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Budget 2022 – Commentary

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An Assessment by Jim Power, Economist

Budget 2022 was framed against a much better background than a year earlier. The economy is recovering from the worst effects of Covid-related restrictions. It was essential that the budget helped the economy deal with the issues in a post-Covid economy, while bearing in mind the risks, challenges and opportunities facing Irish business and the general economy in 2022. There are brighter days ahead for the Irish economy and Irish society, and hopefully Budget 2022 will help those brighter days materialise.

As expected, the budget focused on a gradual unwinding of Covid supports; measures to alleviate cost of living pressures; housing; climate change; labour force participation; and a significant social welfare package.
As outlined in the Summer Economic Statement in July the budget-day package was €4.7 billion. This was broken down into €4.2 billion in expenditure measures and a net tax reduction package of €500 million (revenue raising measures totalling €230 million were announced). The €4.2 billion expenditure package contained €1.45 billion in new measures.

The International Context

International forecasting agencies such as the IMF and the OECD have published very upbeat forecasts for the global economy in recent months. These forecasts are largely predicated on a rapid rebound in economic activity as Covid-related restrictions are being relaxed and pent-up demand is being unleashed. However, this rapid resurgence of demand, coupled with a number of Covid legacy issues and supply-side difficulties, are causing significant problems.
These include:

  • Inflationary pressures are building on many different fronts, and central banks appear somewhat bemused and unsure about how to respond on the monetary policy front. Initially, they argued that the surge in inflation was transitory, and while they still seem to believe that, the transitory period appears to be lengthening.
  • Government borrowing costs are edging up, and growth is showing some tentative signs of softening. There is a risk that short-term interest rates in the US in 2022 and the Euro Area in 2023 may have to be tightened in spite of slower growth. While this is not yet a real prospect, it is a risk factor that will need to be watched closely.
  • Energy costs are rising strongly, with natural gas, coal, oil and many other commodity prices rising very sharply. These increases will fuel higher prices and weaker growth if they are sustained.
  • Brexit is causing serious supply-chain problems in the UK.
  • Shipping costs are rising strongly due to a scarcity of shipping containers and ships. This is feeding through to higher prices and supply-chain problems. If shipping costs rise, inevitably this will result in higher wholesale and consumer prices.
  • Construction costs are rising strongly.
  • There are labour shortages in some sectors, which is driving up labour and other costs.
  • Semi-conductor chips are experiencing significant shortages, which amongst other things, is causing serious problems for automobile manufacturing.

In summary, while the global economy has rebounded strongly from the pandemic, supply-chain difficulties and inflationary pressures are becoming a cause of significant concern. Many of these pressures are apparent in Ireland also. There are some grey clouds gathering that will need to be monitored carefully.

Irish Economic Context

Economic Growth

Despite significant restrictions in place in the first half of the year, economic activity was quite strong, although it varied significantly from sector to sector. While year-on-year comparisons are distorted by the fact that quarter 2 2020 was the worst quarter of Covid impact, the bottom line is that the overall economy is coming back strongly.

In the first half of the year, GDP was 16.3 per cent higher than the first half of 2020, and GNP was 9 per cent higher. Modified Domestic Demand (a measure of indigenous activity) increased by 4.3 per cent.

To consider current levels of activity with pre-Covid levels, GDP in the first half of 2021 was 20.8 per cent higher than the first half of 2019, and GNP was 12.6 per cent higher. This suggests a very strong growth performance despite Covid, but the reality is that this growth was driven by the exceptionally strong performance of the multi-national sector. The indigenous component of the economy fared a lot worse. Modified Domestic Demand in the first half of 2021 was still 3.5 per cent lower than the first half of 2019. However, it should have fully caught up by the end of 2022.

In overall terms, the dual nature of the Irish economy is becoming more evident every quarter, but at least the domestic economy is now back in growth mode, but there is still some catching up to do.

