The Tax Strategy Group Papers drawn up by senior civil servants to outline budget options to Government have often given hints about the direction of budget policy. This year the real debates are about issues which are not written down in the papers, but will be hammered out behind closed doors.
Perhaps there has been so much heat about Budget 2024 already that the decision was made not to stoke the fire yet further. If so, the officials involved did a good job.
There are some interesting nuggets — and some interesting omissions. In income tax, the group considers the concept of refundable tax credits, a measure to ensure lower-paid employees, or even those not in work on one proposal, could get the full benefit of tax credits. This is found to be expensive — costing more than €1 billion — and looks unlikely to feature in any form on budget day.
Indexing for inflation
What will feature, certainly, is an increase in tax credits and the income level at which people enter the higher tax rate. The only question is how significant these increases will be. The papers do not discuss this point, but the €1.1 billion put aside for budget tax cuts in the outline plans do not indicate we should expect a bonanza. Interestingly, there is no mention of the 30 per cent middle-income tax rate proposed previously by then tánaiste Leo Varadkar. Perhaps this idea now has a stake through its heart? There is a possibility it could resurface in a separate review on income tax being undertaken by the Department of Finance. This work is important as it will also look at the issue of whether tax credits and bands should be automatically indexed for inflation.
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The papers also look at the longer-term need to raise more social insurance revenue as the population ages. They again raise the idea of higher PRSI on the self-employed — and outline some ways of doing this — as well as options for a higher charge on employers, including a possible abolition of the lower 8.8 per cent employer PRSI rate charged on wages of up to €441 a week which would merge with the higher 11.05 per cent rate over a few years. This would not go down well with small businesses, though higher employer PRSI in some form seems inevitable in the years ahead. Though probably not in this budget.
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In the other big budget area — welfare — the strategy papers do not give much indication of the likely scale of increase. This battle has still to be fought around the cabinet table.
There are some other interesting points. One is the possibility of cutting the VAT rate of new residential buildings from 13.5 per cent to 9 per cent. This could be useful with construction costs threatening some projects, though it is unclear whether it would lower prices or just go into the margins of builders and developers. Civil servants seem cool on the measure, which could cost €580 million a year if home improvements are counted. The papers also show that in the two years since a special 10 per cent stamp duty applied to the bulk acquisition of 10 or more houses since May 2021, some 630 properties were caught by the tax. This indicates investment funds are still active buying properties, though the Department of Finance said this was just 3 per cent of the new stock coming on the market.
The papers also point towards climate change and big changes coming down the tracks here. The Government will lose money on heavily taxed fossil fuel as cars go electric — which could cost the exchequer €1.5 billion per annum — and people reduce fossil fuel use at home. The papers suggest that Government will have to look at cutting supports for electric cars as well as introducing congestion charges, new road charges and possibly more tax on bigger, heavier cars. It also raises the possibility of abolishing or reducing the relief which basically exempts households from paying electricity tax, which could add €20 or more to annual household bills. None of these climate measures will feature in Budget 2024, but carbon tax will rise again and tougher decisions lie ahead.
