The pre-budget speculation seems to get earlier every year. Ahead of the October package there are already clear indications of the major tax changes planned for budget day and no shortage of suggestions about other possibilities. It is important to put these in context, both in relation to the short-term impact on take-home pay and the long-term issues facing the public finances.
Significant changes to income tax credits and bands are needed if the taxation burden is not to rise as wages increase. Put another way, there are many years in which this did not happen, leading to a stealth increase in the tax burden.
This means that much of the €1.4 billion set aside for a budget tax package will, in fact, go on adjusting the system for wage inflation. This will cost more than €1 billion and elsewhere the room to deliver real increases in people’s living standards via tax changes is limited.
The public should, therefore, treat talk of “giveways” with some scepticism. There will be real tax relief in the budget, but it will be modest enough.
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The longer-term context is also important. The exchequer finances have been supported by an extraordinary rise in corporate tax payments. Nobody knows whether this will continue at current levels, continue to rise, or fall back over the next few years.
Department of Finance warnings that around half of all corporate receipts may be classified as “windfall” – in the sense that they are linked more to tax planning than activity in the Irish economy – are worth paying attention to. However, the extent of the risk faced is hard to calibrate. What should guide policy, however, is not using the windfall aspect of these revenues to pay for ongoing spending commitments.
Against this backdrop, bodies such as the Irish Fiscal Advisory Council and Commission on Taxation have warned taxes are likely to have to rise in the medium term rather than fall. This is based not only on the uncertainties of corporation tax but also on the bills coming down the road due to an ageing population and climate change.
Irish politicians have yet to face up to this. Bar plans for a modest rise in PRSI and increases in carbon tax, there has been little done to prepare or to identify where other tax could be raised. The report of the Commission on Taxation, which addressed this subject in detail, has not been given the attention it deserves.
The concern now is Budget 2025 will make matters worse by narrowing the tax base further, for example via changes in inheritance tax, or an extension of the ill-advised mortgage interest relief reintroduced last year. Tax revenue is now heavily concentrated on corporate tax and on income tax paid by higher earners. If there is a downturn, the exchequer finances could again be exposed.