The whole Coalition spat has come to a head after an article appeared in the Irish Independent on Monday by Fine Gael Secretaries of State Jennifer Carroll MacNeill, Martin Heydon and Peter Burke calling, among other things, for a tax package in the budget worth €1,000. are for an earner with an average income of approximately €52,000. Tánaiste Micheál Martin has accused the three of undermining the budget process. Entrepreneurship Minister Simon Coveney has countered that the three merely outlined Fine Gael policy and were entitled to do so.
This row will pass, but it sets the tone for fraught budget negotiations in the coming months.
1. The background
There is money to spend in the 2024 budget, which will be presented in October. We won’t know exactly how much the government plans to spend on additional spending and tax cuts until it releases its main pre-budget document, the Summer Economic Statement, in July. This is preceded by the so-called National Economic Dialogue, a meeting where interest groups and lobbyists from various sectors explain their budget issues. Subsequently, the coalition will conduct detailed negotiations.
Fianna Fáil is annoyed because she presumably feels that Fine Gael is getting ahead of things, probably partly in an attempt to take credit for what might happen anyway. Taoiseach Leo Vardakar did not help the Fianna Fáil vote by promising a raise for retirees.
It remains to be seen if this develops into a full-scale squabble over budget allocation, with Fine Gael pushing for more taxes than the other two sides want. It could be, as the coalition parties try to create clear water before the next election.
[ Coalition row: ‘No intention to upset anyone’, says Coveney after FG tax cut article ]
[ Fourth budget sees a chasm open between formerly united Coalition partners ]
2. The tax cut argument
There was little surprise in the article by the three deputy ministers. If the sentence about the € 1,000 less tax for middle earners had not been included, it would have been passed without much comment. But it did.
The vast majority of available budgetary resources in recent years have been spent on increasing spending rather than cutting taxes. Many spending increases are baked in to maintain existing service levels before the budget breakdown kicks in each year. And even then, pressure to increase spending on health and education, as well as on welfare and pension rights, has led to the bulk of budget day resources going in this direction.
Last year’s tax package was slightly larger, worth €1.1 billion. But this was outside the permanent budget changes of €6.9 billion.
Another €4.1 billion was spent on temporary spending measures to help people through the cost of living crisis.
How much the tax package will amount to this year depends on some important decisions. First, what will the total budget package be with an estimated budget surplus of €16 billion next year? Treasury officials warn that three-quarters of this surplus (€12 billion) is due to what it classifies as windfall corporate tax receipts – and say it would be unwise to rely on this money to fund pending new tax and finance expenditure obligations.
As a step to counter this, Treasury Secretary Michael McGrath wants to put money aside in a new national investment fund, but as this will not be operational until next year it is not clear how this will be handled. in the budget.
Once the total amount available for tax and spending measures has been determined, the next issue is the breakdown between the two – and then the precise measures to be put in place. Any stop of this process seems to be controversial.
3. The vital role of inflation
The return of inflation has changed many budget parameters. Clearly it puts a strain on spending as more money is needed to provide the same level of service to the public.
But inflation also has an impact on taxpayers. If tax credits and brackets are not increased in line with income, taxpayers end up paying a little more tax each year as the true value of credits decreases and people are gradually pushed to higher brackets in the income tax and USC systems. Economists can “tax drag” this and over a period of years it can have a significant impact.
In some countries, parts of the welfare and tax systems – pensions in particular – are indexed for inflation. Ireland has traditionally not had indexation, preferring to leave the announcement to the then Chancellor of the Exchequer, who typically presents inflation adjustments as a giveaway. In addition to this political advantage, Treasury officials also prefer to maintain flexibility from year to year, presumably to allow more room for maneuver if budget amounts become tight.
Fully indexing the tax and social security systems to inflation would be costly, although the Treasury also benefits from higher inflation, as it also leads to more taxes in areas such as VAT, as prices rise. Indexing the income tax system to fully account for rising revenues would likely cost around €1.5 billion next year, depending on estimates of income increases. One problem here is that average incomes are being lifted by high earnings growth in the highest income sector, while increases elsewhere are more modest.
The government has committed in principle to indexing the tax system every year from 2022 and how this could work for personal income tax is part of a wider consultation on income taxes launched by the Treasury Department. Indexing taxes would inevitably mean the same for social security and pensions.
4. What about the €1,000 for 2024?
A single middle-income taxpayer of € 50,000 plus benefits for about € 830 from the income tax measures in this year’s budget, in particular through an increase in the level of income – from € 36,800 to € 40,000 – whereby they become liable to pay tax at the higher rate. For a married couple with one earner, that went from € 45,800 to € 49,000. There were also changes to tax credits and some USC deductions.
Many of these increases were necessary to keep pace with inflation and thus protect, rather than add to, household purchasing power. There was also some catching up to do after inflation flared up in 2022, averaging 8 percent.
Last year’s increase in the standard rate tax bracket — the income level at which people enter the higher rate — of 8.6 percent was ahead of inflation, which the department forecasts will average 4.2 percent this year.
So the key political question, with inflation projected to fall to 2.5 percent next year by the ministry, is what size of the income tax package is appropriate? It is clear that the government wants to ensure that inflation and higher wages do not lead people to pay more tax – in other words, they will at least start indexing large parts of the system. But the argument put forward by the three secretaries of state is that the budget needs to go further and deliver real gains to middle-income taxpayers.
If the standard rate bracket is adjusted again, the tax credits and the USC system will inevitably also be adjusted. This is to ensure that the lower income earners, who do not earn enough to benefit from the expansion of the standard rate band, also benefit. But if all taxpayers are to benefit equally as a percentage of their income, significant increases in appropriations and the USC system are also needed. It’s not just about how much taxpayers get, it’s also about which income levels do best.
And if taxpayers anticipate inflation, welfare recipients and retirees can presumably expect similar treatment.
This will not only try to gain ground in controversial areas like health and housing, but will also be the real meat of the future budget debate. By throwing the €1,000 figure into the mix, the three deputy ministers kicked it all off. It’s hard to see a tax package lower than last year’s level and it could be higher. The $1,000 forecast may not be far off.
