The Minister for Finance, Mr Brian Lenihan, contends that the economy will return to growth over the next six to nine months.  In underpinning this growth, he stresses the country must regain its competitive advantage and therefore the cost of doing business in Ireland must fall. 

 

As expected, the focus of the budget was to reduce the budget deficit by cuts in spending as opposed to increasing taxes.  There were few changes proposed in relation to Income Tax.  The high earners restriction introduced in Finance Act 2006 which limits the use of certain tax reliefs and exemptions by high income individuals is to be tightened further so that high earners pay up to an effective rate of 30% where they are availing of certain tax reliefs and exemptions.  A new measure is also to be introduced on all Irish nationals and domiciled individuals who are non resident, whose world wide income exceeds €1m and whose Irish located capital is greater than €5m.  There will be a requirement to pay a €200,000 per annum domicile levy from 2010. 

 

Whilst it is welcomed that there was no further increases in tax rates, as the top rate of tax, PRSI and levies is already 55%, the question is whether this budget will be sufficient to stimulate the economy to return to growth as the Minister contends.  As noted previously, the focus of the budget was to reduce the budget deficit through cuts in spending.  The public sector salaries are to be cut on a graduated basis and there is to be a proposed pension scheme for new employees joining the public sector going forward.  Cost cutting measures were required in the budget but it is debatable whether this should have been done through public sector reform as opposed to a straight salary cut. 

 

The key to return to growth will be the release of credit to the markets and the increasing of consumer spending.  The Government has cut the standard rate of VAT from 21.5% to 21% and excise duties along with introducing a Car Scrappage Scheme for cars older than ten years.  The Car Scrappage Scheme operates by providing a reduction in VRT of €1,500 where a new “environmental friendly” car is acquired as part of the trade in.

 

While the Car Scrappage scheme is welcome, the key underlying issues of making credit available to consumers to acquire cars and/or to be confident in spending their savings do not appear to have been addressed.

 

The release of credit and the increase in consumer spending will be critical for the stimulation and of the economy in 2010.  Other measures to support specific industries should be considered such as the abolition of air travel tax to support the tourism industry and a further reduction in the standard rate of VAT to support the retail industry so that spending may increase.

 

It is important that the Government shows strong leadership in order to restore confidence in both the international and domestic markets in the country so that the Minister’s contention of return to growth in a short period of time will be realised.