Government uses Budget tax changes to try to fix housing
This Budget has a lot of significant measures aimed at addressing the housing crisis.
The largest step will be reducing the VAT on sale of apartments from 13.5% to 9%.
The idea is that it would kick start stalled projects which have received planning but have not proceeded because they are not currently financially viable.
Cutting the tax on the sale of new apartments will cost the State €250m next year and €390m in 2027.
The measure takes effect today.
It has been welcomed by the Construction Industry Federation and Tuath, the country’s largest approved housing body.
But Sinn Féin’s housing spokesman Eoin Ó Broin points out, although the Government has framed it as an initiative as a to encourage new building, it will benefit developments that are already under way and those which are near completion too.
Another significant measure is a corporation tax deduction on the costs incurred in building apartments for developers.
It will cost the State €20m next year and €125m in 2027. It will provide a net tax benefit of €6,250 per apartment to developers.
There are also a range of other tax measures to encourage the building of new homes and stimulate regeneration of vacant units.
There is also significant investment in infrastructure targeted at increasing the amount of serviced land for housing with €1.4bn being invested in Uisce Éireann for the water network and €3.5bn allocated to the ESB and Eirgrid.
It could take some years before it becomes clear whether these measures will work.
The indication from recent planning permission figures is that the pipeline of residential construction will deteriorate in future years despite massive demand.
The latest figures from the Central Statistics Office showed an annual decrease of 35% in the number of new homes granted planning permission in Dublin.
There is no doubt that the big winner from Budget is the hospitality industry which secured a reduction in the VAT rate for cafés and restaurants from 13.5% to 9%.
While the cost of this step will be €232m next year, as it is being introduced in July, it will balloon to €681m in 2027.
Over recent years there have been calls for the Government to widen the tax base.
Regardless of the merits of helping struggling cafés, this tax reduction for hospitality narrows the tax base.
It is worth remembering that it is not just the small Irish-owned firms which will be helped.
McDonalds, Starbucks and Burger King will benefit too.
While there has been a significant tax break for hospitality, the obvious omission of indexation of tax bands leaves middle income earners with little benefit from the Budget.
It means as people earn more and go into the higher tax bracket they will have bigger tax bills too.
Minister for Finance Paschal Donohoe was adamant he could not introduce a personal tax package and extend VAT cuts for hospitality and apartments all in the same Budget.
He has held the line, and it is likely he managed to do so because the Coalition is four years away from the next general election.
Despite his prudence, the concerns about the public finances have not diminished.
One issue is that the State looks as if it will be relying more on volatile taxes paid by multinationals than it did in the past.
The Department of Finance said that this year the State will run a surplus of €10bn but when those additional taxes are excluded there is an underlying deficit of €7bn.
That underlying deficit will worsen next year and almost reach €14bn.
It means the Government is relying heavily on volatile taxes paid by US multinationals at a time when the Trump administration is imposing tariffs and particularly targeting Ireland’s huge pharmaceutical sector.
Another reason for concern about the public finances is that spending is continuing to increase rapidly.
The Irish Fiscal Advisory Council says expenditure is rising at 11.9% this year.
That is an enormous acceleration at a time when the domestic economy is expected to grow by 3%.
What that means is that is in the new environment of a more volatile trading relationship with the US, since the implementation of tariffs by the Trump administration, relying on that money to prop up spending is an increasingly dangerous strategy.
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