Every Budget is unique and reflects the economic environment of the time. Budget 2022 was about getting the economy back on track after the impact of the Covid Pandemic. Roll on a year and the focus has moved away from Covid, lockdowns and the effective shutting down of whole sectors of society. Budget 2023 is very much being pitched by the Government as a cost of living Budget.
The ongoing war in Ukraine is having a huge impact on energy costs, which in turn impacts on production costs, including food. A recent presentation by the Energy Supply Emergency Group (ESEG) shows that if recent price increases in energy were to be repeated then almost 70% of households would be spending more than 10 per cent of their income on energy, which is considered the definition of energy poverty. The effects of the energy crisis impact right across the board – individuals, indigenous business and also Multi-National enterprises. When allied with the fact that some taxpayers have availed of warehousing of tax debts due to Covid, these additional pressure may be too much for some businesses. Some of these business will fail. The SCARP (Small Company Administrative Rescue Process) has been much heralded but real questions remain over the effectiveness of the process. Since the introduction of SCARP there have only been a handful of. One of the downsides is that there is an automatic opt out by Government bodies, including the Revenue. This can therefore impact on the effectiveness of the Process.
The energy crisis is also underpinning the inflationary spike at the moment. Eurostat, the European Commission’s statistics bureau, recently announced that the Eurozone inflation rate has increased to a record 9.1% in the year to August. Historically Central Banks have increased interest rates to reduce available cash in the economy and help temper inflation. The ECB increased interest rates in July and is likely to increase rates again in order to combat inflation. But the question has to be asked is this the correct action as the increased energy cost, a necessary staple, is already reducing the available cash in the economy. Expected increases in interest rates will add further pressure on stressed homeowners who may have variable mortgages as well as those struggling to get onto the property ladder. Allied to this Government bond rates are rising, increasing the burden on the State repaying debt. It will be interesting to see how the Government uses the budget to tackle this extraordinary inflation.
Unfortunately the housing crisis, which has been with us for many years now, shows no signs of going away. For many first time buyers as a result of rising interest rates and the limited supply, the opportunity to afford to buy a home is beyond them. What about renting? Well not much relief there, either for landlords or for tenants. Many third level students will be looking forward to going to college, that is if they can find accommodation. A number of universities and politicians are actively encouraging homeowners to “rent a room” in order to ease the crisis. The Minister for Housing has said he hoped more homeowners will rent out rooms and seek to avail o the Rent a Room Relief, on the basis that the scheme does not affect an individual’s entitlement to welfare supports, the pension or student grants. The reality is that the rent a room scheme is not a panacea and it is not for everyone. It’s a bit like putting a sticky tape on a broken leg! How will this be addressed in Budget 2023? For example are property incentives (such as S50 relief) still taboo? Yes, they are availed of by higher income earners, however there is a housing crisis and a crisis in student accommodation. Fresh thinking is required.
The impact of the war on energy security and supply has very clearly brought home the risks faced by Ireland and the broader EU States of being too dependent on others for energy. The case for energy security has never been greater. This brings sharp focus on the whole energy agenda – should Ireland be doing more in the context of renewable energy? Utilising our resources (including wind) to the fullest extent reduces dependency on unreliable third parties as well as allowing the Government tackle the climate crisis. Lots of debate about the potential for renewables. This crisis has shown that it’s time to move past debate. Action is required and that requires fast tracking of strategic infrastructural projects.
RBK will be holding its annual Breakfast Budget Briefing as a hybrid event in person at the Sheraton Athlone Hotel and streaming live online on 28 September. Patrick Fannon, Tax Director, RBK will be analysing the tax measures announced in Budget 2023 and Oliver Mangan, Chief Economist AIB will look at the economic outlook. In the lead up to the Budget over the next number of weeks RBK’s Business and Tax advisors will look at potential tax measures that the Government could consider and areas of concerns that are facing our clients.