Can the so-called squeezed middle expect any significant "unsqueezing" in Budget 2019? Minister for Finance Paschal Donohoe has promised they will benefit although he has also committed to not spending too much extra.
The tax take on incomes shot up during the economic crisis, with the universal social charge the chief culprit. Since then, some small relief has come in successive budgets. Will this be the year of more significant gains for taxpayers?
If this is to happen, then the Minister will have to find some place to raise extra funds, in order to pay for income tax cuts.
He has some leeway – though it is limited enough. This week’s Summer Economic Statement, intended to set the scene for October’s budget, estimated that the Minister could spend a net €800 million on spending increases and tax reductions , and still stay within his borrowing target.
What to do with these funds – and how to increase the amount available by raising more revenues – will now be the key budget decisions.
The Fine Gael agreement with Fianna Fáil is to spend €2 of spare budget cash available for every €1 in tax reductions. Applying this strictly to the €800 million leaves a bit less than €270 million available for a tax package. The Government has already committed €2.6 billion towards additional spending next year.
So if he wants a reasonable income tax package, he needs to find new sources of revenue. The lesson of last October’s budget package is that this can be done. In Budget 2018, the Minister raised €830 million in new measures but only gave back €335 million of this.
Last October, money was found through a big hike in the stamp duty on commercial property deals, a new charge on employers to fund training, and a tweak to corporation tax.
Were the Minister to find new revenues on a similar scale for 2019, it would certainly allow for the most significant package of recent years.
However, commentators don't expect a bonanza."With personal tax measures a costly affair, it appears that any personal tax cuts will be very targeted and perhaps limited," according to Olivia Buckley, director of communications at the Irish Tax Institute.
And remember that in many cases hiking tax elsewhere to help pay for income tax cuts takes money out of people’s pockets too.
For example, higher prices for cigarettes or any reductions to existing tax reliefs. In the last budget, the Minister managed to target most of the pain at the business sector, but there is no guarantee that this can be repeated this year.
The Minister has repeatedly emphasised that Irish people become liable to pay tax at the higher 40 per cent rate at relatively low incomes. Addressing this aims relief at those on average and above-average incomes.
"I suspect that similar to last year, those likely to do best out of Budget 2019 will be middle-income earners," says Peter Vale, a tax partner at Grant Thornton.
Last year, the income level at which people enter the higher 40 per cent rate was increased by €750 to €34,550 for a single person and €43,550 for a married couple with one earner. A further increase looks like a nailed-on certainty this year – perhaps a €1,000 rise might be afforded – thought it is a measure which is costly to the exchequer.
Brian Keegan, head of tax at Chartered Accountants Ireland, points out that every €1,000 increase costs the exchequer about €200 million a year. "One of the consequences of the very welcome fall in unemployment is that it makes income tax changes expensive to implement," he says.
Widening the tax band would only benefit people who currently earn enough to pay some of their tax at the higher 40 per cent rate – a €1,000 increase in the band, would, for example, add €200 to their annual income.
To direct some gains more widely, the 2018 budget also involved cuts in USC, including a reduction in the main USC rate which applies on incomes between €19,372 and €70,404 from 5 per cent to 4.75 per cent. There may well be further USC adjustments in October.
Joe Tynan, head of tax at PwC, believes that the 4.75 per cent rate might fall to 4.5 per cent and there could also be another cut in the lower 2 per cent rate – which applies on incomes between just over €12,000 and just under €19,400 – to 1.75 per cent.
Cutting the main 4.75 per cent USC rate offers greatest benefit to those earning close to the upper limit of just over €70,000, though in cash terms last year’s quarter-point cut delivered just €125 a year to someone on that income level while the sum of all the USC changes gave them about €190 a year.
The self-employed are likely to benefit again from an increase in the earned income tax credit, now €1,150, which is being gradually increased to the €1,650 level of the PAYE credit. A repeat of the increase in the last budget would deliver €200 a year to a self-employed taxpayer.
