Senior officials warned Noonan over cuts to USC in budget

The Government was warned before the last budget that planned cuts to the Universal Social Charge (USC) would narrow the tax base, and that reductions in the charge in future could be accompanied by increases in PRSI.

The warning came from the Tax Strategy Group, a committee of senior civil servants, and has been published as much more dramatic promised cuts to the USC form a central part of the general election debate.

Referring to plans to reduce the number of people who were liable to pay the USC, the group warned Minister for Finance Michael Noonan, that this “would go against the policy of applying the USC at a low rate on a broad base and would lead to concerns around the narrowing of the tax base.” Despite this, the Government went ahead with the move to increase the USC threshold and also cut the main USC rate.

Fine Gael has since made abolition of the USC a central part of its election programme, while Fianna Fáil and Labour plan to abolish it for low- to middle-income earners. Some economists have questioned the affordability of this, and also cautioned about its impact on the tax base.

Election commitments

New doubts have also emerged about the affordability of USC abolition and the other election tax and spending commitments coming from many of the parties. John McHale, head of the Irish Fiscal Advisory Council – the State’s budgetary watchdog – told RTÉ yesterday that, on the council’s estimates, the amount the new government would have to spend on new tax and spending measures in the next five budgets was about €3.2 billion, well below the Department of Finance estimates of €8.6 billion.

Speaking to The Irish Times later, he said that the council's view was that the department's figures did not take into account the cost of "standing still" by adjusting spending programmes and the tax system for inflation. The council did not comment on individual measures but, if its sums are correct, full USC abolition would not be affordable, even if a change in EU rules gave more room for manoeuvre.

State pensions

The Tax Strategy Group also warned that the social insurance fund, which pays State pensions and benefits,was facing pressures in the years ahead, due largely to rising pension costs. It suggested that reductions to USC could be accompanied by increases in employee PRSI, which would raise money for the social insurance fund, while still leaving some net gain for employees.

The Fine Gael election programme is expected to include a planned extension of some level of PRSI payment to those earning more than €13,000 – the charge currently kicks in at €18,000. Under the plan, the USC abolition would still leave employees earning more.

The room for manoeuvre the next government will have is likely to prove controversial in the election campaign. The next minister for finance could decide not to adjust spending or tax fully for inflation, but this route would effectively claw back some of the concessions given in other budget measures. .