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.

Increasing tax on pensioners

Those over 66 pay no PRSI. The tax exemption for pensioners is €18,000 (€36,000 for a couple) and there is also an age tax credit worth €500 to a couple. In addition, over-70s have a top rate of 4 per cent universal social charge (USC) compared to 7 per cent for everybody else earning over €16,016. Those over 70 with an income of €40,000 pay €3,500 less tax than those under 65. There is a view within some sections of Government that the nettle needs to be grasped. Others regard it as political dynamite.

Increasing USC for high earners

There has been pressure from Labour to have the universal social charge (USC) rate for PAYE workers earning over €100,000 increased to 10 per cent. Self-employed taxpayers already pay USC at the 10 per cent rate for income above €100,000. It would yield about €71 million.

Motor taxes and VRT

The Government is committed to increasing motor taxes and the vehicle registration tax. A combination of people buying CO2 efficient cars to avail of cheaper VRT and a collapse in new car sales has seen the State’s take fall from €1.4 billion in 2007 to €387 million in 2011, with indications of further sharp drops in 2012.

Carbon tax was increased by €5 per tonne last year, leading to a 1.5 cent increase in petrol and diesel prices. If there was another €5 jump for 2013, it would add a further 1.5 cent to motor fuel prices and would raise €108 million.

Old reliables

There is a Government commitment to deal with the sale of cheap alcohol in off-licences, though sharp hikes might lead to renewed cross-Border purchases of alcohol and tobacco. A 50 cent increase for a packet of cigarettes would be worth €81 million. A 20 cent increase in excise duties on beer and spirits, and a 50 cent jump in excise on wine, would garner €156 million in new revenues in 2013.

Cuts

Child benefit

With a target of €540 million in cuts and with basic social welfare rates being protected, it is inevitable that child benefit will be hit.

The cost to the State for providing this benefit rose from €965 million in 2001 to €2.5 billion at its peak in 2009. An advisory group to Joan Burton has recommended a cut of €40 in the benefit bringing it back to €100 per child. A waiver would be put in place for less well-off families. But it’s not going to happen in one year. The more likely cut is €10 which would yield €140 million in a full year.

Sick pay

The department is refloating a controversial proposal that employers pay the first four weeks of statutory sick pay, for which the State is on the hook at present.

The measure would save €89 million a year (but the State only about €60 million, because about a third of workers are public employees).

Pensions

Pension rates will be unaffected but some of the secondary allowances for pensioners, including free travel, the fuel allowance, and electricity and telephone packages, could also be modified and tightened. Some of these have a substantial cost. Fuel allowance costs €224 million a year, while free travel costs €75 million.

PRSI

PRSI revenue flowing back to the Department of Social Protection will reduce the total cuts needed to well below €540 million.

Health

The cut for the Department of Health next year is expected to be €79 million but it has been complicated by an over-run for this year which may yet run to €500 million. In August, the HSE announced cuts of some €150 million to plug that gap, including reductions in home help hours and in personal assistants for people with disabilities.

With pay levels left untouched, savings will have to be made in services and in efficiencies. These will include trimming back of the use of agency staff; cuts in overtime; new terms for consultants; increases in charges for providing public hospital facilities, including beds and AE services, to private patients; and further reductions in drug pricing. A hike in the 50 cent prescription charge is also on the cards.

Education

The State pays some €90 million towards the 56 private post-primary schools, mainly through teacher salaries. Higher uptake on early retirement, pay increments and growing enrolment means Ruairí Quinn will have to find more than the earmarked €77 million in cuts. An increase in the pupil-teacher ratio, a €250 rise in student fees and cuts in capitation grants will all feature.

Environment

A major reform of local government was announced last month. Phil Hogan said the measures would save €50 million.

Agriculture

The Department of Agriculture will have to bear one of the biggest comparative cuts, some €114 million in all.

That may mean more raids on payment schemes such as Reps, and the disadvantaged area scheme, as well as capital spending such as forestry. To sweeten the pill, the department gets €1.3 billion from EU-funded schemes.