Even before the Apple money landed on our collective lap, Budget 2025 promised to be big. The projected €10 billion-plus package of permanent and temporary measures in next Tuesday’s budget might be less than the Covid-related and energy-price shock budgets of recent years, but they are not reasonable yardsticks.
The pandemic budgets included the cost of partially nationalising the private sector wage bill – an unprecedented measure taken to stop the economy falling off a cliff during lockdown. The €10 billion spend is better seen in the context of the pre-pandemic budgets, which typically averaged €4 billion.
A major concern is the quiet but very pronounced build-up in current spending, added to year after year by overruns in health – a build-up that can be rationalised, in part, by a bigger economy with a bigger population, and in the case of health by an ageing demographic. Cynics will claim the spend is bigger because we’re on the cusp of an election and the Government is trying the curry favour with the electorate with a more generous package.
The Irish Fiscal Advisory Council (Ifac) says core spending will increase by 9 per cent this year as opposed to the 5.8 per cent the Government signalled at budget time last year, representing another significant breach of the 5 per cent spending rule, which the Government – just three years ago – deemed as the sustainable rate of expansion. Any potential cracks in the Government’s budgetary arithmetic are, however, covered by the super Bazooka of corporation tax, the gift that keeps on giving, which is expected to deliver another record €27 billion to €28 billion this year. If those windfall taxes weren’t there, the budget would involve a more painful set of trade-offs.
Either way, next Tuesday’s budget will be framed around a package of permanent measures worth €8.3 billion, comprising €6.9 billion in spending and €1.4 billion in taxation measures. There will also – perhaps controversially in the context of the fall-off in inflation – be a €1.5 billion package of temporary, one-off measures to address cost-of-living pressures. Sources say it might be extended to €1.8 billion.
[ Budget 2025: Do you have a budget question you’d like answered? Ask it here.Opens in new window ]
[ Irish Times poll: Cost of living tops public concerns for budgetOpens in new window ]
The budgetary parameters, however, tell us little about the likely measures to be announced; who will gain the most; what’s in it for middle-income earners; will the rising cost of doing business, which has led to a spate of insolvencies across the hospitality sector, be addressed; or by how much the Government plans to lift the tax-free threshold attached to inheritance tax. Here are six potential hotspot areas in Budget 2025.
Income tax
Perhaps the most watched point in the budgetary cycle. Minister for Finance Jack Chambers says the average worker will benefit to the tune of at least €1,000 from next Tuesday’s budget, the bulk of which will come from income tax changes, a three-fold combination of increased income tax credits, further cuts to the Universal Social Charge (USC) and a further lifting of the threshold at which workers pay the higher rate of income tax, long seen as too onerous on middle-income earners.
In Budget 2024, the threshold was raised from €40,000 to €42,000 for a single person, meaning employees could earn an extra €2,000 before paying tax at the higher 40 per cent rate. The expectation is for another €2,000 lift to €44,000. But this barely inflation-proofs the budget against rising wages. Wages are rising and therefore workers are paying more of their income at the top rate, lifting income tax receipts. The Government is merely recycling this back into the economy at a neutral cost to the exchequer.
“Ireland’s economic success has been built on inward investment. In a post Pillar Two world (the second plank of the OECD’s global tax reforms), personal tax system and the cost of employment have become increasingly important factors in investment decisions,” the Irish Tax Institute told The Irish Times. “It is important that Budget 2025 builds on the progress that has been made in easing the burden on middle-income earners.”
The institute noted that 33 per cent of income tax earners – approximately 1.2 million workers – pay neither income tax nor USC and that that gave rise to an unusually narrow tax base which was overly dependent on higher paid workers. It’s not obvious the Government is minded to grasp this nettle at such a late stage in the political cycle.
Cost of doing business
If consumers here complain about Ireland’s high-price regime, business owners say the cost of doing business is forcing many out of the game. According to new figures from consultancy Deloitte, the number of businesses that became insolvent between July and September rose by nearly two thirds (on the same period last year) to 238.
The overwhelming majority were SMEs in the hospitality sector. The Restaurant Association of Ireland (RAI) says a typical food business with a turnover of €1 million will see its total costs increase by €97,000 this year. The single biggest driver, accounting for €37,000, relates to the increased VAT rate followed by wage inflation (€36,000); increased supplier costs (€13,500). If the minimum wage goes up by an 80 cent-€1 an hour, as flagged, this will push the annual increase in costs to over €100,000, says RAI chief Adrian Cummins.
