With the shape of the UK’s departure from the European Union still unlikely to be determined by October 8th, this year’s budget looks to be distinctly lacklustre.
Apart from the obvious problem of having a generous budget at a time when so much is unknown about our short-term economic future, the other constraint is there simply isn’t that much money to play around with this year.
With “fiscal space” of some €700 million – of which just €233 million has been earmarked for tax cuts – Minister for Finance Paschal Donohoe’s hands are severely constrained this October.
"In reality, we shouldn't be expecting too much at all. I think it'll be very similar to last year, if even less [generous]," says Keith Connaughton, tax partner with PwC.
But, while the potential for pulling a rabbit out of the hat is limited, the Government is unlikely to let the opportunity pass to offer some good news to the electorate.
"The aim is to try and affect as many people as possible by bringing in a small measure," says Michael Rooney, a tax partner in people advisory services with EY, adding: "He's going to have to try and look at getting as much money into people's pockets as possible."
At best, however, taxpayers should expect only to keep a couple of hundred euro extra from their pay cheques come next January.
“They’ll do something to keep up with inflation and make sure people aren’t worse off in real terms,” says Connaughton.
So what can we expect?
Income tax
Despite the constraints in the public purse, most tax experts expect some form of income tax cuts come October 8th. But they will be moderate.
“The cheapest thing you can do is adjust the bands to give a few hundred euro back to people,” says Connaughton.
Given that Irish workers start paying our top rate of tax – 40 per cent – at a relatively low level of income compared to other countries – €35,300 for an individual – Connaughton expects the Minister to increase the standard rate band slightly.
Rooney agrees. “The 40 per cent band is below the national industrial wage, so he really has to try and increase that,” he says. Widening the band by €1,000 for example will cost €216 million a year.
Getting to the holy grail of €50,000, however, looks to be some way away yet.
There may also be cuts to the rate of universal social charge (USC) – which by now must no longer be a temporary measure – particularly at the lower or middle end, but nothing particularly significant, given the costs of such changes. Decreasing the 4.5 per cent rate to 3.5 per cent rate, for example, would cost €422 million a year, while cutting the 2 per cent rate to 1 per cent would cost almost €200 million a year.
Another option – which could take some years to be fully implemented – would be to introduce a system of more progressive income tax bands.
Similar to the US, where there are seven federal tax bands and the rates start at 10 per cent, moving to a top rate of 37 per cent, Rooney argues that such an approach could offer more flexibility in an Irish context.
“This will become even more pertinent if USC and PRSI are merged at some time in the future, leaving less flexibility in terms of the current tax bands,” he says.
With the Government’s electric car charging points being ramped up, it could also make sense for the Government to retain or extend its electric car incentive regime, which allows employees avoid benefit in kind on a new electric car.
Tax credits
Given that the PAYE and personal tax credits have been lingering at €1,650 for quite some time now, and haven’t even been adjusted for inflation, these could be ripe for an increase.
A €50 increase to the PAYE credit, for example, would cost €106 million a year, while a €200 increase to the married credit would cost €152 million.
However, Rooney notes that such a move should be done only in the context of examining the broader tax base, as any increase to this, or the personal tax credit, also of €1,650, would have an impact on the number of people in the tax net.
Inheritance tax
The Government may have signalled its intention to increase the parent to child threshold back to €500,000 some years ago but, as Rooney notes, “with so little in the pot” any significant changes are unlikely.
This means that we’re likely to remain some way off the stated goal – and way off the peak of almost €545,000 reached in 2009.
However, Joanne Whelan, a tax partner with Deloitte, says a "slight increase" in this threshold is likely; most likely of the order of about €10,000.
Self-employed
One inequity that is unlikely to be addressed in this year’s budget is the 3 per cent surcharge that self-employed people earning more than €100,000 continue to pay. This means that those who are self-employed and in this earnings bracket pay a top marginal rate of 55 per cent, compared with PAYE workers earning a similar amount who pay 52 per cent.
“This inequity between employed and self-employed earners unfairly penalises Irish entrepreneurs for taking risks in trying to scale their operations, providing employment and contributing significantly to the Irish economy, and therefore it should be a priority for the Minister to reduce this tax gap,” says Rooney.
There might be movement on the earned income credit side. This credit was brought in to offer a similar tax benefit to the self-employed as PAYE workers enjoy, via the PAYE tax credit. At €1,350, it still lags the PAYE tax credit of €1,650 and so may increase once more in this budget.
“I don’t think he’ll give the €300 [increase], but maybe we’ll see that in two stages,” says Connaughton. This would cost about €35 million a year.
State pension
In recent years, all pensioners have benefited from a flat increase of €5 a week. This year, however, it's expected that any increase will benefit a much narrower base. Minister for Social Protection Regina Doherty noted earlier this year that offering flat rate increases "diminishes the value" of the state pension, while it also doesn't actually hit the people who might need it the most.
Social Justice Ireland has called for a €9 a week increase to social welfare payments, to bring the top rate up to €257.30 a week. This would also bring the rate in line with 27.5 per cent of average earnings, Social Justice Ireland say.
Help to Buy/Property
Due to come to an end this year, there remains much speculation as to what the Government will do with Help to Buy.
Ilona McElroy, a tax partner with PwC, expects it to be extended, and would welcome a signal on this.
“It is causing uncertainty,” she says, adding that if it is extended, the value of properties eligible for the scheme may be reduced from the current level of €500,000.
On commercial stamp duty, which was increased from 2 to 6 per cent in Budget 2018, McElroy "certainly wouldn't want to see that rate going any higher". On residential, she also doesn't expect an increase, as this could "impact people out there who are already quite constrained".
Where she would like to see some action is with respect to the tax burden faced by so-called “accidental” and smaller landlords.
This is echoed by Padraic Whelan, tax partner with Deloitte, who argues that smaller landlords need to be encouraged back to the market "and a lower rate of tax should be considered to do this".
McElroy would also like to see the stamp duty residential refund scheme, which offers a refund on commercial stamp duty paid on a site which is developed for residential use, enhanced to make it easier to use.
Revenue raisers
One way of boosting the Government's pot is by raising tax revenue from other sources. So could the pint be primed for an increase? With no increase in the excise that applies to alcohol since 2014, the Government could see this as a potential revenue raiser.
As identified by the Revenue, adding five cent to the cost of a pint would bring in some €34 million a year, while an additional €20 million could be generated by adding five cent to the cost of gin and other spirits, and a further €16 million a year by increasing the cost of a bottle of wine by 25 cent.
Another possibility is reducing tax relief on pensions for those paying tax at the marginal rate. As Rooney notes, with autoenrolment on the way, with its offering of relief equivalent to 33 per cent, the Government could see it as a way of saving money by equalising relief enjoyed by higher rate tax payers.
However, Connaughton doesn’t expect such a move. “In the scheme of things, anything to discourage people from providing for their future won’t go down well, so I don’t see that happening,” says Connaughton.