The Labour Market

The labour market was badly affected by Covid-19, but it is recovering as the economy steadily returns to normality. In September 2021, 173,800 people were classified as unemployed, which is 1,000 lower than a year earlier. The unadjusted (for Covid) unemployment rate stood at 6.4 per cent of the labour force. If all claimants of the Pandemic Unemployment Payment were regarded as unemployed, the real unemployment rate stood at 10 per cent of the labour force in September. This is down from 15.9 per cent in September 2020.

Consumer Dynamics

As the economy has re-opened, consumer spending has rebounded very strongly. In the first 8 months of the year, the value of retail sales was 15 per cent higher than a year earlier. When car sales are excluded, the value of sales increased by 4.2 per cent. New car registrations in the first 9 months of the year were 19.1 per cent higher than the equivalent period in 2020.

Household savings reached a record level of €134 billion in July. Savings slipped back slightly in August, but the excess savings of around €16 billion that accrued during the pandemic will provide the basis for a strong recovery in consumer spending over the coming months.

Consumer confidence has rebounded strongly as the economy has re-opened.

Figure 1: Consumer Confidence

Source: KBC Bank

Merchandise Trade

In the first 7 months of 2021, Ireland’s merchandise exports were 1.9 per cent lower than the equivalent period in 2020. The decline is largely due to a decline of 5 per cent in exports of Chemicals and Related Products, which accounted for 63.7 per cent of total merchandise exports in the first 7 months of the year.

On a geographic basis, it is clear that Brexit is having a significant impact on Irish trade in goods in both directions. In the first 7 months of the year, Ireland’s exports to Great Britain were up by 25.7 per cent. However, this overall growth rate masks the fact that exports of Chemicals and Related Products increased by 63 per cent.

As expected, the Irish agri-food sector is most adversely affected by Brexit. Exports of Food and Live Animals declined by 5 per cent in the first 7 months. On the import side, imports from Great Britain were down by 31.7 per cent or €2.9 billion, with imports of Food and Live Animals down by 48.8 per cent or €817 million. Herein lies the opportunity for import substitution.

On the other hand, trade with Northern Ireland is up significantly. In the first 7 months, exports to Northern Ireland increased by 45.5 per cent or €592 million, while imports from the North were up by 60.5 per cent or €800 million.

For the UK itself, the impact of Brexit is very real. Trade with the EU has been significantly damaged and supply chain difficulties and labour shortages have been highlighted in dramatic fashion in recent months. In the first 7 months of the year, EU exports to the UK were up by 6.2 per cent, while EU imports from the UK were down by 17.1 per cent.

Table 1: Merchandise Exports

Region
€mln
% Change (YoY)
% Total Exports
EU-27
35,483
-5.9%
37.8%
Great Britain
8,215
+25.7%
8.7%
Northern Ireland
1,894
+45.5%
2.0%
USA
29,009
-2.1%
30.9%
Other
19,292
-6.0%
20.6%
Total
93,893
-1.9%
100%

Source: CSO

There are brighter days ahead for the Irish economy and Irish society, and hopefully Budget 2022 will help those brighter days materialise.

Jim Power, Economist

The Key Elements of Budget 2021

As expected, the total budget package is worth €4.7 billion. This includes a tax package of €500 million and an expenditure package of €4.2 billion.

In 2022, €87.6 billion will be allocated for public expenditure. €80.1 billion of this will be made available for core expenditure, an increase of over €4.2 billion or 5.5 per cent on 2021, with capital spending increasing by more than twice the rate of current spending. There will be €69.2 billion for core current expenditure – an increase of 4.6 per cent on 2021. €11.1 billion will be made available in 2022 under the National Development Plan, a 14 per cent increase on the capital allocation in 2021.

