The Budget has won the approval of the Dublin financial markets, with the value of Irish shares racing ahead by more than £1 billion and bank shares surging in value.
Cuts in corporation tax and the unexpected halving of capital gains tax pushed financial stocks strongly ahead, Bank of Ireland and AIB went to new all-time highs as the market applauded the "share-friendly" measures.
The ISEQ index gained 120 points rising to a record 3952, with the financial index jumping by 6.75 per cent reflecting share gains in the bank shares. Shares were supported by strong gains on other European markets.
The major banks will gain substantially from the reduction in corporation tax. As a result, Bank of Ireland climbed to a record high of 1,000p in early trading before settling back to close at 993p, up 63p on the day. AIB also entered record territory, rising to 670p, up 48p, with the tax cuts expected to strongly enhance the banks' future profits.
The market had been expecting reductions in corporation tax in the Budget. The Minister for Finance's decision to cut the standard rate from 36 per cent to 32 per cent was slightly more generous than had been expected and will greatly benefit those companies which do not already benefit from paying at the 10 per cent manufacturing rate. The corporation tax cut is forecast to translate into about a 1 per cent increase in total market earnings in a full year. Brokers are currently revising their 12-month ISEQ index forecast.
Around 20 per cent of the companies listed on the Dublin market are estimated to pay tax at the standard rate, mainly banks and financial institutions. They will also benefit from further reductions in the years ahead, with Mr McCreevy announcing that he was targeting a 12.5 per cent corporation tax rate for all industry by 2005.
Davy Stockbrokers is forecasting that, in a full year, the cut in corporation tax will boost the earnings at Bank of Ireland, and Anglo Irish Bank by more than 2 per cent while AIB earning's are likely to rise by 1.5 per cent. Even larger benefits will be accrued by Irish Permanent and Hibernian, where earnings could rise by 4 per cent and 3 per cent respectively.
The abolition of tax credits from April 1999, will reduce investors' yield on shareholdings. Some analysts expect this measure will be by as much as a half of one percentage point and will be evenly spread across all sectors. Overall, though, they suggest that the positive impact on sentiment from the reduction in tax rates will outweigh any negative impact from the cut in credits.
And the surprise cut in Capital Gains Tax was also well received by the market, with the new lower 20 per cent rate expected to release hundreds of millions of pounds for reinvestment in Irish companies.
The Irish Stock Exchange has estimated that the 40 per cent rate precluded thousands of investors from reinvesting funds in the Dublin market.
In most cases, these investors would have built up substantial stakes in leading companies such as Bank of Ireland and CRH, but would be reluctant to realise their gains because of the huge tax liabilities they would incur.
Apart from the tax measures, the Budget was seen to be broadly positive by equity analysts, providing a considerable fiscal, monetary and exchange rate stimulus to the economy.
See also pages 2 and 3
