This was Budget week, the week where fiscal nerds take the day off, stay at home in their pyjamas and shout at the politicians and pundits on TV. I suspect that this kind of person may have been somewhat disappointed by Tuesday’s affair, though.
I’d like to think my interest in Budget Day is a more work than pleasure. In particular, as an economist, a simple Budget can be a good Budget. This is for two reasons. First, ‘Santa Claus’ budgets are an anomaly, not the norm, elsewhere. Good fiscal policy is made by having on-going debates around the best decisions in relation to what is taxed and what is spent.
Secondly, politicians should not always use all fiscal space available to them. The standard rule for fiscal policy is that it should be counter-cyclical: when times are bad, spend more to stimulate the economy. And when times are good, step back.
The last few years have seen Ireland grow faster than any of its European neighbours. Employment has risen so fast that unemployment has fallen by ten percentage points in five years, an astonishing improvement.
And, before all this, Ireland had ‘enjoyed’ massive fiscal stimulus during the Crash when its peers, through the Troika, allowed it to borrow very large deficits, rather than have to balance the books. Looking at this year’s Budget, one might ask the question: if we don’t run a surplus now, when is Ireland ever going to run a surplus again?
But those decisions are of course made at a pay grade higher than mine. Focusing specifically on housing, the construction industry certainly got one of its wishes: this was by and large a simple budget with few substantive changes.
In particular, fears on the part of house-builders that Help-to-Buy would be scrapped did not materialise. My own prediction that it would be tweaked, just so that policymakers could say that had reviewed and ‘fixed’ the scheme was also wide of the mark.
There were a couple of missed tricks, however. In particular, build-to-rent is still treated anomalously for VAT: if you build but never sell something, why should you pay VAT on it? If this had been changed, viability of urban rental apartments would have improved significantly – and this is where the shortage of housing is most acute.
But by far the biggest headline from the Budget, when it came to property, was the change in commercial stamp duty. Commercial real estate transactions are now subject to a 6% stamp duty rate, compared to a 2% rate before the Budget.
Bizarrely, the Minister justified this decision by saying it had been even higher in the mid-2000s. I would have hoped that we can all agree with hindsight that fiscally policy in the second half of the Celtic Tiger was extraordinarily reckless.
It is a relatively fundamental rule of fiscal policy, for example, that you don’t make permanent spending commitments – such as ‘benchmarked’ public sector pay increases – on the back of temporary revenue sources. And taxing transactions, aka stamp duty, is the ultimate temporary revenue source.
I have no doubt that there is every chance this will look a smart move in 12 or 24 months. The Budget also tweaked the Capital Gains Tax exemption, which meant that someone who bought certain forms of commercial property (including sites) between 2011 and 2014 could pay no CGT as long as they held it for at least seven years. That has been cut to four years.
This means that those who bought in 2012 or 2013 expecting to have to hold until 2019 or 2020 can now get out. With Brexit increasingly looking like an economic car-crash, foreign investors may well be tempted to realise existing gains rather than hope for more. A 6% stamp duty rate may look small if your site has trebled in value since 2012.
But this is finite stock of revenues. Commercial stamp duty returns are likely to increase dramatically – probably more than three-fold – next year and the year after. But we should not expect that to continue, in the same way that we should not have expected the €10bn or so in revenues associated with a housing bubble to continue ad infinitum,
Policymakers should look to tax stocks, not transactions. This means reforming commercial rates, not hiking stamp duty. In particular, there are anomalies with the rates system that exclude public bodies and encourage vacancy. Replacing rates – and commercial stamp duty and developer contributions – with a land value tax on all forms of land, other than private homes and farms, would generate more revenues but without the dangers.
An edited version of this post was originally published in my column in the Sunday Independent.