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Institute finds expected wage rises not factored in

about 24 hours ago

Cliff Taylor

Prof Tim Callan of the the ESRI found bigger adjustments to the tax system would have been needed to ensure expected wage inflation did not eat into the value of wage increases. Photograph: Cyril Byrne




The budget did not do enough to adjust the tax and welfare systems for the expected rise in wages next year, an analysis from the Economic and Social Research Institute states.

Its analysis of the impact of the budget on different income groups, published on Thursday in The Irish Times, shows that the tax system was not adjusted enough to account for expected wage growth of 3 per cent. Despite the adjustments to the standard rate band and USC, tax will take a bit more of expected wage gains, limiting the net rise in incomes for employees.

Looking at the increases in welfare rates, the analysis finds that the average €5 rises granted in the budget will mean welfare recipients fall short of the 3 per cent benchmark, doing slightly worse than higher income sections of the population in a budget where the net changes for all groups were small.

The budget offered cash gains to taxpayers and welfare recipients via a series of measures. The ESRI’s analysis takes these changes into account and then factors in the impact of expected wage inflation.

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Impact on households

It thus tries to measure the impact on households of budget policy, assuming that employees on average get the 3 per cent rise in 2018. This 3 per cent figure is taken as the benchmark from which gains and losses are calculated for all income groups, using an ESRI model based on CSO data for 8,000 households.

Taxpayers will gain from the cuts in USC and the extension of the standard rate tax band. However, a bigger adjustments to the tax system would have been needed to ensure that expected wage inflation did not eat into the value of wage increases, according to the ESRI research, undertaken by Prof Tim Callan. For this reason the gains for employees in all income groups fall slightly short of the 3 per cent benchmark.

In the area of welfare, the €5 per week increases will also leave most recipients short of the 3 per cent gain, according to the data, which suggests that a rise of about €6 a week for most welfare recipients – and €7 for pensioners – would have been needed to achieve this goal.

Prof Callan estimates that it would have cost about €1.1 billion to fully index the income tax and welfare systems in a way which would have left most people gaining around the 3 per cent benchmark. However, the amount allocated in the budget was about €400 million short of this.

According to Prof Callan, writing in today’s Irish Times: “We do not argue that indexation is necessarily the best policy. It does, however, provide a more informative benchmark against which to measure the distributional impact of actual policy than the unindexed policy.”

Employees with share options will pay capital gains rate of 33% and can delay payment

Wed, Oct 11, 2017, 21:00

Mark Paul

The Key Employee Engagement Programme (Keep) would “support SMEs in their efforts to attract and retain key employees”, said Minister for Finance Paschal Donohoe




Key staff with share options in tech start-ups and other small businesses will pay less tax on these, and delay paying the bill, under a new scheme that is the centrepiece of the Government’s budget pitch to the enterprise sector.

Minister for Finance Paschal Donohoe announced the Key Employee Engagement Programme (Keep) in his speech.

He said Keep would “support SMEs in their efforts to attract and retain key employees in a competitive international labour market, by providing for an advantageous tax treatment on share options”.

Currently, key staff who are granted share options are hit with the tax bill as soon as the option is exercised (once they buy the shares). The gain also attracts marginal income tax rates, which can be more than 50 per cent.

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Under Keep, the tax will fall to the capital gains tax rate of 33 per cent. It will also only become payable when the shares are sold and the gain realised. This means staff can pay the tax bill out of the proceeds of the share sale, instead of being hit with the bill upfront as soon as the shares are put into their name.

Budget briefing

Speaking at a budget briefing in Government Buildings, the Tánaiste and Minister for Enterprise Frances Fitzgerald said “the business sector has been looking for this scheme”.

She said the Government hopes to secure “early” approval for Keep from European Commission competition and state aid officials.

Accounting and consultancy firm Deloitte said the Keep scheme would help eliminate problems faced by some start-ups, such as how to value illiquid shares for tax purposes.

But it expressed disappointment that the scheme was not extended to larger companies with share option schemes, such as multinationals.

In a further concession to the small enterprise sector, the Government said it was also increasing the earned-income tax credit for self-employed by €200 to €1,150.

The department said this was “a further step towards achieving parity with the PAYE credit”. The self-employed have long complained they are penalised in the system for tax credits, compared to PAYE employees.

