Government will do what is politic in recovery budget

The emphasis in today’s budget will be on families. With a general election on the way, the entire package will be cast to ensure at least some of the benefit of recovery goes to every home in the State, come the new year.

This presents a slippery challenge in its own right. If the political requirement is to ensure something for all cohorts, meeting that objective lessens scope to deliver major advantage to any one group. In that sense at least, the art of spreading around the largesse to all is the art of limiting the largesse to any one group, to make it all go further.

But there will be focused initiatives too. The childcare package, which will provide a second year of free childcare for children up to the age of 5½, is aimed at parents and cast to encourage them to take up employment. In addition, the child benefit payment will go up by €5. A package for the elderly is always a political necessity, hence a €3 increase in the weekly pension. So too is a housing package, although the scope and scale remains unclear.

More to come

There is another crucial dimension, however. For all the razzle dazzle over the Budget, the 2016 package will be presented with the promise of more to come in 2017 and 2018 if the Government is re-elected – whenever Taoiseach Enda Kenny calls the poll. In foodie terms, Michael Noonan and Brendan Howlin might well describe today’s fare as the starter with the main course and dessert to come. This means, of course, that they must please enough people with the starter to ensure they opt for the main course.

The fundamental aim is to direct the gain at the people of “middle Ireland” – and the main weapon is the universal social charge, the tax bazooka through which the State has collected many billions of euro to rebuild exchequer revenues in the wake of the crash.

If it’s a given that a popular tax is a contradiction in terms, the USC ranks among the most unpopular of all taxes. This flows both from the efficiency with which it extracts money from workers and from its association with onerous bank bailouts which helped to wreck the public finances.

But what is “middle Ireland”? The answer to that for the purposes of this story is that “middle Ireland” is what the Government says it is – and the Government resolved one year ago that the people in this group are those earning up to €70,000.

An examination of Revenue data shows this income bracket captures up to 2.2 million income earners, including people on very low incomes who don’t pay income tax. This informed the political decision this time last year to introduce a new 8 per cent USC rate on income above €70,000, the objective being to avoid disproportionate benefit at upper income levels and ease the overall cost of the tax measures so there’s more available lower down the income ladder. This “cap” will be retained today.

The 7 per cent universal social charge which applies on incomes between just over €17,000 per year and up to €70,000 will be cut by 1.5 percentage points, thereby bringing total taxation on “middle” income below 50 per cent to 49.5 per cent. The political messaging is clear. After huge tax increases which led to the Government taking more than half the earnings of middle earners in tax, such people will henceforth take home (a little) more than half their pay.

Lower USC

The two lower USC rates – 3.5 per cent and 1.5 per cent – will each be cut by 0.5 percentage cuts. The entry point thresholds at which each of these rates applies will also be increased, the aim at the lower level being to remove another 90,000 low-paid people from the tax net. Although the deeper economic merits of that move are debateable at best, this is a political act at its root.

The underlying promise will be, of course, that there’s more of this in store this time next year. The same goes for the introduction of a €500 credit akin to the €1,650 PAYE credit for self-employed workers, which will be cast as step one in a three-step manoeuvre to put self-employed on a similar footing to the PAYE workers.

After prolonged and painful retrenchment, this will be the second “recovery” budget.

The Government lost the political advantage last year amid deepening controversy over Irish Water. There is no scope now for any repeat of that.