BUDGET 2018 – Analysis for Construction

Jeanette MairGeneral Economy

  • To end Quarter 3, the Exchequer recorded a surplus of €2,344 million, a year-on-year improvement of €2,369 million, underpinned by proceeds of the AIB share disposal.
  • Tax receipts in the first nine months of 2017 are broadly on-profile and up over €1.8 billion year-on-year underpinned by an improving economy.
  • Gross voted expenditure is being managed within expectations, and is up 4.6 per cent in the year, reflecting the Government’s commitment to investing in public services and infrastructure.
  • The economy continues to grow strongly with real growth projected to be 4.3 per cent in 2017 and 3.5 per cent in 2018.
  • Unemployment is now at its lowest since 2008, at 6.1 per cent and is forecast to fall to 5.7 per cent on average in 2018.
  • The projected deficit for this year is 0.3 per cent of GDP and taking account of the Budget package, the forecast deficit for 2018 is 0.2 per cent of GDP. (In structural terms, the metric by which Ireland’s obligations under the Stability and Growth Pact are set and measured, means that Government is on course to deliver a structural deficit of 0.5 per cent of GDP, thus achieving Ireland’s Medium Term Objective).
  • Budget will establish the Rainy Day Fund in 2018 and transfer at least €1.5 billion to it from the Ireland Strategic Investment Fund to start it off. As set out in the Summer BUDGET 2018 Analysis for Construction CIF Economic & Policy Research 2 Economic Statement, the annual contributions of €500 million will commence in 2019 after Ireland has achieved the Medium Term Objective in 2018.
  • Total voted capital spending for 2018 will amount to over €5.3 billion, an increase of €790 million on the 2017 allocation. Budget announced an additional allocation of capital expenditure of €4.3 billion over the next four years, up to the end of theexisting Capital Plan in 2021. This will result in capital expenditure doubling between 2015 and 2021 – from €3.7 billion to €7.8 billion Gross Voted Capital. This increased investment will deliver better public services, promote regional economic growth, and help address challenges such as Brexit and climate change.
  • At the time of the Summer Economic Statement, the unallocated fiscal space for 2018 amounted to a little over €500 million in nominal terms and €180 million of this has since been committed to the Public Service Stability Agreement.
  • To augment the resources for distribution in the Budget, additional revenues of the order of €830 million have been raised, giving a total Budget day package of €1.2 billion. Expenditure will receive an additional €898 million: €684 million is being used to fund additional current expenditure and an additional €214 million is going to capital expenditure.
  • Tax reductions on income worth €335 million are being introduced.

General Expenditure Plans

  • Budget increases gross voted current expenditure by over €1.8 billion or 3.4 per cent compared to the expected outturn for 2017 excluding the water charges refund.
  • Budget increases voted capital expenditure by €790 million from €4.54 billion this year to just over €5.3 billion in 2018. This is an increase of over 17 per cent.

Housing

  • Budget is making up to €750 million of the Ireland Strategic Investment Fund available for commercial investment in housing finance. The funds announced will be made available to a new vehicle to be known as Home Building Finance Ireland or HBFI. HBFI CIF Economic & Policy Research 3 will increase the availability of debt funding on market terms to commercially viable residential development projects whose land owners want to build homes.
  • Over and above that already committed to in ‘Rebuilding Ireland’, Budget is providing an extra €500 million for the direct building programme which will see an additional 3,000 new build social houses by 2021, increasing the existing Rebuilding Ireland target of social housing homes to 50,000, of which 33,500 will be delivered through construction.
  • Budget provides additional Exchequer funding of €75m for a second phase of the Local Infrastructure Housing Activation Fund (LIHAF), which will also support the local authority delivery of affordable housing. When combined with the local authority matching contribution, this fund has the potential to provide approximately 5,000 homes at more affordable levels by 2021.
  • The Help to Buy Scheme has been retained.

Stamp Duty on Commercial Property

  • Budget is increasing the level of stamp duty on commercial property transactions from 2 per cent to 6 per cent with effect from midnight tonight. However, in relation to commercial land purchased for the development of housing a stamp duty refund scheme will be introduced because of the housing supply challenge. The refund will be subject to certain conditions, including a requirement that developers will have to commence the relevant development within 30 months of the land purchase.

Vacant Site Levy Increase

  • Any owner of a vacant site on the register who does not develop their land in 2018 will pay the 3 per cent levy in 2019 and then become liable to the increased rate of 7 per cent from 1 January 2019. If they continue to hoard their land in 2019, they will pay 7 per cent in 2020, resulting in an effective vacant site levy of 10 per cent over the two years.