In trying to promote a budget feelgood factor, the Minister faces two problems. The first is that it takes a lot of cash to make a meaningful difference to people’s take-home pay. Typically, the tax changes in last year’s budget added €5-€8 per week to the take-home pay of PAYE taxpayers, and up to €10-€12 a week for the self-employed.
The Government may hope that the combined impact of pay rises and tax cuts will deliver the political “X factor” of popularity. Public servants will receive a rise of 1 per cent in October and 1.75 per cent in September next year, with further gains for lower-paid employees and also an increase in the income level on which the pension levy is applied.
Private sector salaries are also on the rise and are expected to increase by 3 per cent-plus on average this year and next.
However, there is a another issue here, which you won’t hear the Minister refer to on budget day. If the proportion of people’s income taken in tax is to stay the same when wages are increasing, then tax bands and tax credits must increase in line with wage inflation. Otherwise, people end paying a bit more at the higher tax rate, or their credits are worth a bit less.
“With no increase in tax credits and only a small increase in tax bands, inflation will give rise to an increase in income tax without the Minister appearing to raise taxes,” says PwC’s Tynan.
The bottom line for taxpayers is that the package this year will probably be the most generous since the financial crash, even if the increase in take-home pay is still modest. Perhaps the gains from income tax changes might rise to €10 a week for many, compared to the €5-€8 a week in Budget 2018.
The real issues squeezing people’s living standards are increases in rent and house prices and the cost of childcare, hitting younger, cash-pressed families in particular.
The bottom line for taxpayers is that the package this year will probably be the most generous since the financial crash, even if the increase in take-home pay is still modest
The Government’s new investment programme, the real focus of extra budget resources with a spending hike of €1.5 billion, is designed to address some of these issues. But the political problem is that delivering new infrastructure takes years. Despite all of the talk of prudence, the budget will also look for the short-term political gain from putting cash in people’s pockets. Some things never change.
BUDGET TARGETS: SOURCES OF NEW REVENUE
Cigarettes and alcohol: Subject to a 50 cent excise rise again last year, cigarettes have been hit year after year. Even if there is some diminishing returns here – partly due to smuggling– they are likely to be targeted again. There has been some discussion about whether increasingly popular cheaper packs might take a heavier hit. Whatever the exact formula, smokers will again be in the firing line. Alcohol was spared last year, but is likely to be at least examined this year as a revenue raiser.
Fuel: The environmental rationale for having low tax on diesel rather than petrol has been well and truly destroyed. Government officials have scoped out a plan to bring diesel tax in line with petrol over a period of years. One issue is that it would hit the trucking sector, which is very much in the Brexit firing line .
An increase in carbon tax – which is charged on gas, oils and solid fuels – would be another way of raising revenue. “There is capacity for the Government to raise money here,” according to Buckley of the Irish Tax Institute. “According to the Tax Strategy Group papers last July, an increase in the rate of the carbon tax by €5 per tonne of CO2 emitted would raise in the region of €110.4 million, and that is just one possible measure.” This would mean higher prices to consumers.
Pension contributions: Employees can get tax relief on pension contributions at their highest tax rate, meaning the better-off gain more. This has been referred to by Paschal Donohoe, but with a shortfall in pension savings change would be controversial. This has also been the subject of significant debate and some reforms in the UK. "It is hard to imagine a more short-sighted public policy measure," according to Keegan of Chartered Accountants Ireland.
Business sector: The Minister has options here. Keegan notes the possibility of limiting the ability of companies such as the major banks to avoid paying tax by continuing to write-off losses accumulated during the crash. Tax experts also expect changes to the rules dealing with some Irish companies with overseas subsidiaries and to transfer pricing rules.
VAT: "An increase in the special 9 per cent VAT rate for the hospitality sector is an obvious means to bring in additional tax revenues," says Vale of Grant Thornton. In the run-up to the last budget, the Minister said the threat of Brexit to tourism was an argument to leave the rate where it was. Bringing it back to its original 13.5 per cent level would raise a chunky €600 million.
Local property tax: Your LPT bill will not change in 2019. But the Minister is due to announce what will happen to the charge to the house valuations underpinning the tax at the end of next year, which will have an impact on bills for 2020.