  • The standard rate income tax band was widened by €1,500 and the personal tax credit, the employee tax credit and the income credit were widened by €50. These measures aimed to keep pace with the cost-of-living increases.
  • Over €60 million is being made available to extend the commercial rates wiaver for business, which ran out at the end of September. It will be targeted at hospitality, arts and certain tourism related sectors.
  • The Employer Wage Subsidy Scheme (EWSS) will remain in place in a graduated form until the 30th of April 2022 – that is six months after the lifting of most public health restrictions and two months after the PUP ceases. There will be no change to EWSS for the months of October and November; businesses availing of the EWSS on the 31st of December 2021 will continue to be supported until the 30th of April 2022; across December, January and February, a two-rate structure of €151.50 and €203 will apply; for March and April 2022, the final two months of the scheme, a flat rate subsidy of €100 will be put in place. The reduced rate of Employers’ PRSI will no longer apply for these two months; and the scheme will close to new employers from the 1st of January 2022.
  • The 9 per cent VAT rate for the hospitality sector will remain in place until the end of August 2022.
  • An income tax deduction amounting to 30 per cent of the cost of vouched expenses for heat, electricity and broadband in respect of those incurred while working from home, which will be formalised in legislation through the Finance Bill.
  • A €90 million package for the aviation sector to help rebuild connectivity.
  • An extra €89 million is being given to the tourism recovery package. This will include €50 million for further business continuity supports and €39 million for Enhanced Tourism Marketing and Product Development.
  • There is a social welfare package of €558 million. This includes a €5 increase per week in the state pension and other welfare payments, including the fuel allowance.
  • The national minimum wage has been increased by 1.9 per cent from €10.20 per hour to €10.50. The ceiling for the second USC rate band increased from €20,687 to €21,295 to prevent minimum wage earners from moving into the higher USC tax rate. The exemption from the top rate of USC for all medical card holders and those over-70 earning less than €60,000 will continue to apply.
  • The Childcare scheme is being expanded and will have a record €716 million allocated in 2022.
  • The annual yield from the bank levy has been approximately €150 million to-date. It is being extended for a further year. However, as Ulster Bank and KBC are leaving the market in 2022, they will be excluded from the charge. The remaining banks will pay the same amount in 2022 as they did in 2021; this equates to approximately €87 million in total.
  • There will be €34 million made available for apprenticeships.

In relation to climate change:

  • The carbon tax is being increased by a further €7.50 per tonne to €41 a tonne. This is set to reach €100 by 2030.
  • There is a modest tax disregard in respect of personal income received by households who sell surplus electricity that they generate using micro-generators back to the grid.
  • From January 2022 a revised VRT table is being introduced. The 20-band table will remain in place with an uplift in rates, as follows: 1 per cent increase for vehicles that fall between bands 9-12; a 2 per cent increase for bands 13-15; and a 4 per cent increase for bands 16-20.
  • The €5,000 relief for Battery Electric Vehicles is being extended to end 2023.
  • There is €202 million in funding for retrofitting grants and schemes to improve the energy efficiency of homes.

On the housing side, the Government’s Housing for All strategy targets the delivery of 33,000 new houses per annum on average out to 2030. In relation to housing, some initiatives were announced in Budget 22:

  • A Zoned Land Tax will be introduced to encourage the use of land for building houses. The tax will apply to land that has been zoned suitable for residential development and is serviced, but which has not been developed for housing. The rate at the outset will be 3 per cent. There will be some exclusions and a 2-year lead-in time for land zoned before January 2022, and a 3-year lead-in time for land zoned after January 2022.
  • The Help to Buy scheme is being continued at current rates for 2022. A full review of the scheme will take place during 2022.
  • The relief for pre-letting expenses for landlords will be extended for a further 3 years.
  • More than €200 million is allocated to retrofitting in excess of 20,000 homes, with half to be spent on 4,500 free home upgrades for low-income or energy-poverty households.
  • Over the next 5 years €20 billion will be made available for housing, with €6 billion being allocated to the Department of Housing, Local Government & Heritage. It is planned to deliver 4,000 affordable homes and 9,000 new build social housing units in 2022.

Jim Power,
Economist

The views expressed in this article reflect those of Jim Power and are for informational purposes only. They do not represent the views of Aviva. Jim Power’s views may change.

Budget 2022

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