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Ireland’s luxury problem: what to do with its €8.6bn surplus

Some economists see a ‘once-in-a-generation’ chance for public investment, but Dublin says it must save for the future

Officials preparing Ireland’s upcoming budget face a situation most of their peers elsewhere would love to have: an €8.6bn surplus and an economy that grew five times faster than expected last year.

But deciding what to do with the country’s tremendous fortune is proving trickier than anticipated.

“Ireland’s problem isn’t that it doesn’t have enough money — it has loads,” said Gerard Brady, chief economist at Ibec, Ireland’s biggest business lobby. “The problem is that it is struggling to find ways to turn that money into real things that people need.”

More than a decade on from a crash that required the EU and IMF to step in with €67.5bn in loans and impose a controversial austerity programme, the government remains cautious and stresses it is saving prudently for future pension, climate and infrastructure challenges.

But some economists believe failing to deploy its tremendous fortune misses an opportunity to fix infrastructure problems that risk strangling Ireland’s boom.

“There is an overwhelming need for public investment and a once-in-a-generation opportunity to finance that from your back pocket,” said economist David McWilliams.

There are many areas where the money could be well spent — from tackling a housing crisis in a country where population growth is fast outstripping new supply, to alleviating electricity grid, water supply, health service and public transport challenges. “Rarely has a country been given such an extraordinary opportunity to change society and been advised not to do it,” McWilliams said.

The country is on course for a bumper surplus for the third consecutive year in 2024, after being €8.3bn in the black last year and €8.6bn in 2022, according to official data.

Surging corporation tax receipts from Irish-based global companies, mostly in tech and pharmaceuticals, are behind the overflowing government coffers.

The government says corporation tax receipts, which brought in €23.8bn in 2023 and are forecast to raise €24.5bn this year, are volatile, temporary and unlikely to keep expanding at their recent pace.

It estimates half its corporate tax haul could be “windfall”, or temporary, in nature and has opted to put more than €100bn of the surplus in two sovereign wealth funds by 2035 to address future pension, climate and infrastructure challenges.

The government has slashed its budget surplus forecast for the years ahead — it had predicted €65bn for 2023-26 — but is still expecting a total of €38bn for 2024-2027.

Outside of the big tax haul, Ireland’s economy is performing strongly.

Ireland’s GDP figures are distorted by its oversized multinational sector, but modified domestic demand, the government’s preferred measure of growth, rose 2.6 per cent last year. That compared with a previous official estimate of 0.5 per cent for 2023.

With the economy running close to full employment and with annual inflation having surged as high as 9.2 per cent as recently as 2022, the government has vowed to spend carefully for fear of overheating — despite price pressures now falling back to 1.1 per cent.

But Dermot O’Leary, chief economist at brokerage Goodbody, said there was evidence of “spending creep”.

“The government has been talking a good game in relation to the need for prudence, the move to set up these savings funds. Yet the actual reality has been significantly less prudent in terms of spending growth,” he said.

Dublin has used some of the money for debt repayment, lowering its debt-to-GNI ratio to just under 76 per cent, and to fund Covid-19 measures and cost of living support.

But with a general election due by 2025, expectations of a giveaway budget on October 1 are mounting.

“An embarrassment of riches is difficult for ministers to manage, particularly this side of an election. So certainly politics is coming into it,” O’Leary said.

So far, the government has said the budget will include €6.9bn in spending and €1.4bn in tax measures — moves it admits will breach its self-imposed rule of increasing spending by no more than 5 per cent a year.

Emma Howard, a lecturer at the Technological University Dublin, said Ireland should use some of its surplus cash to “look beyond the macro to societal problems”.

Ireland ranks as the loneliest country in Europe, with almost a fifth of people lonely most or all of the time and nearly two-thirds of people suffer from anxiety or depression, according to EU data. One in seven children live in homes below the poverty line, defined as 60 per cent of the median disposable household income.

“There is money we could spend right now that could improve some social issues. We should be looking at that, because we can afford it,” she said.

McWilliams said Ireland should use its surpluses to create start-up funds to foster entrepreneurialism. “It’s a failure of imagination,” he said.

