October budget may be too early to lower tax, warn economists

Coalition ‘statement of priorities’ includes commitment to publish tax reform plan

Tue, Jul 15, 2014, 01:00

A number of economists have warned that October’s budget may be too early for the Government to take action to lower the amount of tax paid by people at the top rate of 52 per cent.

Following the Cabinet reshuffle last Friday the Coalition published a “statement of priorities” for its remaining 21 months in office. It included a commitment to publish a tax reform plan “to be delivered over a number of budgets to reduce the 52 per cent tax rate on low- and middle-income earners.”

Jim Power, chief economist at Friends First, said that, having just exited the EU-IMF bailout, talk of tax cuts was “premature”. He said arguably the most positive thing the Government could do in the remainder of its lifetime would be to deliver two “neutral budgets”.

Minister for Finance Michael Noonan has indicated that a budget correction of less than the previously forecast €2 billion will be required in October, as a result of positive trends in economic data.

John FitzGerald of the Economic and Social Research Institute said the Government should plan to introduce a €2 billion correction and lower the target to €1 billion, or less, if the data remained positive closer to the time.

The Government has committed itself to bringing the budget deficit below 3 per cent of economic output next year, which Prof Fitzgerald said left limited room for manoeuvre.

“The problem for the Government is they’ve got to actually take money out of the economy this year and if they want to have tax cuts they’ve got to take more out to leave room for it,” he told RTÉ’s Morning Ireland.

“It’s too early to talk about an end to cuts. Hopefully by next year then you will be reaching a situation where the Government could be facing, if things go well, in 2016 without having to make cuts or increase taxes.”

Paul Sweeney, an economist who previously worked with ICTU, said that if the Government was keen to cut tax the best thing it could do was reduce consumption taxes such as VAT.

Alan McQuaid of financial services firm Merrion Capital said a tax cut was plausible based on the economic figures published so far this year but he said it remained to be seen if this would be backed up by subsequent data.

Tom McDonnell of the Nevin Economic Research Institute said increasing the threshold at which the 52 per cent rate kicked in by €1,000 would cost the State €140 million, but such a move would benefit only about one in five workers.

Séamus Coffey of UCC said work remained to bring the deficit down and he expected the Government would announce measures this year that might not happen until 2016, 2017 and 2018.