From a financial viewpoint, I can’t imagine it’s going to be a very Merry Christmas this year for many people, particularly with Budget 2010 fast approaching. The Minister for Finance is due to deliver his speech to the Dáil on 9th December and it is set to be one of the most important Budgets in living memory – they have got to get this one right by making the necessary tough decisions that will put our public finances back on the right foot. This isn’t going to be pretty.

The scale of the fiscal adjustment required is enormous and it requires greater emphasis on making changes to expenditure than taxation. In fact, studies show that economies with large public deficits are more successful in turning things around when the focus is on expenditure cuts rather tax increases. The Irish economy currently stands at a precipice and any significant increases in taxation could potentially push it over the edge and into bankruptcy.

In years gone by the Budget has always been closely watched from a property perspective, particularly in relation to areas such as stamp duty, capital gains tax and mortgage interest relief. But given the dramatic changes to the economic landscape that have taken place, what can the property sector expect from Budget 2010?

Well for a start, will we see the introduction of a property tax? The report from the Commission on Taxation published during the summer months (the timing of which was an attempt to minimise its impact with the Dáil out of session and most Ministers and TDs away on holidays) clearly favoured the introduction of such a tax. In fact, a property tax plays a central role in widening the overall tax base i.e. ensuring that we are not reliant on the performance of any one part of the economy (e.g. the property and construction sectors) for tax revenue.

I am all in favour of a property tax – most modern economies have one and in retrospect, it was a big mistake to abolish residential rates back in the 1990s. It is by far one of the most effective ways of funding the running of local services and this should be its primary function once introduced.

But introduce a property tax now? This would be the equivalent of economic suicide. Fortunately, it looks like a property tax is being put on the long finger. There are a number of issues that need to be resolved first before such a tax could be implemented, the most important of which being how it is administered – is it a flat charge or is it based on the valuation of the property? In the event it is the latter, then this requires a national property database, which needs to be updated on a regular basis. This is something that could be put together in a relatively short period of time. A messy alternative would be to allow the owner of the property to assign a value themselves, which is not exactly ideal for a variety of reasons. Another issue to consider would be who should pay and if some homeowners below a certain income threshold or recent first-time buyers should be subject to such a tax.

While a property tax is unlikely to get the nod in Budget 2010, it looks almost certain to become a reality once the economy begins to improve. And once a property tax is in operation, it will in all effect signal the end for stamp duty.

So, why not end stamp duty on residential properties now? And not just for existing owner-occupiers (first-time buyers have been exempt for some time now), but for investors too?

Revenue from all stamp duties (which includes residential property, commercial property and credit/debit cards) accounted for less than 3% of all tax receipts in the eight months to the end of September this year. Quite clearly it is making relatively little contribution to the Exchequer at the moment and even when the property market eventually starts to recover, it is unlikely to be a major source of revenue given that most home buyers no longer need to pay the tax.

From a revenue perspective, the Government has very little to lose in abolishing stamp duty right now (the politics of such a move are less clear). Abolishing stamp duty would be, on its own, unlikely to ignite a recovery in the market, but it won’t do any harm!

Stamp duty should be abolished for investors too. They already make a considerable contribution on the profits of the sale of their property by paying capital gains tax. Equally they are now subject to paying a flat tax on ownership of second homes.

One of the most unusual things the Commission on Taxation recommends is the continuation of mortgage interest relief for first-time buyers, while it should be discontinued for all others. The Commission puts forward a fairly weak argument that the relief should be retained for first-time buyers, in that it would adversely affect recent first-time buyers who would see their repayments rise and the value of their recently acquired property decline. The solution here is to phase-out the relief over a given time period, but to stop offering it to new first-time buyers as soon as possible. This would help the market operate more efficiently, given that these types of reliefs only ever end up distorting prices.

The phasing out of mortgage interest relief would probably be quite unpopular. At least, that is to say that it would be more unpopular than most of the other unpopular changes to taxation/expenditure that are going to be part of Budget 2010! But it would be in the long-term interests of the property market and would represent a potential saving for the Exchequer.

In a similar vein, rent relief should be abolished. Of course, this is unlikely to prove to be popular with most landlords, particularly given the fairly dramatic drop in rents observed over the last eighteen to twenty-four months. But, as with mortgage interest relief and prices, rent relief has the effect of distorting rental values and as a result should be abolished.

Are any of the above likely to happen? It’s difficult to say, but my guess is probably not. I believe the Government will be very reluctant to make any changes to taxation relating to property, given the weakened state of the market. But this is the point – now is probably the best time to implement such changes, when activity is low and the market is in a state of flux.

There is very little the Government can do to help turn the market around. However, through measures such as abolishing stamp duty and mortgage interest relief, it could at the very least take steps to ensure it operates more efficiently once the upturn in activity eventually does comes along.

This article was written exclusively for irishconstruction.com by independent economic research consultant Geoff Tucker BA MA, Geoff Tucker can be contacted at tucker.geoff@gmail.com.