grayson Buckley
Partner, Tax
John Byrne, Partner, Tax - Crowe Ireland
John Byrne
Partner, Tax
Cormac Doyle Crowe Ireland Tax Partner
Cormac Doyle
Partner, Tax
Lisa Kinsella, Partner, Tax - Crowe Ireland
Lisa Kinsella
Partner, Tax