‘Complacency’ has spawned excesses that could spark a new financial crisis

Wed, Oct 11, 2017, 19:44

IMF managing director Christine Lagarde speaks at a meeting in Washington on Wednesday, as the organisation expressed concern about a growing debt pile in G20 countries. Photograph: Andrew Harrer/Bloomberg




The International Monetary Fund has warned that good times in the global economy mask longer-term risks, including a $135 trillion debt pile in G20 nations that companies and consumers are already finding difficult to service.

A day after upgrading its global growth forecasts for this year and next the IMF warned on Wednesday that benign economic conditions were fuelling an appetite for risk that, together with central banks’ response to the 2008 global crisis, appeared to be laying the ground for a new financial crunch. 

“While the waters seem calm, vulnerabilities are building under the surface [and] if left unattended, these could derail the global recovery,” said Tobias Adrian of the IMF’s financial stability watchdog. 

The good times were breeding “complacency”, he said, that was “spawning financial excesses”. 

If these continued to build, the IMF said in its latest Global Financial Stability Report, they could lead to a crisis that, were equity prices to tumble 15 per cent and home prices to fall 9 per cent, would cut 1.7 per cent off global output. 

Such a crisis would be “broad-based and significant”, though it would be only a third as severe as the 2008 global crisis, the IMF said. The US, where the Fed has ended quantitative easing and is further along the path to normalising monetary policy, would probably be hit less hard than Europe and emerging markets, which would see $100bn in capital outflows.

The IMF found cause to worry in the growing non-financial sector debt in G20 economies, which last year reached $135 trillion, or about 235 per cent of aggregate annual economic output.

The US and China each accounted for about a third of the $80 trillion increase in debt since 2006, the IMF said.

The low interest rates that helped fuel the increase in leverage since the financial crisis had broadly made that debt relatively affordable to repay. 

Financial stress

But in most G20 countries, companies and households had loaded up on so much debt that the debt service ratios – a measure of affordability – had increased, pointing to greater financial stress. Among the G20 countries where that issue is most acute are Australia, Canada and China, the IMF said. 

Also of concern were elevated asset prices in financial markets and what the IMF called a “widening divergence between financial and economic cycles” that would further complicate central banks’ efforts to normalise monetary policy. 

While the world’s largest, systemically important banks and biggest insurers were generally in better shape, there were also signs that many had yet to find sustainable business models for the long term, the IMF said. 

The world’s 30 biggest, systemically important banks, hold more than $47 trillion in assets, or more than a third of the total assets and loans held by banks worldwide. They have also added $1 trillion in new capital since 2009 while reducing assets, meaning they are far healthier than they were. 

But about half of the world’s major banks generate return on equity below 8 per cent, the line which the IMF argues banks need to hit to have a sustainable business. Moreover, major banks holding about $17 trillion in assets were expected to generate unsustainable returns in 2019, the IMF said. 

Low interest rates, the IMF pointed out, had also forced insurance companies to bet on riskier and more illiquid assets to find returns, creating another area of potential vulnerability.

At least a third of US and European insurers’ bond portfolios had a BBB rating or lower. In the UK about 25 per cent of annuities were backed by illiquid investments such as property, with insurers planning to raise that to 40 per cent by 2020. 

Copyright The Financial Times Limited 2017

House prices up 10.6% quarter, behind Czech Republic, where prices rose 13.3% in Q2

Wed, Oct 11, 2017, 16:56

Charlie Taylor

Overall, house prices in the EU rose 4.4 per cent compared to the second quarter




Ireland recorded the second highest increase in house prices in the European Union during the April to June quarter, according to new figures published by the EU’s official statistics body, Eurostat.

House prices in Ireland rose 10.6 per cent versus the second quarter a year of 2016, behind the Czech Republic, which recorded a 13.3 per cent increase, but ahead of Lithuania, where property prices jumped 10.3 per cent.

Overall, house prices in the EU rose 4.4 per cent compared to the second quarter a year earlier with an increase of 3.8 per cent for the 19 member states sharing the euro.

Compared with the first quarter of 2017, house prices rose by 1.5 per cent in the euro zone and by 1.8 per cent in the EU as a whole in the April to June period.