Others say Ireland could enhance its 5.3mn citizens’ wellbeing and the country’s economy by improving a planning system that can hold up infrastructure developments for years.

The government is seeking to legislate to reform the system, including setting deadlines for planning decisions.

Housebuilding is finally accelerating, but remains well short of projected need. A new national children’s hospital, now set to cost €2.24bn, is way behind schedule and four times over its initial budget. It is unlikely to open until next year at the earliest.

“We could . . . deliver more with the resources we have — so money isn’t everything,” said John Fitzgerald, an economist and adjunct professor at Trinity College Dublin.

Whatever Ireland does with it, the money looks likely to keep coming.

Under one part of a two-pillar OECD tax reform plan, intended to remove advantages for multinationals doing business in low-tax jurisdictions, Ireland has increased its 12.5 per cent corporate tax rate to 15 per cent for large companies.

But the other part — a requirement for corporations to pay tax where their customers are located, which would funnel away some of Ireland’s corporate tax receipts — is effectively dead. 

“We are in a very, very strong position at the moment,” Seamus Coffey, chair of the Irish Fiscal Advisory Council, told a recent conference. “The hope is that we don’t make a mess of it.”

Fears of rise in UK capital gains tax trigger selling ‘frenzy’

Wealth managers report upswing in activity as investors position themselves ahead of October Budget

Fears that the UK government will raise capital gains tax in its October Budget are driving a “frenzy” of activity by business owners, property investors and shareholders, according to wealth managers and tax experts.

Earlier this week Sir Keir Starmer gave the strongest signal yet that the Labour administration will raise taxes to close a £22bn “black hole” in the public finances at the October 30 budget.

“There’s a Budget coming in October and it’s going to be painful,” Starmer said in a speech on Tuesday. “Those with the broadest shoulders should bear the heavier burden.”

Several advisers said their asset-owning clients were worried about potential increases in capital gains tax — particularly as Labour ruled out raising national insurance, income tax or VAT in the run-up to July’s general election.

“It is a frenzy”, said Tim Stovold, partner at Moore Kingston Smith, an accountancy firm, who reported inquiries about selling assets, due to worries about tax rises, had rocketed since the election.

Capital gains on assets including businesses, second homes and shares are currently taxed at between 10 and 28 per cent — lower than the 20 to 45 per cent levied on income.

Miles Dean, partner and head of international tax at Andersen, said his clients with real estate, company shares and crypto assets — had been pushing to sell them and pay tax at the existing rates for at least 18 months — “ever since it became clear that Labour were going to get into power”.

Nimesh Shah, chief executive at advisory firm Blick Rothenberg, said the prime minister’s statement had prompted a “significant number of queries in the last 24 hours”.

Several clients who own businesses were pushing “through business sale transactions way in advance of when they would have, with an urgency to complete”, added Ian Cook, financial planner at Quilter Cheviot. Share portfolio investors were making use of the ability to sell shares and rebuy them in what is known as “bed and breakfasting”.

Cook said he also knew of a number of property investors who were in the “throes of liquidating property portfolios”. Most of them had started selling down their assets as soon as the new government was confirmed. Investment properties owners who had not yet started selling would find it difficult to complete before the October Budget, Cook warned.

“For both property owners and entrepreneurs, there’s a lead time. You don’t put it on eBay and then it’s gone in a week,” he said.

Advisers reported that as well as selling to external buyers, clients were disposing of assets in other ways such as selling into family trusts or gifting assets to younger generations. The latter mechanism was also being used by people concerned there would be changes to the inheritance tax system, such as a capping or scrapping of certain tax reliefs.

Clare Munro, a tax adviser at Weatherbys Private Bank, said there had “definitely been some concern” from clients about both potential capital gains tax and inheritance tax changes and this had led some to take action.

However, she warned that there were risks around making short-term selling decisions, including any rumoured tax changes not coming to fruition or losing out on potential growth from hold assets over the long term.

Stovold agreed that some people were “losing their common sense” and looking at accelerating sales of assets that they had intended to hold for at least the next 10 years. He added that there would be tax raising benefits for the government of letting the CGT “rumours run rife”.

Overall the uncertainty was unhelpful for businesses and their owners, said Mike Hodges, partner at accountancy firm Saffery.

