USC: Best we can hope for is a very long goodbye

The Department of Finance quite likes the universal social charge – or so you might conclude from various communications from senior officials to the Minister. The latest, released in a freedom-of-information request to Sinn Fein’s Pearse Doherty, outlines what would be needed to replace the €4 billion revenue if the USC was abolished.

Needless to say, all the options are horrific. The USC accounts for not far off €1 in every €10 raised in tax each year (9.1 per cent, to be precise). And so, were it to be abolished in one fell swoop, replacing it would require big tax hikes elsewhere – for example, a sixfold increase in the property tax combined with a range of other hikes in capital taxes, or a rise in the two main income tax rates by five points each to 25 per cent and 45 per cent.

Everyone knows that this is not going to happen. We are never going to be able to afford to abolish the USC in a year or two, even if the tone of the general election debate might have suggested otherwise. The documents, drawn up as briefing notes for a new Minister for Finance – in the event, Michael Noonan was reappointed – look designed to drive home the point that progress in cutting the USC was going to have to be slow.

Gradual phasing out

The department said the notes pre-dated the programme for government and the plan was for the “gradual phasing out” of the USC to continue. The plan was never to abolish it in one go.

The statement added: “While scope is limited in this year’s budget there will be a further move to curb USC, especially for mid- to low-income earners”. The statement also noted that there was “absolutely no intention” to increase property tax in the forthcoming budget. In fact, Noonan has acted to freeze property tax bills until 2019, a move which will introduce so many anomalies that the tax could yet be wide open to legal challenge.

What we will see in the budget is some limited further relief for USC. It would be a surprise if the main rate – cut from 7 per cent to 5.5 per cent in the last budget – was not cut again. But the room for manoeuvre on budget day will be limited – about €330 million will be available to reduce taxes, compared with €750 million last year. A bit more may be available in subsequent years, but that depends on the ability of the economy to continue to grow at 3 per cent plus a year, post-Brexit.

The plan of the Government – if it lasts – is to continue to use the spare resources in the budget to cut the USC year by year. This is because the alternative route to phasing out the USC – raising significant money elsewhere – is seen as unpalatable. Cash will be raised from a new tax on sugary drinks in the next few years. And it is likely that income tax credits and the standard-rate band will not be adjusted for wage inflation – effectively a sneaky tax increase on people getting wage rises, which will offset some of the gains of USC cuts. But there is no way the Government will take the potential political hit of raising a large sum elsewhere after the water charges debacle.

But there will be no big move to , say, hike property taxes or indirect taxes. And the scale of the revenue raised by the charge mean we will all be living with it for years yet. We are talking, at best, about a decade-long phase-out of the charge, if that is the route successive governments chose to take.

Political capital

Sinn Féin, whose plans were more modest in terms of USC reduction than those of Fianna Fáil and Fine Gael, will seek to make some political capital out of this in the run-up to the budget. Fine Gael, meanwhile, by refusing to give way on its plans to phase out the charge, will struggle to make the case that this is achievable in a reasonable time frame.

Calculations presented by the department in pre-budget tax documents set out a programme which could see the USC roughtly halved by 2020. It would require all the estimated room for tax cuts to be allocated to USC reductions – and in fact for new revenue to come on stream to meet some of the cost after 2018. And remember that for the room to manoeuvre to emerge we need economic growth to continue.

So the painful USC charge on our payslips is here to stay for quite some time yet. The best we can hope for is a very long goodbye.