Noonan defends move to phase out USC over next five budgets

Minister for Finance Michael Noonan has again defended Government plans to phase out the universal social charge (USC), suggesting the move represented a "valid fiscal approach" and enjoyed cross-party support.

Addressing the Oireachtas Committee on Budgetary Oversight, he said the tax was introduced as an emergency measure during the financial crisis and now that the emergency had passed it should be gradually removed.

Mr Noonan said it would take at least five budgetary cycles up to 2021 to fully eliminate the charge, which currently generates €4 billion in tax receipts for the exchequer, which equates to just under a quarter of the total personal tax yield.

Sinn Féin TDs David Cullinane and Pearse Doherty, whose party opposes the move, repeatedly raised concerns, however, about the potential erosion of the tax base.

They cited a number of sources, including an internal Department of Finance paper, which suggested the Government's plan was regressive and costly and may not benefit low-paid workers, while noting that employers' group Ibec and the Irish Congress of Trade Unions were both against the move.

“Given the pressure we have on public services, do you accept that now is the time to maybe re-evaluate the phasing out of the USC,” Mr Cullinane asked the Minister.

Mr Noonan acknowledged there were concerns but said there were “acres of papers” from inside and outside the Department of Finance detailing how Ireland’s high tax regime was damaging economic activity and employment.

“The USC on top of income tax gives us marginal rates of tax which are too high and I intend reducing them,” he said. “There’s plenty of evidence to say that this is valid economic approach and a valid fiscal approach.”

Mr Noonan indicated the upcoming budget would again focus on reducing the USC’s impact on low and middle-income earners.

Last year’s budgetary changes removed 42,500 lower-income earners from the tax net by increasing the USC entry point to €13,001.

Independent TD Stephen Donnelly suggested the Government’s fiscal space could be doubled to €2 billion next year as a result of the proposed closure of a tax loophole relating to Capital Gains Tax, which was allowing so-called vulture funds registered here to avoid millions in tax.

He noted that US private equity firm Cerberus would walk away from its purchase of Nama's Northern Ireland loan book, known as Project Eagle, with about €2.8 billion with little or no tax liability because of the Section 110 loophole, which allowed companies with distressed property assets set up as charities.

Mr Noonan said Section 110 had been established to stimulate activity in the financial services sector but “was now being applied where it wasn’t intended to be applied” and the loophole would dealt with in the upcoming Finance Bill.

However, he cautioned that even if the amendment is successful, there may be a change in behaviour so the revenue gain could not be relied upon.

In his opening address to the committee, Mr Noonan again signalled the Budget would be held on October 11th. He said the adjustment would be in region of €1 billion, split two/one between spending hikes and tax cuts.

In its latest assessment, the Fiscal Advisory Council warned the real adjustment would be far greater, perhaps in the region of €2.4 billion, given the extra boost to spending agreed in the middle of this year.