“Causing people to act in haste doesn’t feel like the best way to create the confidence and stability around the tax system that will encourage people to invest,” he said. “With two months still to go until the Budget, we don’t want to encourage a fire sale mentality.”

Private equity warns UK capital gains tax overhaul could be ‘tipping point’

Potential increase of capital gains tax comes on top of changes to non-dom and carried interest regimes

Private equity executives have warned radical action to overhaul the UK’s capital gains tax regime could prove pivotal in sparking an exodus of dealmakers from Britain.

Prime Minister Sir Keir Starmer’s speech on Tuesday, where he cautioned that those with “the broadest shoulders should bear the heavier burden”, sent jitters through the UK private equity industry.

The newly elected Labour government had already put the industry on notice with a consultation that closed on Friday about plans to change the tax treatment of carried interest, the performance fees that fund managers receive from asset sales.

Many private equity executives are also exposed to changes to the favourable “non-dom” status that allowed wealthy foreigners to avoid paying tax on their overseas income. 

One partner at a top-20 global private equity firm said: “If the government does something really strong [in the Budget next month] then that will be the tipping point where people accelerate plans to leave.”

A second executive at a leading private equity group added: “If things become significantly unattractive relative to other countries and you’re not from the UK, why would you stay?” 

Private equity executives have long benefited from an arrangement that means carried interest is taxed as a capital gain at a rate of 28 per cent, rather than the highest bracket of income tax, which is 45 per cent plus national insurance.

The industry has for months been preparing for Labour to tighten the regime. 

However, insiders viewed the Treasury’s one-month-long consultation as an aggressive move that signalled the government was not prepared to give detailed consideration to its proposals.

The timing of the consultation, which took place during August when many people were on holiday, suggested the government was “paying lip service” to the industry, one leading tax lawyer said. 

“This is a matter of principle for the government and it will primarily be a political decision,” he said.

The Treasury said: “Following the spending audit, the chancellor has been clear that difficult decisions lie ahead on spending, welfare and tax to fix the foundations of our economy and address the £22bn hole in the public finances left by the last government.”

“We are committed to reforming the tax treatment of carried interest, delivering fairness in this area of the tax system while recognising the vital role that our world-leading asset management industry plays in channelling investment across the UK. We launched a call for evidence so that a wide range of stakeholders can provide their views as part of this.”

In March, one of London’s top private equity lawyers warned that Labour’s plans to raise the tax on carried interest could be more damaging to the capital’s status as a dealmaking centre than Brexit. 

The UK is the largest hub for private capital investment outside the US, with UK-managed funds accounting for just over half of the total private equity and venture capital raised in Europe in 2023, according to the British Private Equity and Venture Capital Association. 

While relatively few individuals directly benefit from the carried interest regime — around 3,000 people in the UK — many more jobs in banking, law and consulting depend on the private equity industry.

The industry has warned that aggressive fiscal tightening could harm Britain’s position as an asset management centre at a time when other jurisdictions are competing to lure top earners. France, Italy and Germany tax carried interest at 26-34 per cent. 

Many of the largest private equity firms in the UK are the European outposts of US operators, meaning their staff are often highly mobile with limited ties to Britain. KKR, Blackstone and Apollo Global Management all have their main European base in London.

“The American groups have got the loudest voice here,” said the first private equity partner. “Many of the people who are based in their European headquarters in London — French, German or Italian — have no loyalty to the UK at all” and some of them had already left since Brexit. 

Victoria Price, head of private capital at consultants Alvarez & Marsal, said six private capital professionals of her 80 individual clients were moving abroad because of expected tax changes.

Chancellor Rachel Reeves has previously suggested buyout executives who invest in their funds alongside their investors would continue to enjoy favourable treatment. 

Lobbyists have sought to ensure that borrowed money counts as so-called “skin in the game”. They have also warned the government not to adopt a retroactive approach to taxation and to avoid adopting complex new rules.

Several private equity executives said they expected an increase to capital gains tax of at least five percentage points, although they had not completely ruled out a bigger move to align capital gains more closely with income tax.