He says business groups have no truck with the proposed hike in the minimum wage but desperately need a compensating measure like a return to the reduced 9 per cent rate of VAT, which he argues could be applied solely to food-led businesses. Interestingly, the Department of Finance, in its recent tax strategy papers, costed such a move at €545 million a year.
[ Corporate insolvencies set to hit highest level since 2017, Deloitte forecastsOpens in new window ]
For the 7,000 independent food businesses, outside pubs and hotels, in the Republic, many of which are carrying warehoused tax debt and are operating with little or no margin on the back of rising costs, next Tuesday’s budget is a “watershed moment”, says Cummins. Ibec group Retail Excellence Ireland said any supports the Government introduces must be an adjustment to the core costs of doing business.
Inheritance tax
Ireland’s inheritance tax, which falls under the Capital Acquisitions Tax umbrella, is levied at 33 per cent. The €335,000 tax-free threshold that applies to children inheriting from parents (before the 33 per cent rate kicks in) is viewed by many as too little in the context of rising property values. The threshold is expected to be raised to €400,000 in the budget, costed by the Department of Finance at €52 million.
Inheritance tax is a thorny issue. Moves to ease the burden will be decried as a sop to the wealthy. Trinity College Dublin economist Barra Roantree argues that only a small fraction of households exceed the current tax-free threshold (fewer than 10 per cent of inheriting households and fewer than 3 per cent of households overall).
Arguing in favour of lifting the threshold, Minister of State with responsibility for financial services Neale Richmond said in a recent Irish Times article: “For most people this will be their main interaction with any inheritance tax and, as a result, many people are faced with the prospect of selling their family home due to the tax bill.”
Cost-of-living supports
Temporary measures to alleviate cost-of-living expenses, the budget within the budget as some call it, will be scaled back to perhaps €1.5 billion next year, down from €2.3 billion in Budget 2024, but not done away with. Social welfare recipients can expect a double payment in October ahead of their usual Christmas bonus to be paid in December. Chambers is also said to be considering a further energy credit of possibly up to €250.
Critics maintain that many of the measures are untargeted and going to households that don’t need them. Tom McDonnell of the trade union-backed Nevin Economic Research Institute told the Oireachtas committee on Budgetary Oversight last week that “once-off cost-of-living supports have no obvious rationale in the current economic climate”.
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There is speculation that the renters’ tax credit will also be raised from €750 to €1,000. But is the latter now aimed at the housing crisis (with Irish rents rising at two-and-a-half times the euro area average since 2019) or the cost-of-living crisis? Budget history tells us that temporary measures have a habit of becoming permanent.
The overheating risk
Ifac and the Central Bank of Ireland both claim the coalition’s proposed budgetary spend pushes too much money back into an economy when it is already running at close to capacity. When they say capacity they mean full employment. Adding to demand when the economy can’t produce more goods and services merely bids up prices and erodes competitiveness. While headline inflation has fallen to just 1.7 per cent, below the euro area average, Ifac insists this is merely a reflection of international energy prices and that domestic price pressures across a range of areas such as rents, medical services, cafes and restaurants are continuing to rise strongly.
Ifac chairman Seamus Coffey recently told the Oireachtas Committee on Budgetary Oversight that pricing pressures in the domestic economy were now “similar to what we would have seen in the 2000s”, an era that ended in chronic overheating and a banking collapse.
Ifac believes the Government is pursuing an “everything now” approach by simultaneously promising tax cuts, higher day-to-day spending and a continued ramp-up in capital investment and that it needs to prioritise. Chambers will insist he is acting in a prudent manner and trying to add to the productive capacity of the economy with an emphasis on capital rather than current spending.
Apple tax money
Ministers have insisted that the €13 billion arising from the Apple tax case will not change the budgetary arithmetic as it would take a number of months to get a final determination on the actual amount, but it surely provides a degree of comfort in terms of strained budgets in health and other areas.
Soundings from ministers to date suggest the windfall might be diverted town three channels: into paying down the country’s large national debt; into the two sovereign wealth funds set up by the Government last year; and into additional capital spending, perhaps on housing.
Many would perhaps like to see the Government do something more visionary or imaginative with the money rather than seeing it vanish into the budgetary ether. Chambers will likely hint at where the money is destined to go in his maiden budget speech on Tuesday.
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