A central task of politics is how to collect and spend money. Ireland’s roller-coaster economic history has made this contentious area. The legacy of the tax hikes during the financial crisis lives on in the pay packages of many, while the austerity measures at the time – particularly on housing – continue to cast a long shadow. Government spending has risen sharply in recent years and the political view is that the vast majority of additional resources in the budgets should be spent on higher expenditures rather than lower taxes.
This has put Fine Gael in a tricky place. It wants to offer tax cuts to its middle and upper income base, but space has been limited in recent years, forcing it to follow through on promises such as phasing out the USC – a crazy idea that would put a hole in our taxes basis – and to ensure that people earning less than €50,000 do not pay tax at the 40 percent rate.
Now, however, with a €16bn surplus for next year, it has ambushed its coalition partners with the early launch of a plan to give the middle earners a budget increase of €1,000. The bulk of the extra funds will still go to higher spending. But this budget is different because there is clearly enough money to drive up spending and have a tax cut package bigger than seen in years. And also to save a few euros for the future.
In this year’s package, a sole earner of $40,000 – or more – earned $831, while someone earning $30,000 got an extra $191. This is the sharp end of the policy of tax cuts
The budgetary tax package is likely to be around €1.6 billion, compared to €1.1 billion last year. Much of this – most of it – will be needed to effectively index the income tax system, ensure people aren’t pushed into the higher tax bracket as revenues rise, and preserve the real value of tax credits. But trying to calculate inflation-adjusted gains and losses in an economy where incomes are rising at different rates is complex. And so the focus is usually on the top numbers — who wins and who loses in cash.
And so we come to the pledge of €1,000 from the three Ministers of State of Fine Gael. Fine Gael said it believed the money should be delivered via an increase from €4,000 to €44,000 in the income level at which single people start paying tax at the higher income tax rate of 40 per cent. There would be proportional increases for single-income couples. They also want a $100 increase in personal tax credits, a cash amount that all taxpayers can deduct from their accounts.
When other likely adjustments are added, the winners here would be similar to the 2023 budget. Most of the money would go to those who earn enough to pay income taxes at the higher rate. In this year’s package, a sole earner of $40,000 – or more – earned $831, while someone earning $30,000 got an extra $191. This is the sharp end of the policy of tax cuts.
Deciding to give all earners the same benefit in the 2024 package by spending the money on increasing tax cuts – rather than most of it on widening the band – would cost a lot more money, probably close to €2.5 billion .
The economic rationale for widening the tax bracket from the standard rate is that the Irish tax system is unusual in charging people high income tax rates on relatively modest income levels. But the Fine Gael movement appears to be more about politics and appeals to the party’s constituency. Figures from the Revenue Commissioners show that around 750,000 people pay taxes at the higher rate and would therefore benefit from the increase in the standard rate. Fine Gael estimates that 1.3 million taxpayers would benefit from this measure, taking into account those who do not earn enough to benefit fully from the measure. This figure seems high – and Fianna Fáil sources say it is an overestimate.
But whatever the exact number, the Fine Gael package focuses the bulk of the money available for tax cuts on the 23 percent of people who pay taxes at the higher rate, rather than the 41 percent who pay alone against the standard 20 percent. percent rate. The remaining 36 percent do not earn enough to pay income tax, another feature of Ireland’s tax system.
Tánaiste Micheál Martin has said emphatically that the focus should be on lower wage workers and the most deprived
It will be interesting to see how the Fine Gael plan survives the heat of budget negotiations. If the Summer Economic Statement, expected in July, allocates about $1.6 billion to a tax package, the party’s plan would use nearly all of that money. Does Fine Gael’s claiming credit then mean that Fianna Fáil in particular will dig in and look for a package that spreads profits a bit more broadly, even if middle and upper earners get a little less? Or, along with the Greens, will it focus its political fire more on spending commitments as it feels progress in areas such as health, housing, child care and climate change will resonate more with voters? Tánaiste Micheál Martin has stressed the need to focus on lower wage workers and the most deprived. Many lower income earners who do pay taxes are renters, so extra tax relief for this group could be a step forward in budget talks about taxes?
There is also a broader context. Given the bills the state will face in the coming years – and despite large surpluses expected – bodies such as the Fiscal Advisory Board, the Tax Commission and the Treasury Department warn that in the medium term we will all have to pay more taxes to aging population, climate change bills and so on. And the Tax Commission firmly and rightly argues that additional tax should come largely from areas other than income.
Big political questions and decisions are coming. But in the budget bubble we are in right now, and with a general election likely next year, the coalition parties will feel they can have it all in the 2024 budget – spend more, pay less in taxes and set aside a little money to look sensible. to see. . Budget ministers Michael McGrath and Paschal Donohoe have their hands full trying to keep this all under control, as a Fine Gael-esque boost to higher earners would inevitably curtail general demands elsewhere.