Cost of reliefs and allowances under scrutiny as belt tightens

The wide range of tax reliefs and allowances in the tax system are to be critically examined in light of the tight Budgetary position.

The need to do this is highlighted in the pre-Budget discussion papers of the Tax Strategy Group published yesterday by the Department of Finance. The cost of tax reliefs is also understood to have been discussed at the talks on a new national partnership programme.

The National Economic and Social Council is working on a paper on the issue, which is likely to recommend the abolition or reduction of some allowances.

According to the Tax Strategy Group papers, the total cost in terms of tax forgone of the major tax incentives is more than €7 billion per annum. This is a significant cost compared to total annual tax revenue of around €29 billion. Much of the cost is due to normal business allowances (total capital allowances cost €1.65 billion a year) and also pension reliefs (€2.4 billion). It would be simplistic to say these could be removed without major economic dislocation, according to a paper discussed by the committee.

Meanwhile, abolishing some reliefs would not necessarily mean that all the lost revenue would be recovered, as economic behaviour would be likely to change. But the group says there is "an undoubted need" to examine the costs and benefits of the different incentives and of proposed new ones.

On Budget day, Mr McCreevy announced that a range of property based schemes would end on schedule in December 2004. Subsequently, a Government document submitted to the continuing partnership talks committed the Government "to ongoing review of the scope for widening the tax base", informed by a report on the strategic options from the NESC.

The Labour Party finance spokeswoman, Ms Joan Burton, said the Government had not done enough to close off tax loopholes and said the lack of information available to policymakers in this area - as demonstrated by the paper - was "extraordinary".

Most of the cost figures relate to 2000 and there is no reliable figure for some schemes, such as the Urban Renewal tax relief scheme.

The Tax Strategy documents also make clear that the social welfare increases announced on Budget day were generally lower than civil servants calculated was necessary to meet Government commitments, under its programme or the National Anti-Poverty Strategy.

A rise of €10 a week was granted in the old-age pension, compared to €13.20 which the group calculated would keep pace with the Government commitment. There was a rise of €6 per week in the lowest supplementary welfare payment, compared to a rise of at least €10 which would have been required, while the €8 rise in child benefit was well below the third phase of a promised increase programme.

The figures "show the full extent of the Government's breach of faith", according to a Labour Party statement.

The papers also show a range of pre-Budget discussion on possible reforms to the tax system. Among these were ending the current zero rating on food, oral medicine, book or children's clothes and shoes.

One possibility examined was the introduction of a new 5 per cent rate for food, oral medicine and books and imposing the full 21 per cent standard rate on children's clothes and shoes, raising €386 million a year. But the paper discussed by the group recognised this would be highly inflationary, would hit the less well-off and that " there would be significant public opposition".

The reduction of some of the items which had been subject to the 12.5 per cent rate ( increased to 13.5 per cent on Budget day) might have limited benefits in terms of cutting prices to consumers, according to the papers, while VAT changes would also be a blunt instrument for achieving environmental policy goals.