While the government’s Summer Economic Statement indicated an overall spending package of €6.7 billion for Budget 2023, that still leaves precious little room for manoeuvre when it comes to introducing meaningful tax and spending measures aimed at addressing the cost-of-living crisis, according to Mazars international tax partner Cormac Kelleher.
That lack of scope is illustrated by the fact that €3 billion of the total is pre-allocated, with €3.7 billion left to be divided between government departments. Additional public spending makes up €5.65 billion of the package while the remaining €1.05 billion will go on taxation measures.
“In that light, we certainly can’t expect significant tax reforms,” says Kelleher. “The two issues dominating the budget will be inflation and housing. And easing the burden of the increase in living costs will be the priority.”
If they were to target the lower-paid, they could also look at cutting USC rates and increasing the income level at which people start paying it
He believes the main question relating to tax at this stage will be whether the ministers decide to introduce a new 30 per cent rate or if they will focus on the old reliables by widening bands and increasing credits.
“If they were to target the lower-paid, they could also look at cutting USC rates and increasing the income level at which people start paying it. However, that would have to be looked at in conjunction with changes to tax rates, bands, and credits. All these things are linked. Having said that, it matters little what changes the minsters choose to make as the net impact on individual taxpayers of the overall tax package is likely to be much the same.”
Another idea being mooted in the broad income tax space is an increase in the Small Benefit Exemption which allows employers give their employees vouchers worth up to €500 in value, tax free, each year. The suggestion is for the tax-free amount to be increased to €1,000.
“While that sounds good in theory, the increase would only have an impact if the scheme were widely used,” Kelleher points out. “But the fact remains that those employers who do avail of the scheme only use up a small fraction of the €500 limit.”
Housing is the other issue likely to dominate debate in the run up to the budget. However, we are unlikely to see any significant departure from current housing policies in Budget 2023. The government has consistently made the case that its Housing For All programme requires time to work and will offer a solution in the medium to long term. It has also made the quite reasonable case that there are no quick fixes beyond current measures that will increase the housing supply in the short term.
That doesn’t mean there isn’t scope for the government to augment its existing strategy with some carefully targeted measures, Kelleher contends. “It has already been indicated that a vacant residential property tax will be introduced in the budget and the ministers could also look at some tax measures to encourage individual private landlords to remain in the market.”
There are practical and political difficulties to overcome with any such measures, he accepts. “From a political perspective, any measure aimed at helping landlords could be seen to be helping the well off.”The practical difficulties relate to the nature of some measures being mooted. “There have been suggestions of some kind of preferential tax treatment for private landlords who charge rents at less than the market rate,” Kelleher notes. “That would be exceptionally difficult to introduce. Defining the market rate at any given time for different areas of the country would be a near impossible task.”
He also points to the tail-chasing dog scenario where every landlord charges a certain amount below the market rent with the effect of lowering the market rent. “Where does that stop?” he asks.
A more straightforward measure would be a change in the tax treatment for capital investments in rental properties owned by private landlords. “At present, a private landlord who invests in extending or upgrading the energy rating of a home can write off the cost over eight years. If that period was shortened significantly, it might help. Similarly, allowing the write off against all income rather than just the rental income on that property could have a positive effect. There could be a clawback should the house be sold before the normal eight year write off period had expired.”
There are also ways for the government to stimulate housing supply. Among these is to encourage the change of use of older industrial sites located within cities and towns for residential development. Kelleher suggests putting in place measures to incentivise the owners of these sites and premises to sell them to developers or state bodies and move to cheaper, more suitable edge of or out of town locations.
The incentive could take the form of 100 per cent relief from CGT on all sale proceeds which are reinvested in the business over a certain period of time. “That would allow the business owners to sell a site in a good location and purchase another in a cheaper area. They could use the sale proceeds to buy or build a new premises and everything they invested in new plant and equipment and expansion of the business would be exempted from CGT. That isn’t an entirely new idea. Similar provisions have existed in the tax code in the past. Ultimately, it’s tax foregone as the CGT will become payable whenever the owner disposes of the business in future. But it shouldn’t be a free for all. It would need to be very specific and finely targeted.”
People are focused on paying this week’s bills, not on their income when they are 65
Noting the recent ESRI report linking the housing shortage with potentially increased poverty among older people, he points to another looming challenge for the government – the establishment of a national auto-enrolment pension in 2023 to allow for employee enrolments in 2024.
“Budgetary preparations need to be made for the new scheme,” says Kelleher. “For example, the funding for the yet to be established state body to oversee the system needs to be put in place. But despite the vital importance of the scheme, it is unlikely to be a priority of either politicians or the public at present. People are focused on paying this week’s bills, not on their income when they are 65.”
And the introduction of the scheme could be endangered if the cost of living crisis persists into 2023. “It could be perceived by many low and middle-income earners as an additional tax. A public education programme is required to explain the scheme and its benefits. It is a great idea, but the timing could have been better. It’s just a pity that it wasn’t introduced years ago when it was first proposed. It could now end up being a near term casualty of the cost of living crisis. There is more than a year to go before its introduction, but it could be delayed yet again. But a failed attempt to introduce it would be far worse than another delay.”
He believes imaginative solutions will be required if the budget is to make a real difference to the people suffering most from cost of living increases. “Creativity will be critically important,” Kelleher concludes. “Ministers Donohoe and McGrath will have to look carefully at who they are trying to help and come up with targeted measures for people most at risk of poverty without further fuelling inflation. And they must do that while meeting the competing demands of health, education, environment and other key departments.”