The Minister for Finance in his budget speech announced a major change in the way in which a tax deduction for medical expenses will be calculated from 01 January 2009 onwards. A deduction for medical expanses incurred in a tax year were usually relieved at the marginal rate of tax, (i.e. 41 per cent for high earners). The tax relief will now be given at the standard rate of tax from 01 January 2010.

This is likely to impact largely on those families who have permanently incapacitated loved ones. Revenue issued a tax breifing in April 2008 stating that it will be their practice in cases of hardship to allow tax relief during the tax year subject to an end of year tax claim for medical expenses being submitted in the normal way.

In 2007 the Irish economy grew by an impressive 4.1%. Consumer spending was strong, albeit not as strong as some had expected given the stimulus from the release of the SSIA funds. Nevertheless, it still rose by 6.3%, and contributed 3.5% points to the total growth of the economy.

However, following a year of bouyant spending, it would appear that the Irish consumer has essentially gone on strike in 2008. This reluctance to spend has become increasingly evident as  the year progresses, and looks set to persist. Indeed, we will likely observe a fall in consumer spending this year and next, and the oulook for 2010 at this stage is uncertain.

Essentially all categories of retailers are feeling the pinch. However, some sectors, notably the motor trade, and household goods and clothing and footwear, have been worst hit. While to date there have been little signs of heavy discounting in an attempt to bolster falling sales volumes, we would expect to observe some efforts to stimulate consumer demand in coming months. indeed, it will be interesting to observe the state of play in the all important Christmas retailing period.

No single factor explains the reigning in of consumer purchases, rather there is a combination of factors working to depress both consumer confidence and spending.

First and foremost, the ongoing labour market deterioration is having a major negative affect. Since the mid-1990s there was strong growth in the numbers in employment, a postive for purchasing power and consumer spending. We are now in a situation where employment growth is moving into negative territory, and the knock-on effect is heightened consumer caution and saving, and a slowdown in consumer spending.

Household disposable incomes have also been hit by raging energy and food prices. As a result inflation remained stubbornly high in the first half of 2008, increasingly by an average of 4.7%. Budget 2009 put a further dent in spending power, with the introduction of an income tax levy that will knock about 1% off disposable incomes.

Consumer confidence had also been damaged by the continued negative news-flow on the domestic and international economies, in addition to the financial market turmoil and tightened lending conditions.

Taken together, this combination of worsening labour market conditions, lower disposable incomes, and subdued confidence levels has lead to consumer crunch.

A positive for spending, and particularly in 2009, is that inflation is set to fall sharply as mortgage interest rates, and energy and food prices fall. All else equal, this should boost consumer spending. But all else is not equal, and falling prices alone will not be enough to boost the beleaguered consumer sector.

The reason for this is that confidence is set to remain depressed well into 2009, primarily as a result of poor outlook for the Irish labour market. It is confidence that will ultimately determine the recovery of consumer spending.

A return to more normal levels of confidence would require an improved labour market and more positive news on the domestic and international economies. Given that it is likely to be late 2009 before this materialises, muted consumer confidence and spending are set to continue for the foreseeable future.

We welcome the appointment of Ms Gillian Jones ACA as Tax Manager in October 2008. A member of the Institute of Chartered Accountants in England & Wales she joins BKRM after nine years with Deloitte’s Dublin, tax department.
Gillian will bring a vast wealth of experience in the areas of corporate tax, personal tax planning, capital and inheritance taxes.
We wish her well in her new role.

The partners wish to announce the retirement of Mr McLean as tax partner of the firm with effect from 31st July 2008.
After 14 years of dedicated service to the practice, Frank has decided to devote himself to other business and personal interests which he has been unable to attend to due to the demands placed on him as tax partner.
His professionalism and attention to detail will be sorely missed along with his extensive knowledge of the Irish tax system after 35 years service.
We wish him well in his future endeavours.

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