After several years of minimal change, this year the budget looks set to be back with a bang. With the Government setting aside about €1 billion to help with cost of living measures, it’s likely that not only will there be something for everyone in the audience, but there might actually be something meaningful.
“That focus on your pocket has become even more critical because of cost of living pressures,” says Doone O’Doherty, a partner with accounting firm PwC.
Of course with inflation continuing to run riot, it’s important to note that the “real” impact of these changes may not be as bountiful as one might hope for. “People could get with one hand and see it taken back with another through inflation,” says O’Doherty.
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Nonetheless, budget measures suggested thus far would mean that a typical family could save into four figures next year if most of the proposals are implemented, thanks to lower income taxes, an increase in child benefit, cuts in childcare costs, rent credit, and an increase in social welfare payments.
So just what’s on the table for September 27th?
Income tax
Many of the biggest changes are likely to be in the area of income tax. As Minister for Finance Paschal Donohoe recently said: “A key objective of taxation policy in Budget 2023 will be to avoid workers paying additional tax simply because they move through higher tax brackets because of inflation.”
Guiding initial discussions was the much mooted introduction of a 30 per cent tax rate. First flagged by Tánaiste Leo Varadkar back in March, the introduction of such a rate would have lowered the tax bill for those on the higher rate of 40 per cent.
However, as budget day approaches, enthusiasm seems to be waning for this approach.
For one, such a move would require structural change, says O’Doherty, pointing out that two rates have been in place since 1990. Revenue systems would have to change, as would those of payroll providers, to ensure that the new structure operates correctly.
It would also be complicated by the fact that some reliefs are given at the marginal rate: would pension relief for example, also move from 40 per cent down to 30 per cent?
And there is also, as O’Doherty points out, the issue of equity. A third rate of taxation would only benefit about 35 per cent of taxpayers
So, while a 30 per cent rate “would improve the competitiveness of the personal tax system, I think the negatives currently outweigh the positives”, she says.
Camilla Cullinane, a partner with KPMG, is also hoping for a boost to Ireland’s competitiveness on the personal tax front — although how much it helps will depend on how far the Government goes.
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“Every little bit helps for sure,” she says, adding that in the global war for talent, Ireland’s relatively high rates of taxation for middle income earners and above can be a negative. There is an argument, she says, that tax bands and credits should be linked to inflation, and automatically increased on an annual basis.
“There could be a statutory mechanism to allow for that,” she says, which could be “turned off” if needs be. Such an approach would be a “bit fairer” — particularly if inflation is to remain an issue in years to come — to ensure that workers aren’t dragged into higher levels of taxation just because of a higher wage.
“But they don’t have to do one or the other,” she adds. “They might come out and do a bit of a mix,” she says.
Indexation is going to be expensive — and will still likely fall short of the current rate of inflation.
In its recent paper, the Tax Strategy Group modelled two rates. Indexing the income tax system to the tune of 3 per cent a year would — in full-year terms — cost the exchequer €630 million, while indexing at a rate of 4 per cent would cost €845 million a year. Applying an increase of €1,500 to the standard rate band would cost about €585 million.
On the other hand, the benefits of indexation are more broadly felt than a 30 per cent rate, as 72 per cent of taxpayers (or two million taxpayer units — a term that reflects the joint taxation of many couples) would benefit from it.
Another area which needs to be looked at is the taxation of personal investments, says Cullinane.
“I do think that there’s a really strong argument to be made for simplifying personal investments,” she says.
On the self-employed front, as Cullinane notes, there was nothing in the Tax Strategy papers on this cohort, so potentially no changes on this front, although of course any changes to income tax will also benefit them.
Social welfare
It is set to cost a hefty €1.1 billion, but the touted €15 “across the board” increase in social welfare payments would be welcomed by many. If it was to come in, the state pension would increase to €268 a week, delivering an extra €780 a year to pensioners qualifying for the full pension.
Similarly, those on other social welfare payments would see their payment increase to €223 a week.
