Will Sinn Féin’s huge success in the general election lead to big changes in government policy towards the economy and business?
Will they even be in government, with Fianna Fáil on Thursday saying it would try to form a government with other parties? And if despite this Sinn Féin did enter government, would their manifesto programme be watered down – as so many have before – by coalition talks and then putting together a programme for government?
With the formation of a new government looking like it is going to take time – and a second general election a possibility – businesses are facing significant questions about the environment in which they will operate. And for now, there are few answers.
On Monday morning the phones were hopping in Dublin stockbroker, accountancy and legal firms, the companies that advise investors here, whether in the Irish markets or in the economy. And, as typically happens in such situations, some investors decided to shoot first and ask questions later, with stocks of the main banking and property groups falling sharply on Monday.
Bank shares, on a downward trend now for a couple of years, were hit by Sinn Féin policy to change their tax arrangements and give the Central Bank power to cap mortgage rates.
Investors in the builders and REITs were worried about that party’s plans to cap rents, increase stamp duty on commercial property and change the tax rules applying to them. Shares stabilised and some regained ground after the initial fall, but trading remained choppy.
“The level of interest in the topic is enormous,” said Dermot O’Leary. chief economist at Goodbody stockbrokers, with significant contact from international clients. Investors would be likely to sit on the sidelines until there was clarity on the direction of policy, he said.
The market in Irish government debt, meanwhile, remained calm. Rating agency Standard & Poor's wrote that Ireland might move "toward a more relaxed budgetary stance, despite still-high public debt", but expected that it would remain within EU budget rules.
But investors here, too, will be watching the next moves. And analysts are already setting it in the context of international trends.
"The combination of Sinn Féin's performance in the Irish elections and the right-wing AfD's performance in the Thuringia regional elections has sent a loud and clear message across the Atlantic: the political centre cannot hold in Europe, " commented Megan Greene, senior fellow at the Centre for Business and Government at the Harvard Kennedy School.
In a note to clients in the wake of the election, Davy Stockbrokers wrote that the rise of Sinn Féin reflected international trends.
“Global wealth inequality is at record levels due to the deflationary forces on wages from globalisation and, to a lesser extent, technology. The counter-acting inflationary force of monetary policy is of little direct benefit to the general public.”
The political uncertainty over the formation of a new government means business leaders and analysts will have to scratch their heads for a while longer over what it all means.Whether Sinn Féin is in government or not, the vote looks set to spark a more activist State programme of house-building, with pressure to increase spending. Either Sinn Féin will lead this or the other two parties will try to “fix” the issue if they are the main participants in a new administration.
And there is a sense that whatever the outcome of the talks now under way, Irish politics has been realigned – and this is bound to have an economic impact. Even if Sinn Féin were not to form part of the next government, it is clearly now a big and growing force. Is a traditionally pro-business Ireland about to change direction?
Will big business be targeted?
For years policy here has been focused on attracting foreign direct investment (FDI), mainly from the US, and tax rules have been set with this in mind. There has been some change in recent years – for example, taxation of some types of property funds was tightened and tax loopholes like the double Irish closed off.
Sinn Féin says it “ values foreign direct investment and is committed to retaining the 12.5 per cent rate”, though it also says it would call on the IDA to attract companies from a wider range of countries – in other words to reduce reliance on US firms.
The issue for Sinn Féin, if it is in government, is that the big US firms pay significant sums to the exchequer each year – with the top 10 firms paying 45 per cent of all corporate tax revenue, as well as more in income tax and PRSI.
Whoever is in government needs this cash to keep rolling in to help fund its programme – indeed, Sinn Féin has targeted the multinationals for more cash from changes to the taxation of intellectual property and employers’ PRSI, in particular, as well as a hike in commercial stamp duty.
To complicate matters further, the new government will have to go in to bat on the OECD negotiations on corporate tax – the base erosion and profit shifting (BEPS) process – now entering a crucial phase and with significant implications for the exchequer.
“Sinn Féin are supportive of the 12.5 per cent rate and the OECD BEPS process which is a continuation of the current Government’s position,” according to Feargal O’Rourke, managing partner at PWC.
“However, their manifesto proposes more employer and employee tax for people earning more than €100,000, as well as reducing how much people can save for their pensions. That will probably hit the FDI sector more than the domestic sector and FDI may see it as making Ireland most costly to do business in. So there is unease in that sector.”
