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

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".

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Tom McDonnell, Nevin Economic Research Institute

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.

Paul Sweeney - Economist (formerly of ICTU)

“If you introduce tax cuts you’re going to have to pay for them elsewhere and that means you’re going to have to cut public services,” said Paul Sweeney. “When you do that, you’re hitting the vulnerable most.”

He said he could see why the Government would make such a commitment as “the voting class are the middle class, so they want to give something there”.

He said it would be better not to cut tax at all until the economy recovers more. “We can’t afford it just yet,” he said.

He said cutting the top rate or expanding the relevant band “is really the worst thing you can do if you’re going to do anything” and that, if a cut is to come, a focus on consumption taxes such as VAT might be a better call.

“People are obsessed with income tax but for every €100 we spend in income tax another €100 goes in consumption taxes. Our VAT rate is extraordinarily high at 23 per cent and everyone pays it.”

Jim Power - chief economist, Friends First

Despite having an ideological leaning towards lower taxes, Jim Power said talk of cuts “at this juncture is premature” with the State having just exited the EU-IMF bailout.

“I still think there is a lot of work to be done to get the public finances back into shape and the notion that you would now turn around and start cutting taxes at this juncture I would find premature and potentially dangerous.”

He said the State’s deficit should be brought below 3 per cent of GDP “before we start talking about tax cuts”. “I think the appropriate time to talk about tax cuts would be under the next government.”

The most positive thing the Coalition could do in the next couple of years would be to “deliver neutral budgets” he said. He fears tax cuts would not be self-financing and the Government would have to look elsewhere to make up the difference or else the deficit would start to widen, which he said the State could not risk at present.

Séamus Coffey - economics lecturer, UCC

“I don’t think we’re in a position to do it,” said UCC economist Séamus Coffey of a Government commitment to cut tax. “Who is going to pay for it?”

He said there was still work to be done lowering the budget deficit and he expected that while the Government might announce plans to tax cut in October the cuts may not kick in for some time.

“I think they’re going to announce it will happen over 2016, 2017 and 2018 and probably do nothing this year,” he said. “They’ll be hoping that when it does come that economic growth or inflation will pay for it, but there are no guarantees on it.”

He said changing tax bands rather than rates would be the better way to boost low- and middle-income earners.

“If you cut the rate by 2 per cent and you’re on €50,000, it’s not going to mean a massive amount to you as you pay very little tax at 52 per cent, but if you’re on €200,000 that’s a substantial tax cut.”

Alan McQuaid - Merrion Capital

With a general election expected to take place in 2016, Alan McQuaid believes it would make more sense for the Government to wait until October 2015 before bringing in tax cuts.

“If you can do it in two budgets that’s well and good,” he added.

He said economic data for the first quarter of the year was positive, and tax cuts would be plausible “based on the numbers so far this year”.

“But [the data] is only for one quarter. You’ll have to wait and see what happens with tax receipts,” he added.

He said that if stimulus were to be delivered, it made “more sense to do it in terms of tax cuts” rather than than wage increases or increased spending.

“Last week the IDA pointed out that the last thing we want to do is become uncompetitive and start pushing up wages indiscriminately,” he said.

“If you’re going to give concessions to consumers, I think tax is the way to do it.”

Tom McDonnell - Nevin Economic Research Institute

“If there is to be space in the budget we certainly would not advocate tax cuts of the type noted by the Government,” said Tom McDonnell.

Citing a parliamentary reply from the Minister for Finance, he said some 1.6 million workers are exempt from income tax or pay the standard rate, meaning about 300,000 pay the marginal rate.

The marginal rate gets “arguably quite high at a low level” but he said offering refundable credits rather than tax cuts would be better as they entice people into the workforce: “The idea is that those workers who do not use up all of their tax credits because they are not earning enough would essentially get the value of those credits refunded to them at the end of the year.”

Such a measure would make it cheaper for business to employ young people or those returning to the workforce at the bottom end “because those workers know they will be getting a portion of their income from the State”.