“No one will make different life decisions if the tax rate goes up by a couple of per cent,” said a third executive. “I hope and trust that the worries about this ceasing to be viewed in a commercial way . . . are not justified.”

Some executives at private equity firms in London expressed scepticism about a mass movement out of the UK regardless of changes to the tax regime. One partner at an international firm said, even if carried interest were taxed at 45 per cent, “it would be hard to beat the convenience of London”.

“Not much is going to change, no matter what,” they said.

New York business elite rally in favour of fashion merger

M&A titans may be signalling to Kamala Harris to lighten up on antitrust enforcement

The heavy hitters at the Partnership for New York City are perhaps not the target market for Coach and Michael Kors. But the two “accessible luxury” brands are suddenly of interest to the Manhattan-based non-profit civic group whose mission is to stand up for the Big Apple’s business interests, particularly Wall Street and commercial real estate.

Last week, PFNYC released a public letter it sent to the pair of US senators from New York as well as two senior members of the House of Representatives New York delegation asking them to denounce a lawsuit brought by the US Federal Trade Commission, the competition authority. The FTC is seeking to block two fashion companies, Tapestry and Capri, from combining. The combined company would boast such brands as Coach, Michael Kors and Kate Spade with an enterprise value exceeding $20bn. 

The FTC argues that consumers would be harmed if Coach and Kors, currently part of different companies, would no longer be competing against each other in the upper middle-class, “accessible luxury” handbag category. 

The New York angle is that both companies are based in the city and Joanne Crevoiserat, the chief executive of Tapestry, is an executive committee member of the PFNYC. The letter stated that the FTC action was “ideologically motivated” and a “clear case of regulatory over-reach”.

Outside groups sharing views on antitrust litigation is not unusual. But among the boldfaced names in PFNYC are top mergers and acquisitions bankers and lawyers whose multimillion-dollar bonuses depend on a thriving deals marketplace. Many of these Masters of the Universe are also Kamala Harris supporters or fundraisers including the likes of Blair Effron, Brad Karp and Rodgin Cohen.

Should Harris win the US presidential election, a question emerging is whether she will jettison FTC chair Lina Khan and the Department of Justice’s Jonathan Kanter, who have both aggressively litigated corporate consolidation and even tightened the so-called merger guidelines, their rubric used to evaluate deals. 

Wall Street and the C-suite have enormous influence in New York City politics. President Joe Biden has, to a surprising extent, kept corporate interests at arm’s length, a posture that some New Yorkers are undoubtedly looking to change in the next administration and the PFNYC intervention is a portent of that.

The PFNYC said the Tapestry/Capri merger would help prop up the New York fashion industry, which it says has faded in recent years, and that the US deserved a luxury national champion in the way Europe had LVMH. Tapestry additionally adds that the FTC’s definition of the handbag market is arbitrary and constrained (at one point it wondered if duffel bags and backpacks could count as a type of handbag).  

In an interview with the Financial Times, Kathryn Wylde, president and chief executive of the PFNYC, reiterated the view that the Biden regulators were making “politicised” and “inconsistent” choices in enforcing antitrust law, but expressed surprise when I told her that the FTC commissioners had voted 5-0, including its Republican members, to block Tapestry/ Capri. 

Still, parts of the FTC’s case remain novel and will come under scrutiny. The agency says that so-called serial acquirers — companies that repeatedly buy smaller competitors as their primary growth strategy — are newly worthy of review. 

Harris’s views on competition and economic issues themselves remain a mystery. She has condemned price gouging and floated a wealth tax but her longtime ties to Wall Street and Silicon Valley have given the billionaire class hope that she will not be so tough if elected president. 

One lesson from New York, however, is that style matters perhaps as much as policy. Given how much big business contributes in taxes and philanthropy in the Big Apple, financiers almost demand tokens of respect and flattery in exchange. Wylde herself revealed her group’s need for support when New York City elected a new and apparently more solicitous mayor.

“This is a great relief,” Wylde told New York Magazine in 2022. “We have eight years of a mayor who was completely disparaging of wealth and business, and New York City barely survived it. Adams [the new mayor] has been very clear that New York City needs corporations, needs the wealthy, that we have always needed them, and we don’t want to demonise them.”