On 13 October the Minister of Finance, Mr. Paschal Donohoe presented the 2021 Budget. This budget, the largest Ireland has ever seen, is dominated by the response to the Covid pandemic. The numbers reveal the magnitude of the financial burden caused by the worst epidemiological emergency in a century.
The price of the pandemic
Going into 2020 Ireland's economy was solid shape. 2019 was closed with a budgetary surplus of 0.2% of GDP or €700 million. There was a lot of uncertainty surrounding Brexit but the finances seemed to be well balanced and prepared for the worst. The Government allocated €1.2 billion towards Brexit preparations, including a €650 million in contingency funding. In addition to that, a Rainy Day Fund was set up and supplied with €1.5 billion in case of a sudden economic downturn.
And then Covid-19 broke out.
Ireland very quickly introduced a wide-raging set of restrictions in order to slow down the spread of the virus. The Government coupled the restrictive measures with a set of supports aimed to help people and businesses affected by Covid. As of October, the total cost of support measures implemented by the state stands at €24.5 billion. In comparison to last year's Budget plan, this figure is nearly eight times higher than predicted for support measures.
As a result of the pandemic, the growth of the Gross Domestic Product is expected to fall from 5.6% recorded in 2019 to -2.4% in 2020. As the economy contracts 320,000 jobs are expected to be lost in 2020. Increased spending will result in a deficit of €21.5 billion or 6.2% for 2020.
Where is the money coming from?
Ireland collected €7.5 billion in corporation tax in 2020. A large portion of this income was allocated to pay for the pandemic expenses. The Government is committed to keeping the Corporation tax rate at 12.5% seeing how important it is for the bottom line.
Ireland along with many other nations hit by Covid will have to resort to borrowing in order to fund the increased expenditure. The additional spending will bring the value of Ireland's national debt up to €219 billion or almost 108% of national income, which is 10% more than expected for 2020.
Ireland can also count on savings from last year. For 2021 Mr. Donohoe announced that he will fully utilise the €1.5 billion available in the Rainy Day Fund.
The Minister of Finance also acknowledged the role of the European Union and the European Central Bank in providing a multi-year recovery plan as well as a bond purchasing programme.
The plan for 2021
What's ahead of us in 2021 in terms of Covid remains a mystery. By finding an effective vaccine or treatment for Covid we could eliminate the uncertainty and pave a more predictable way to recovery. If, on the other hand, we remain in the lockdown-reboot cycle, the pressure on the economy and society may be far greater.
The Budget for 2021 sets out reduce this uncertainty by building up healthcare capacity and protecting people and businesses. Given the more optimistic scenario, the Government believes that 155,000 jobs can be recovered in 2021 and the GDP can return to positive 1.7%. The aim is also to manage deficit and reduce it to €20 billion or 5.7%.
The total budgetary package for 2021 is €17.8 billion. Out of that amount €8.5 billion will be used to fund expenses to tackle Covid. This includes €2.1 billion in contingency funding. €3.8 billion will be allocated to support existing services with a high proportion of that amount going towards the Department of Health. Core capital projects will see an increase of €1.6 billion in 2021. €3.4 billion will be used to create a Recovery Fund. This fund will be used to provide a stimulus for increasing employment. An increase of capital expenditure to €10.1 billion will be allocated to investments in schools, homes and public transport. In addition, €270 million are provided in taxation measures.
A number of measures introduced in the 2021 budget are designed to save businesses in light of the pandemic. Debt warehousing will be introduced to help businesses that are struggling to make their tax payments on time. This scheme allows to defer payments for up to a year without having to pay interest.
The Budget also offers provisions for business sectors impacted by restrictions imposed under the five stage National Framework for Living with Covid-19. Qualifying businesses will be able to apply to Revenue Commissioners for cash payments.
Payments will be calculated on the basis of 10 per cent of the first €1 million in turnover and 5 per cent thereafter, based on average VAT exclusive turnover for 2019. It will be subject to a maximum weekly payment of €5,000.
This support comes into effect in November 2019 and will be valid until 31 March 2021.
Wage subsidy schemes
COVID-19 Refund Scheme later replaced by Temporary Wage Subsidy Scheme (TWSS) were introduced to encourage employers to keep staff on payroll during periods of lockdown or business slowdown caused by Covid.
Ireland has applied for EU assistance to help fund the scheme. This potentially means €2.1 billion from EU to help with balances. The subsidy scheme in some shape or form is expected to continue to run until the end of 2021.
There were no big changes to income tax introduced this time and most employees will not see any difference on their payslip one way or another. However, employees on rates close to minimum wage will see a small change to the USC calculation work in their favour. For the self-employed, the income credit was increased to €1,650 to match that of a PAYE employee. For those who have caring responsibilities, there was a big increase in the Dependent Relative Tax Credit from €70--€245.
For companies that subsidize remote working the cut off tax free value is €3.20 per workday. Any payment above that will have to be classified as Benefit-in-kind and therefore taxed. Office equipment or furniture provided to the employee will not incur Benefit-in-kind as long as it's 'wholly, exclusively and necessarily in the performance of the duties of their employment'.
Individuals who work from home but don't receive a remote work subsidy from their employer can claim a relief from the Revenue for utility expenses such as heating and electricity as well as broadband. Unfortunately, individuals cannot claim back the cost of office furniture or equipment.
The standard rate of VAT will be reduced from 23% to 21% from 1 September 2020--28 February 2021. The VAT rate for hospitality and tourism will be decreased from 13.5% to 9% from November 1 2020--December 2021.
Help to buy
The Help-to-by scheme has been extended until the end of 2021 with a 10% property value threshold set at €30,000.
Climate change efforts
The long term goal of Ireland is to become climate neutral by 2050. In line with that Carbon tax was increased from €26--€33.50 per tonne of CO2. This is another incremental increase on the way to the target tax value of €100 per tonne of CO2.
A modification in the method of calculation of the severity of car emissions will mean an increase in the vehicle registration tax and motor cars on petrol cars. Effectively, the rates on electric and hybrid vehicles with smaller carbon footprint will make them more attractive to buyers. Existing reliefs for green cars will be allowed to expire.
Alcohol and Tobacco
Smokers now have another reason to kick the habit as the price of a packet of cigarettes has been increased by 50 cents and now stands at €14.
The tax on alcohol products remained unchanged.
What about Brexit?
The impact of Brexit still remains uncertain. The negotiations between the EU and the UK so far did not conclude with a mutually acceptable trade deal. In case of an unfavourable outcome, Ireland will have to use whatever resources are still available in the Recovery Fund. Ireland will also count on additional help available from the EU via the Brexit Adjustment Reserve.
The promise of the 2021 budget is that it will make provisions for the supports necessary to fight the effects of the pandemic as well as make necessary investments for the future. We are looking forward to 2021 thinking that it cannot get any worse than 2020. Even though the Irish finances are probably in better shape than in other countries, the economy (and people) can tolerate only so many lockdowns and #holdfirm hashtag campaigns. This situation cannot continue. In the coming months the global community must come up with solutions to manage the spread of the disease that don't require recurring shutdowns. We need this to hope for a better 2021.