Vulcan Insight

Budget 2021 – “A Budget like no other”

13 October 2020

Introduction

Budget 2021, the first Budget of the Fianna Fáil, Fine Gael and Green Party coalition Government has been variously described as “a Budget like no other”, “the most challenging Budget any Government has ever put together” and the most consequential Budget for some time, set, as it is,  against the backdrop of the shattering social and economic consequences of Covid-19.  Despite these descriptions, such has been the saturation of Covid-19 related news in recent weeks that today’s Budget has, in many ways, come in under the radar as the public have been largely spared the pre-Budget wrangling, rows and kite-flying that usually characterises headlines from mid-September onwards. Indeed, such has been the all-consuming nature of the pandemic that the fact that Fianna Fáil and Fine Gael have outlined a shared budgetary vision for the first time, with Sinn Féin leading the opposition charge has barely been commented upon.

Background

The backdrop to Budget 2021 could not be more severe and was aptly summed up by the former Minister for Finance, Michael Noonan. Writing in June to promote the merits of the recently finalised Programme for Government, Noonan described how in 2011 upon entering Government the economy he inherited was akin to a car which had failed its NCT and was out of gas – “it took a lot of elbow grease, but we got it back up and running, and by the end of the decade, the banger had become a race car.” With respect to Covid-19 and its impact, Noonan colourfully noted that this time the car has been flattened by a meteor that had dropped out of the sky.  

With such focus on the pandemic, one would be forgiven for forgetting that another meteor, a no-deal Brexit, looms large despite more positive soundings on that front last week. It is in this context that Minister for Finance Paschal Donohoe informed the public in September that the Government would be framing Budget 2021 on the premise that a free trade agreement between the EU and UK would not be agreed before the end of the year and that from the beginning of next year bilateral trade between the two would be on World Trade Organisation terms.   The other major assumption underpinning Budget 2021 is  that, in the absence of a vaccine the economy – and broader society – must co-exist with the virus. 

Headline Figures

The days of balancing the books are truly behind us. Budget 2021 forecasts a deficit of €20.5 billion. This year’s deficit will bring overall national debt levels to just under €219 billion or almost 108% of national income. On the jobs front a total loss of approximately 320,000 jobs in 2020 is forecast, with this recovering by approximately 155,000 jobs next year.

The total budgetary package is unprecedented. Of the nearly €18 billion:

  • €8 ½ billion is for public services;
  • €3.8 billion will be spent on supporting existing services, in particular the Department of Health;
  • €3.4 billion will establish a Recovery Fund to stimulate demand and employment;
  • Capital expenditure will increase to €10.1 billion, the largest amount that has ever been allocated to investment in schools, homes and public transport;
  • Also, Government has provided a net tax package of €270 million.

In addition, Government confirmed that that the National Economic Plan will be published next month and, as was well flagged, Government will fully utilise the €1.5 billion Rainy Day Fund.

Pandemic and Brexit Supports

Clearly,  this is the Budget to tackle Covid-19 and much of the firepower has been directed at business. While highlighting support provided at European level, Donohoe confirmed a Recovery Fund worth €3.4bn will be established to counter the economic impact of the pandemic and Brexit with a focus on infrastructure, reskilling and retraining and investment in jobs. The fund forms a cornerstone of the Government response to Covid-19.

A new Covid Restrictions Support Scheme will provide targeted support for businesses who have been significantly impacted by health restrictions and will generally operate when Level 3 is in effect.

On wage subsidy schemes, Government will apply for EU funding towards the cost of the Temporary Wage Subsidy Scheme and a new scheme to replace the Employment Wage Subsidy Scheme will be formulated to provide certainty out to the end of 2021.

In a move which will be welcomed by the hard hit hospitality sector, the reduced VAT rate of 9% for the hospitality and tourism sector will take effect from the start of November.  In addition, a further commercial rates waiver for the final quarter of the year will be introduced.

With respect to Brexit, Minister McGrath confirmed that around €340 million of voted expenditure will be spent on Brexit supports in 2021. This includes an additional allocation for work at ports and airports and provides for around an additional 500 staff for operationalising checks ahead of January 1st.