Capital Gains Tax Relief

  • Budget is reducing the 7 year period owners must retain qualifying assets to enjoy full relief from Capital Gains Tax to 4 years. This will reduce any impact it may have on limiting the supply of development land available for sale.

Mortgage Interest Relief (Tapered Removal)

  • The extension of Mortgage Interest Relief for homeowners who bought between 2004-2012 will begin to taper off. This will take the form of the continuation of 75 per cent of the existing relief into 2018, 50 per cent in 2019 and 25 per cent in 2020.

Upgrading Vacant Residential Property for Rental

  • To encourage owners of vacant residential property to bring that property into the rental market for a minimum of four years, Budget introduces a new, time-limited deduction for pre-letting expenses.

Health (cap ex)

  • An additional €471 million has been made available to cover the period 2018-2021 for cap ex in health. This represents, on average, an additional €120 million each year. This funding will allow for investment in critical infrastructure including the delivery of the National Children’s Hospital project and a range of other investments in primary and community care schemes.

Education (cap ex)

  • On foot of the midterm capital review, Budget is investing an additional €310 million out to 2021 to address the infrastructure needs of the higher and further education sectors.
  • The Minister for Education will also announce in the coming weeks details of an additional €200m PPP investment in the sector that will support regional development.

Transport (cap ex)

  • There will be an increase of €9.6m in transport funding that will support increased public transport services and improvements to our road network that will see total current funding in this area rise to €414m. The capital allocation for the Department will total €7.5bn over the four year period to 2021 and will allow continued progress on a number of projects, such as: (1) Phase 2 of the National Indoor Arena; (2) the Sallins Bypass; (3) the Oberstown interchange project and a number of other roadbuilding projects will begin construction, assisting commuters, enhancing balanced regional development.

Heritage (cap ex)

  • Additional funding to the Department of Culture, Heritage and the Gaeltacht of €4 million in capital will allow for key measures to be progressed in 2018.

National Training Fund Levy Incremental Increases to 2020

  • Budget increases the National Training Fund levy in 2018 from 0.7 per cent to 0.8 per cent to provide €47.5m of additional investment in the Higher and Further Education Sectors next year. To provide clarity, I am also announcing that the levy will rise to 0.9 per cent in 2019 and to 1.0 per cent in 2020.

SMEs pre and post Brexit

  • Budget is making a loan scheme of up to €300m available at a competitive rate to SMEs, including food businesses given their unique exposure to the UK market, to help them with their short-term working capital needs, supported by the European Investment Bank Group, the European Commission and the Strategic Banking Corporation of Ireland.

Climate Change

  • Budget allocates €36 million to facilitate the expansion of the energy efficiency programmes across the public commercial and residential sectors. CIF Economic & Policy Research 6

General Taxation

  • The point at which an income earner attracts the higher rate of income tax will rise next year by €750 per annum. The entry point for single earners increases from €33,800 to €34,550. Budget also introduces targeted changes to USC that reduce the rates but that do not narrow the USC tax base. The entry point to USC will remain at €13,000. The 2½ per cent USC rate will reduce to 2 per cent and the ceiling for this new rate will increase from €18,772 to €19,372 to ensure that full-time workers on the increased national minimum wage of €9.55 per hour do not pay the upper rates of USC. The 5 per cent rate of USC is also reducing to 4.75 per cent, thereby reducing the top marginal rate of tax on income up to €70,044 to 48.75 per cent.

Corporation Tax

  • The 12.5 per cent tax rate will remain. In order to ensure some smoothing of corporation tax revenues over time, the limitation on the quantum of relevant income against which capital allowances for intangible assets and any related interest expense may be deducted in a tax year will be reduced to 80 per cent. This change in respect of expenditure incurred by a company on intangible assets occurs from midnight tonight.

The Self Employed

  • Budget provides for a €200 increase in the Earned Income Credit, bringing it to €1,150 per year from 2018. This increase will be of benefit to over 147,000 self-employed individuals.

Next Steps

  • Increasing infrastructure investment was a central element of Budget 2018 with the Minister for Finance and Public Expenditure & Reform stating that increased investment will “deliver better public services, promote regional economic growth, and help address challenges such as Brexit and climate change”. The Department of Public Expenditure & Reform will shortly hold a consultative forum to contribute to the framing of the new 10 year National Investment Plan (NIP) due to be unveiled later this year. Consultation will include deliberation on how the NIP will support the new National Planning Framework. CIF will continue to play an active role throughout this critical consultative period.

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