Peter Vale, head of international tax at Grant Thornton, agrees that the proposed hike in personal taxes on those earning €100,000-plus would be an issue for the major multinational players here.
“While our competitive tax regime makes Ireland a compelling location for foreign investment, our high personal tax rates can act as a deterrent, particularly in attracting key executives that often locate here as a part of a company’s initial steps into Ireland,” he said.
He also warned about any changes which would encourage companies to move their intellectual property assets out of Ireland, which could over time “see a reduction both in economic activity and in tax receipts, across all tax heads”.
What will it mean for people’s pockets?
Sinn Féin’s personal tax proposals involve a significant redistribution, with higher taxes on better-offs and some reliefs for lower earners. Its policy to cut the universal social charge (USC) on earnings up to €30,000 would benefit most earners, though for those earning €100,000-plus, other measures would more than compensate.
These include phasing out the benefits of personal tax credits above the €100,000 income level – a policy in the programme for government of the outgoing administration, but never implemented – and a new 5 per cent levy on incomes over €140,000.
The two other big parties, Fianna Fáil and Fine Gael, also propose relief for middle and lower earners – with Fine Gael aimed more at the middle bracket. But Sinn Féin’s proposed hit on higher earners is a notable fund-raiser in its calculations.
Looking at single earners, calculations by Ibec chief economist Gerard Brady show that a full implementation of the Sinn Féin plan would lead to modest gains for most earning up to €90,000; lower earners would get the highest proportional gains. Losses start to kick in over €120,000 and those earning between €140,000 and €160,000 would see their effective tax rate – what they pay as a percentage of their total income– rise by around two points to between 44 and 46 per cent.
Sinn Féin also proposes a hit on what it calls “gold-plated pensions”. This includes a lowering of the standard fund threshold from €2 million to €1.2 million and also reducing the earnings limit for the self-employed and AVC payments to €115,000.
According to Suzanne Cashin, head of retirement asset services at Brewin Dolphin Ireland, these changes could expose many with relatively modest pensions to higher tax . She said clarity would also be needed on whether this would apply to public sector as well as private sector pensions.
“Would, for example, a garda or a nurse be viewed as retiring on a ‘gold-plated’ pension? Civil servants with 30 years’ service retiring on a pension or annuity of €34,000 would require an equivalent cash fund in the private sector of €1.8 million.”
So, in terms of taxes, a lot will depend on whether Sinn Féin ends up in government or not, and, if it does, what gets into the agreed programme. If the next administration is comprised of Fianna Fáil and Fine Gael, plus other smaller parties, changes will be less dramatic.
What happens while a new government is formed?
The normal business of government continues, overseen by the outgoing administration. But the longer it takes to form a new government, the more uncertainty may grow as to what will happen – and the more key international negotiations will progress without the clear direction for Irish input which only clarity on a new administration can bring.
As early as next Thursday, the day the Dáil is due to reconvene, a key EU summit takes place which will try to decide the budget for the next seven years , including the vital issue of CAP payments.
Leo Varadkar will likely be the one to travel to represent Ireland's interests. Beyond that come key talks on a new trade deal between the EU and UK, due to get under way in early March, with vital early decisions in fisheries a key for Ireland.
Also, separate but linked – and potentially contentious – negotiations on the new trading regime for Northern Ireland are due to get under way.
Beyond that, investors will be looking for clarity on Ireland’s approach. With significant tax changes possible – particularly in relation to commercial property – it is likely that some deals will be put on hold, while general interest in these sectors in the Irish stockmarket will be parked.
Investors are increasingly used to dealing with political uncertainty and change, of course. But in terms of government representation, it could get more awkward if the situation drags on towards Easter with no government formed and the Brexit talks moving into a key phase, along with the OECD talks on tax reform.
Perhaps the most significant issue – and the most difficult to call – is the impact on multinational investment.
These big companies have been used to clarity in the direction of Irish policy and – like the voters – they want to see the housing issue sorted. But they will also be taken aback by the scale of the tax changes on business and their higher-earning employees proposed by the party getting the biggest share of the popular vote. And this party will either be in government in a few weeks, be the favourite in a new general election or be in a strong position in opposition, which could see it come to power in a few years’ time.
Their question will be whether Ireland is starting to move away from its “pro-business” stance and, if so, what this means. It is a question which may take quite some time to answer.