Further, in addition to the Christmas bonus, a one-off autumn bonus payment has also been discussed. This would see a double payment in one week, similar to the end-of-year payment. However, at such a generous rate, it may not be offered at a lower increase of €10 or so.
[ Budget 2023: Package of more than €6.5bn planned amid soaring inflationOpens in new window ]
Energy costs
Energy costs are already high and will rise further next year, even before the planned increase in carbon tax. This is set to increase by €7.50, which means it will go from €41 to €48.50 per tonne of carbon dioxide emitted. If carbon tax increases, petrol, diesel and home-heating oil prices will follow.
To counter this, the Government is likely to take some steps. These could include a once off bonus to those claiming the Household Benefits Package. This gives €35 a month towards the cost of gas or electricity (as well as a free TV licence), and more than 450,000 people benefit from it every year. Doubling it for a month would see the payment rise to €70.
Another possibility is a second payment of the €200 electricity credit, which electricity payers will benefit from by the end of the year.
Housing
Just because we now have a cost of living crisis doesn’t mean the housing issue has gone away, and this year’s budget is likely to make some efforts to improve the situation for thousands. However, whether or not any meaningful change will be introduced remains to be seen.
More of the focus this year may be on landlords, given the steady tide of smaller landlords leaving the rental market. As O’Doherty notes, the Government appears to have been “dusting down” a 2017 tax strategy group paper on the fiscal treatment of landlords.
Items on the table include a potential increase in the deductibility cap for pre-letting, which is currently set at up to €5,000 of expenses.
“Costs have risen so they may look to raise that cap,” says O’Doherty.
[ Budget spending must be firmly anchored in growth and tax revenueOpens in new window ]
Another option might be to allow relief from CGT if a property is bought with a tenant in situ, and retained as a rental property for five years.
“Any combination of those would be interesting,” she adds.
Allowing landlords to offset rental losses against other taxable income in the current year, making property tax deductible, or simply reducing the level of tax at which rental income is payable at are other options.
But it’s not just landlords; tenants will also likely benefit.
First up is the potential reintroduction of the rent credit for tenants. At its peak, it cost about €100 million a year and helped more than 200,000 renters meet their accommodation bills. However, the savings achieved under the credit weren’t substantial when looked through the prism of today’s rent costs — the typical adult for example would have saved about €360 a year, rising to €720 for a pensioner.
For home buyers, Help to Buy, which is due to run out at the end of the year, may be extended further.
Children/education
Childcare costs remain a major issue for those with young children. Cutting them is expensive but seen as necessary and Children’s Minister Roderic O’Gorman has said he wants to cut childcare fees by half over the next two years.
There is also talk of boosting the child benefit payment. Doubling it on a one-off basis would mean a €280 one-off payment for families with one child or €560 if they have two.
Already, the back-to-school allowance has increased by €100 per child from August, while there has been talk of cutting the €3,000 college registration fee by somewhere between €250 and €500.
Capital taxes
On the capital taxes side, Cullinane says that “all the thresholds and reliefs need to be increased with inflation”.
“This definitely needs to be looked at,” she says, adding that when it comes to capital acquisitions tax, for example, the current parent-child threshold is €335,000 — unchanged since 2019, despite rising house prices.
She would also like to see CGT indexation reliefs reintroduced.
Old reliables
Cigarettes and alcohol are unlikely to be so reliable in this year’s budget. It is expected that there will be no increases to the cost of either, despite both being regular revenue raisers. A decision not to increase either is likely to come against the background of the increased cost of living, with the introduction of a minimum alcohol pricing earlier this year putting upward pressure on prices.
PRSI
But the budget may not yet be an entirely one way street. Increasing the rate at which PRSI is levied has been discussed for some years now, partly due to an increase in benefits made available to the self-employed, and partly because of issues surrounding the funding of the state pension in years to come.
As O’Doherty notes, if the Government was to go down this road of hiking PRSI, it could offset some or all of any increase in take-home pay due to tax cuts.