The highest prices increases on a quarter-on-quarter basis were recorded in Latvia and Slovakia, where prices increased by 6.1 per cent and 5.6 per cent respectively.

Elsewhere, Department of Health gets big increase for public inquiries and legal fees

Wed, Oct 11, 2017, 16:47

Colin Gleeson

Minister for Pucblic Expenditure Paschal Donohoe in his office at the Department of Finance, Dublin. Photograph: Brenda Fitzsimons / THE IRISH TIMES




When Paschal Donohoe was appointed Minister for Public Expenditure last year, he likely never expected to find himself mulling over the number of 99-year-old citizens in the State when sitting down to do his budgetary sums.

People born on the island of Ireland receive a special message from Áras an Uachtaráin when they reach their 100th birthday, as well as a reward of €2,540 for their “longevity”, which, of course, comes out of the public finances and has to be budgeted for.

Ireland is getting older, with the last Census revealing the number of people aged 65 and over rose by 102,174 in the five years to 2016 – more than twice the amount that entered the 15-64 bracket.

The “centenarian bounty”, which was awarded to 407 individuals in 2014, received €1.33 million in funding from Donohoe for 2017, which represents enough for about 526 individuals.

It would appear there are expectations for a few more centenarians next year, as Donohoe increased funding to the scheme by 5 per cent, bringing the total amount to over €1.4 million. That’s enough for about 553 people.

Elsewhere, the Garda has secured an increase of 21 per cent in its budget for “office equipment and external IT services”, rising from €36.8 million in 2017 to €44.7 million next year. That’s a lot of paper clips and notebooks.

However, members of the force might have to deal with a few leaky pipes and draughty windows, as its budget for the “maintenance of Garda premises” is to come down by 11 per cent from €721,000 to €642,000.

Meanwhile, you can expect more accurate weather forecasts next year, as the Department of Housing has secured an extra 26 per cent in funding for Met Éireann. That’s €24.5 million for 2018, up from the €19.4 million it has this year.

Then there’s the Department of Health, which must be expecting another stellar year as it increased its budget for “statutory and non-statutory inquiries” as well as “legal fees and settlements” by 150 per cent, up from €4 million to €10 million.

Over at the Department of Foreign Affairs, a programme to “promote our economic interests internationally” has seen its funding increased by 16 per cent to €36.2 million from €31.2 million.

Perhaps that’s not surprising with Brexit coming down the tracks, and a separate programme to “protect and advance our values and interests in Europe” has seen its funding go up 15 per cent from €23.3 million to €26.8 million.

It’s pretty obvious where the department’s priorities lie however, with the funding for its programme to “work for a more just, secure, and sustainable world” increased by just one per cent.

Separately, the Department of justice’s programme to promote “an equal and inclusive society” was increased 18 per cent from €22.2 million to €26.3 million, while its programme for a “fair immigration asylum system” had its funding increased by 3 per cent from €145 million to €150 million.

Electric vehicles, welfare rates and personal tax changes also feature

Wed, Oct 11, 2017, 12:33

Dominic Coyle

Commercial stamp duty: the decision to triple it left readers scratching their heads. Photograph: iStock/Getty




Confusion about the new 6 per cent rate of stamp duty on commercial property transactions was the single biggest issue for readers in Wednesday’s Live Budget 2018 Q&A.

The Minister for Finance’s new electric-vehicle regime, new welfare rates and promised new share-option scheme also featured prominently among questions answered by a team from The Irish Times and PwC.

The decision to triple commercial stamp duty – Paschal Donohoe’s major fundraising initiative, due to raise a projected €376 million – left readers scratching their heads. Although the Dáil voted on Tuesday night to approve the measure, the Minister has yet to disclose how the scheme will work.

Readers wanted to know precisely which transactions would be covered by the new higher rate, when it would kick in and, most particularly, what would happen to deals that were already in the pipeline or recently signed but not yet closed.

Mr Donohoe confirmed overnight that there would be transition arrangements to cover ongoing transactions, but he released no other details. The Department of Finance says these are likely to appear in the Finance Bill, which will be published on Thursday next, October 19th.

