Next month’s Finance Bill should contain a range of tax-based changes and tax incentives

BRIAN LENIHAN’S first budget showed little of the courage he demonstrated in guaranteeing the debts of the Irish banks some 14 days earlier.

The earlier move was truly ground-breaking. By contrast, Tuesday’s Budget was dull and unimaginative, with its main feature, the new income levy, having been well flagged and reflective of a reasonably measured action in the current circumstances.

However, Lenihan will have more days in the sun before the monetary foundation for Ireland’s 2009 economic performance is settled. This year’s Budget is only one piece of a complex fiscal jigsaw, with the bank guarantee, possible further Government intervention in the banking sector and November’s Finance Bill making up the full picture.

The last affords the Minister an opportunity to be more adventurous and to target a range of tax-based changes and tax incentives to serve as a stimulus for a return to economic growth.

The decision to increase the income tax credit available to first-time residential buyers, at the expense of other homeowners, seems reasonable. It strikes a balance between allowing the residential market to find its own level yet acknowledging the affordability difficulties faced by first-time buyers.

On its own, however, it will have little effect as revitalising the housing sector is dependent on restoring stability in the banking sector. This requires sufficiency of capital in the sector to ensure an adequate supply of mortgages to first-time buyers.

The reduction in stamp duty on commercial property from 9 per cent to 6 per cent is also welcome, albeit long overdue. On its own it will not serve to pump a meaningful stimulus into the economy.

The commitment to capital spending of more than 5 per cent of GNP in each of the next three years is much more significant.

The 2007 report of the National Competitiveness Council noted that we continue to lag behind our European counterparts in the quality of our infrastructure.

Continued investment in essential road, rail and other infrastructure is vital for economic growth and to maintain our attractiveness as a location for foreign investment.

The Minister did not indicate how he proposes to finance future infrastructural commitments. He could do worse than look towards the private sector.

Increasing use of long-term private finance through properly-structured PPP projects meeting appropriate value for money criteria would serve as an effective means of avoiding the Government’s investment in infrastructure projects being treated as borrowing under the Maastricht guidelines, and effectively takes the borrowing off balance sheet.

Increasing use of the PPP model could serve to release extra Exchequer funds for other economic programmes and support the stabilisation of public finances.

Tax incentive packages remain an effective means through which governments target particular socio-economic ends. The redevelopment of the IFSC is an example of how well structured tax incentives have delivered well for Ireland in the past.

The Minister has an opportunity to introduce focused tax changes and targeted tax incentives into his fiscal jigsaw in November’s Finance Bill.

He could start by recognising that the existing system of tax incentives for projects such as private hospitals, nursing homes, and childcare facilities, no longer serves as a practical incentive to encourage private investment.

This is because successive restrictions on the incentives have limited their use to only taxpayers with very substantial rental income, with the result that the incentives are too narrowly focused on a small taxpayer base.

The incentives should be made available to all taxpayers. This would serve as an effective and equitable stimulus to re-ignite private hospital and nursing home development and support the demand for service level improvements, while also promoting employment in the construction sector.

Secondly, capital allowance- based tax incentives should be refocused as a form of tax credit rather than capital allowance and spread evenly over a period of seven to 10 years rather than involving an accelerated first-year allowance.

Thus the incentive could be availed of by small and large, individual and corporate taxpayers equally and would help encourage private investment yet ensuring that the near-term cost to the exchequer is likely to be less than the related exchequer revenues generated during construction.

A similar incentive could be extended to other vital investment areas with the potential to pay long-term dividends. These include investment in renewable energy and in updated broadband.

Having been only five months in the role of finance minister, Lenihan finds himself in a place familiar to his predecessors of having a lot done but having a lot more to do. He can be commended for his performance to date yet encouraged to be more courageous when it comes to finalising his fiscal jigsaw come next month’s Finance Bill.

David Kennedy is tax partner and head of advisory services at KPMG