Noonan's choice of cuts and tax hikes severely curtailed by three promises

ANALYSIS:Three commitments leave little room for manoeuvre in devising budget

Government insiders call it the “triple lock” – the three commitments that severely restrict the room for manoeuvre in drawing up the budget.

They are:

– No changes to income tax, bands, or credits;

– No decrease in social welfare rates;

– The Croke Park agreement that protects public pay.

The budget’s overall adjustment is €3.5 billion. Some €2.25 billion will be in cuts, split between current at €1.7 billion and capital at €550 million.

New taxes and duties will make up the remaining €1.25 billion. The triple lock makes achieving those targets very difficult as pay and social welfare payments make up 75 per cent of the spending side; and income tax, VAT and corporate tax (none of which can be touched) make up 80 per cent of all revenue. That means the Government must make its cuts from 25 per cent of spending, and can make adjustment to only one fifth of all taxes.

Taxes

Michael Noonan’s department provisionally indicated that the €960 million in new taxes it will raise will be split between direct and capital taxes (€415 million), indirect tax (€420 million) and local taxes (€125 million). There is a carryover of €250 million from the full-year effect of measures from last year’s budget.

Property tax

The common assumption is that the property tax will come in at around an average €300 per household. That could yield €250 million for the six months it is in operation in 2013, and about €500 million in a full year. However, that €250 million amounts to only €90 million of new revenue as the household charge (a property tax), which it replaces, was targeted to raise €160 million each year.

Reducing tax relief on pensions

At the moment, tax relief at the top rate of 41 per cent is available on private pension contributions. The Government’s tax strategy group has suggested a two-stage approach, if the relief is to be reduced to the standard rate of 20 per cent, first a cut to 34 per cent and then to 20 per cent. The potential savings to the exchequer are substantial – with a cut to 34 per cent, it would yield €155 million in 2013 and €225 million in a full year. A more dramatic cut to 20 per cent would save the State over €300 million next year. Cuts are politically sensitive as the Government has already raided private pensions.

Extending PRSI

There is a specific commitment to extend PRSI to unearned income, such as rental and share income. That would bring in up to €80 million in additional revenues. While the PRSI rate of 4 per cent will remain unchanged, there have been discussions about bands and thresholds and allowance. Currently those with weekly income below €352 do not pay PRSI and the first €127 is exempt for all earning above €352. Relatively small downward adjustments of one or both of those limits would bring in a large yield.