Former taoiseach Leo Varadkar was fond of championing the people who got up early in the morning – the hard-working middle classes he saw as the Fine Gael heartland. But talk about relieving the income tax burden on this group – and even the delusional concept of abolishing the USC – seems a long way off now. This is because Budget 2026 has one important message. In the mixture of pure chaos and urgent priorities that is the Irish budget process, personal taxpayers are now at the back of the queue.
In the years ahead, more tax is going to be needed and it is a fair bet that income taxpayers will keep picking up the tab, including the middle-earning mugs and their quietly prosperous colleagues, the six-figure earners – many already paying 35 to 40 per cent of their income in tax.
This will happen for two reasons. First, public spending is continuing to storm higher – at best the growth rate will slow a little next year but, at close to a planned 8 per cent, it remains well ahead of inflation. The Coalition was correct to focus on infrastructure and to try to underpin investment. But has it got control of its spending? We have yet to see if this Government – and the Department of Public Expenditure, which is meant to control these things – can actually bring it in anywhere close to target and deliver on what is promised.
The second reason is that it looks politically impossible to increase taxes in any other area. A bit extra will come from the local property tax, as we revalue our homes, with the Revenue Commissioners showing exquisite timing by sending out reminder letters during budget week. But we are talking about perhaps another €50 million annually here. By comparison, not indexing income tax bands and allowances for wage inflation will raise about €1.2 billion for the exchequer, as employees see a bit more of their income go in tax.
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Finance Minister Paschal Donohoe promised in his speech on Tuesday to stand by the Coalition’s commitment to make “progressive” changes to income tax “if the economy remains strong”. But with pressure to spend more on infrastructure and public services, and the real risk of some hit to corporate tax revenues from Donald Trump’s policies, scope to adjust income tax will be limited. The stealth tax of letting inflation do its work on income tax returns will remain the path of least resistance to raising more cash.
Wise heads reckon that the Coalition is likely to face tougher budgets than this year’s during its term. There is the Trump factor and the risk of its impact on corporation tax. Meanwhile, the budgetary costs of an ageing population are adding up and the potential costs of climate change bills for not meeting our carbon targets will come into focus.
Minister Darragh O’Brien said estimates of what these potentially significant EU penalties would be were “back-of-an-envelope stuff” by bodies such as the Fiscal Advisory Council. And there are uncertainties. However, the Coalition has yet to even scribble its own promised longer-term plan for the public finances on the back an envelope, or even the side of a beer mat, raising suspicions that at least some parties in Government don’t like what the forecasts show.
The Government has a plan on its shelf on how to pay for all these pressures in the shape of the 2022 report of the Commission on Tax and Welfare. But it won’t pay much attention to it, because its direction was to broaden the tax base by raising extra taxes from capital and property, rather than income. It goes into politically toxic areas such as hiking inheritance tax and levying much greater charges on the key source of Irish wealth, “the family home”, to such an extent that Varadkar dismissed that approach as being like a Sinn Féin manifesto.
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So for this Government’s term, income tax is likely to be the fallback revenue-raiser. It is unrealistic to expect soaring corporation tax to keep taking up the slack. Spending will remain the priority. Even this year, €150 million was cut off the tax package at the last minute and given over to extra spending. More than €8.50 out of every €10 in the budget package went on higher spending, leaving little for tax cuts.
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This all bring risks, too, as the Irish tax base is narrow. A high proportion of income tax is already paid by a relatively small group of higher-earning people. Nearly half of all income tax is paid by those earning more than €100,000. And a recent Central Bank analysis showed that half of all the growth in income tax since 2019 came from the richest 10 per cent of taxpayers.
Just as Ireland is reliant on tax from a few big multinationals, it also needs the income tax from their employees and from the highly paid jobs supported elsewhere by the activities of big tech and big pharma. This is the huge central exposure for Ireland but, as the ESRI’s Alan Barrett argued this week, few anywhere in Irish politics are paying attention, bringing echoes of 2007.
Is it politically sustainable to keep soaking income tax payers? It might be, but only if the soaking is slow – and if the promised investment actually takes place and public services improve noticeably. Spending minister Jack Chambers seemed to recognise the need for reform in service delivery in his speech – and health minister Jennifer Carroll MacNeill has wondered aloud if taxpayers are getting a full bang for their buck from higher health spending.
The chaotic nature of the process – with fraught meetings with key departments going on into the early hours of budget morning – does not give great confidence. Nor does the delivery in many departments from the continual ratcheting higher in spending in recent years – set to be €118 billion next year, having more than doubled over the past decade – or their apparent disregard for spending limits set down on budget day.
If the Coalition can show that it can deliver key projects and better services from the higher income taxes it is collecting, then it has a saleable story. But if it keeps taking a bit more from incomes each year and still does not deliver, then there is trouble ahead.