On Taxation

Minister Donohoe already set out his stall when it comes to income tax earlier this year when he said categorically there would be no rise. However, there are some specific changes to USC and employer’s PRSI to protect low wage workers. For the self-employed, the Earned Income Tax Credit has finally been equalised and there are also changes to assist families with caring responsibilities.  On Corporation Tax, Donohoe noted that just under €7.5bn has been generated for the exchequer to date and he once again reaffirmed Ireland’s commitment to the 12.5% rate.

In addition, a Commission on Welfare and Taxation will be established to review the tax system.

Health & Housing

On health, extra spending of €4bn has been confirmed – making Budget 2021 the largest health budget ever – as the country’s health service responds to the Covid-19 crisis and attempts to establish something resembling normal levels of service.

The ongoing pandemic has allowed Housing Minister Darragh O’Brien to begin life in the Customs House away from the scrutiny that his predecessor endured. Nevertheless, the crisis aptly described as the “greatest medium-term threat to Irish economic and social stability” remains. €5.2 billion has been provided to the Department of Housing, which aims to construct 9,500 new social housing units in 2021. Minister McGrath also underscored the delivery of social housing and allocated €110m to provide for affordable housing and cost rental schemes alongside €210m for the Rebuilding Ireland Home Loan Scheme. Additional Help-To-Buy measures announced under the July Stimulus have been extended to the end of 2021. The Stamp Duty refund scheme will be extended to the end of 2022.  

Climate Action

The impact of yet another meteor, climate change, and the influence of the Greens in Government can also be seen as Government has decided to stick to its commitment with a €7.50 increase in the carbon tax. In terms of changes to taxing and cars, a modified new structure of rates and bands will be put in place with lower VRT rates for cars with lower emissions. The nitrogen oxide surchange bands will be changed so that higher emitting vehicles pay more. There will also be a total of €65 million available to fund deep retrofitting of social housing stock. Whether today’s measures will be green enough to stave off Eamon Ryan’s increasing number of critics within his own party, remains to be seen.

Other Key Measures

In terms of other key measures, Taoiseach Micheál Martin’s Shared Island Unit, established as part of the Programme for Government negotiations, has been given significant financial backing with €500m to fund cross border projects over the next five years.

On the Justice front, Minister Helen McEntee has managed to secure funding for the training of 620 new Gardaí next year along with the recruitment of 500 new Garda staff.

One of the final parts of the Budget, a decision to pay a Christmas bonus for a majority of those receiving the Pandemic Unemployment Payment, was only agreed last night after lengthy talks.

In terms of other social welfare measures there are increases to the Living Alone Allowance, Fuel Allowance, the Qualified Child Payment, the Carer’s Support Grant and Parent’s Benefit is being extended by a further three weeks. The customary €5 increase in the State Pension will not take place this year. Around €220m in funding is to be set aside to pay for the delay in increasing the State Pension age increase from 66 to 67.

Additional funding is also being provided to the Department of Higher and Further Education to support over 10,000 upskilling and reskilling opportunities. Also, 4,000 new apprentices will be provided under the Apprenticeship Incentivisation Scheme. Additional significant educational supports include funding to the Department of Education to provide for the hiring of 990 additional SNAs and 403 additional teaching posts.

Many employees will be disappointed that there are no further measures introduced to assist remote working, instead the opportunity was taken to highlight existing measures. The forthcoming Remote Working Strategy will be watched closely.

There is also significant support for one of the sectors of the economy most heavily impacted by the pandemic; the arts and entertainment industry.

On the old reliables, excise duty on a pack of 20 cigarettes is increasing by 50c.

Conclusion

To return to the earlier analogy, with Budget 2021 Government has not dared dream that the Irish economy will return to anything resembling a “race car” anytime soon. Instead, they have strived to ensure that the country will trundle along as billions of euro is pumped into the economy to keep it afloat.  On his way into Cabinet this morning Minister McGrath described Budget 2021 as a “hope and confidence plan.”’ That sense of hope will be tempered by uncertainty around both the future course of the pandemic and a Brexit trade deal and while there are signs for optimism in the economy with the multinational sector continuing to perform well, for the interim we can only hope that the car stays on the road.