The Bill should also clarify which transactions fall under the new rate. The Minister said that duty will be refunded where land is sold for residential property development, so long as purchasers meet certain conditions, notably that development must begin within 30 months. Whether that means actual construction or simply the submission of plans remains unclear.

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The Q&A highlighted interest in the proposed new key-employee engagement programme, or Keep, which is designed to help small and medium-sized business attract or hold on to key employees by offering them a stake in the business. Current tax rules make that unattractive, but, again, business owners will have to wait until the Finance Bill to see the precise shape and scope of the scheme.

The Minister announced a 0 per cent benefit-in-kind rate for drivers of electric vehicles, but this is only a one-year measure. It is hard to see motorists justifying the extra price of an electric car without more clarity for the longer term, but the best the Minister could offer was a full review of BIK incentives on vehicles. Many readers were hoping the new 0 per cent rate would also apply to hybrid vehicles. Unfortunately, it does not.

Others to be disappointed were landlords and those hoping to benefit from more generous inheritance-tax thresholds.

Despite widespread expectation that the budget would help landlords as the rental crisis escalates, particularly in Dublin, the Minister was silent. So no accelerated mortgage-interest relief for landlords and no offset of local property tax. Unless Mr Donohoe decides to slip some relief into the Finance Bill, landlords will have to wait until next year.

The same goes for inheritance. The Government raised the category-A threshold, which applies to gifts and inheritances passing from parents to children, last year to €310,000 and committed to bringing it up to €500,000 over the coming years. Readers had been hoping for some move this year, but that was not forthcoming.

As usual there was strong reader interest in welfare rates, especially in relation to qualified dependents and children. The Minister applied a €5 increase across the full range of reliefs, and raised the payments for dependents.

The Government’s very modest childcare package, prescription charges, and the lack of any measures targeting students or expatriates exercised some readers; a significant number just wanted to get a fix on how the new rates for universal social charge and the higher threshold for the higher-rate tax band would target them.

Next week’s Finance Bill may fill in some of the blanks from the Minister’s speech or allow him to respond to disquiet in certain areas with additional measures. We’ll have to wait and see.

If you’re still unsure how Budget 2018 will affect you, you can email our weekly Q&A column, via

Central Bank forecasts nominal 3.2 per cent increase in pay per employee next year

Wed, Oct 11, 2017, 12:11

Peter Hamilton

The Central Bank has found that “high skill sectors such as finance, professional activities and IT” have seen relatively strong wage growth on the back of labour tightness. Photograph: Alan Betson




Slow wage growth in Ireland may be the result of a perception of increased job insecurity on the part of workers, Central Bank economic research has found.

Wage restraint in the post-recession years has been constant, with wages, in some cases, falling. Household income, however, has increased, a phenomenon the Central Bank suggests is down to more people working in the household and those people working more hours.

One of the standout factors behind wage restraint appears to be worker concern that their job isn’t secure. That concern looks to have been well founded with the bank pointing to evidence that the “costs of losing a job increased significantly during the recession and remained high during the early years of the recovery”.

Additionally, worker demands for wage increases may have been moderated in the post-recession period due to the “prevailing low inflation environment”.

The principal finding of the research is that while the labour market has recovered strongly from the recession, “overall compensation and hourly earnings growth remain subdued when compared to the pre-crisis period”.


However, the bank indicates that the market is at a turning point and forecasts a nominal increase in compensation per employee of 3.2 per cent in 2018. That includes a 0.4 per cent increase in the average hours worked and hourly wage growth of just below 2.8 per cent.

Labour tightness, or the difficulty in finding new hires, has helped some sectors and as the economy returns to full employment, the research suggests that could drive growth higher.

“For example, the period from 2000 to 2007, when unemployment was under 5 per cent, saw real wage growth averaging 2.2 per cent per year,” it said.

Wage growth

The bank also notes that “high skill sectors such as finance, professional activities and IT” have seen relatively strong wage growth on the back of such tightness. Its explanation for wage growth in times of tightness is that employers tend to compete to hire the available workforce which creates the conditions for wage increases.

While the report is mildly positive, the bank attaches a caveat in its conclusion, saying: “It is nevertheless important to note that historical trends, from a wage perspective, may not necessarily prove to be a reliable guide to future developments for a variety of reasons.”