Taxpayers, welfare recipients seek relief

The Budget changes must be evaluated against pay and prices, writes Paul Tansey, Economics Editor

Numerically, income taxpayers and social welfare beneficiaries are the two biggest groups who will be looking for relief and sustenance from today's Budget.

To assess whether these two groups are winners or losers from the Budget, the fiscal changes introduced by Minister for Finance Brian Cowen need to be evaluated against two yardsticks - pay and prices.

On the pay front, average non-agricultural earnings are forecast to increase by between 5.0 per cent and 5.5 per cent in 2007 compared to 2006. There are an estimated 2.3 million income earners in the Republic this year, of whom more than two million are taxed on a PAYE basis.

Any failure to index tax credits and tax bands to the increase in money wages would tip previously exempt low-paid employees into the tax net while thrusting more income earners into the top tax band.

In the limiting case, if tax credits and tax bands were to be left unchanged next year, then the numbers exempt from income tax would fall by almost 30,000, while the numbers paying tax at the top 41 per cent rate would rise by 70,000 to 548,000.*

The resources earmarked for tax concessions today will be channelled principally to keeping those on minimum wages out of the tax net and to checking the drift of those on moderate incomes into the top tax band.

Not only are these twin objectives in line with the commitments in the Programme for Government of June 2007, but they would ease the progress of next year's national pay negotiations.

In the inflation arena, the average level of consumer prices in 2007 is forecast to be 4.9 per cent higher than in 2006. Even where increases in mortgage interest rates are excluded, underlying inflation in 2007, as measured by the Harmonised Index of Consumer Prices (HICP), is projected at 2.8 per cent.

Social welfare payments are made to almost one million people in the Republic. Since Mr Cowen is already committed to increasing mortgage interest tax relief to offset the rise in mortgage interest rates over the past year, he could argue that basic social welfare payment rates only need to be raised by 3 per cent or so to compensate for underlying inflation. But he is likely to be more generous, raising basic benefit rates in line with the overall inflation rate.

Those anticipating the promised cut in the top rate of tax from 41 per cent to 40 per cent should not hold their collective breath.

Those owning large cars and SUVs can expect a sizeable tax hike. Vehicle registration tax (VRT) already contributes about €1.4 billion a year to the exchequer and the Programme for Government said it would "introduce measures to further weight VRT and motor tax in favour of cars with lower emissions".

*Taxation Statistics, Budget 2008, November 2007, page 12.