Public spending may have rocketed over the past 20 months due to the impact of the Covid-19 pandemic but it appears that tax cuts and welfare increases will be on the table nonetheless when the Government sets out its budget on October 12th.
As Tánaiste Leo Varadkar recently said, there will be tax measures aimed at "middle-income people in particular", as well as a welfare package to offset the impact of the rising cost of living.
Of course taxes may be cut, but no-one is expecting a giveaway budget of old.
"There'll be no goodies," says Doone O'Doherty, a tax partner with PwC.
Indeed, while the Government has set aside money for tax reductions, it’s expected to amount to just about €500 million, with a further €1 billion or so to be spent on social welfare and improving services. This means that tax measures will be moderate.
Given the fiscal constraints, Padraic Whelan, tax partner with Deloitte, acknowledges there is "limited scope" for budget-day measures. Nonetheless, he says it's important there is "some progress made".
So what might we see?
From the Government's point of view, there is money to be made. A one percentage point increase in PRSI, for example, would bring €700 million into the exchequer in a year. However, as O'Doherty notes, this would hit younger earners who may already have been adversely impacted by the pandemic.
Income taxes
Last October’s programme for Government committed to no increases in income tax or the universal service charge (USC) and Whelan “hopes that this is the case”.
Given that income tax is now the biggest contributor to the exchequer’s coffers, even a small increase would generate significant funds: Revenue estimates that a one percentage point increase in the 20 per cent standard rate of tax would bring in €664 million in a full year.
But such an increase would sting. “It’s difficult to raise large sums of money without hitting people’s pockets in a big way,” says O’Doherty.
On the other hand, cutting taxes may cost too much, with a one point cut to the 20 per cent rate costing the Government about €600 million; a similar cut to the 40 per cent rate would cost €319 million in taxes forgone.
Where a move might be made is with respect to tax bands. Whelan would like to see a plan to index tax bands and tax credits from 2022.
There is talk of PRSI increases for workers and for the self-employed, though these may be signalled rather than introduced this year
“If inflation starts going up, at least there’s something there to pay for it, so a pay increase is protected,” he says. Changing the bands doesn’t cost as much as changing the rate; widening the standard rate band by €500 to €35,800 would cost €43 million a year.
If the minimum wage increases in January, an increase in the USC thresholds, to keep the tax burden of those on this wage at a similar level, is likely.
Social welfare
The last time we had an increase in the State pension was back in March 2019, and so an increase now of €5 a week may well be up for discussion, bringing the weekly payment up to €253.30.
There may also be a range of other increases to welfare payments, again likely at the rate of €5 a week, given the Government’s commitment to delivering a welfare package. These increases may be targeted at those most in need.
Housing
An extension to the Help-to-Buy scheme is expected; the scheme, which offers a tax rebate to first-time buyers of new homes is currently due to run out at the end of the year.
“Help-to-Buy should be extended and retained,” says Whelan.
An update on the mooted shared equity scheme, which would see government take a stake in the cost of a new home for a first-time buyer, may have to wait however. The Central Bank recently affirmed that it has not yet given the thumbs up to the scheme, and is currently considering potential interactions between it and existing mortgage rules.
While the Government's recent Housing for All strategy proposed a vacant property tax, it's also unlikely to make any announcement on budget day on this front, as it intends collecting data on vacancy levels first. So it may be 2023 before we hear more on this.
But there may be other announcements. The Government should be looking at ways of getting vacant units back into use, says Whelan. As towns across Ireland start to re-awaken after the pandemic, the number of vacant shops and other outlets is becoming ever more apparent. He suggests some form of incentive, be it a reduced capital gains tax rate of 20 per cent or so to encourage people to offload the units; or help for people on the other side, in terms of reducing the costs of renovation.
Employers’ costs
An increase in employers’ PRSI, up from the current rate of 11.05 per cent, has been mooted as a way of raising tax revenue. However, there is some opposition to this.
“It would be the wrong time to do it,” says Whelan.
“Any increase would impact all employers, including many who have suffered during the pandemic,” says O’Doherty, adding that a potential increase would also come against a backdrop of increased costs for employers coming down the line.
These include changes to statutory sick pay, which will increase the number of paid sick days to 10, and is due to be phased in by 2025, as well as the much discussed – and delayed – pension auto-enrolment, which is now targeting a 2023 launch.
“Employers will be looking at that as an additional cost,” she adds.
There is also talk of PRSI increases for workers and for the self-employed, though these may be signalled rather than introduced this year.
Upskilling and training
A key focus of the budget may be on upskilling and retraining as the State starts to emerge from the pandemic, and the Pandemic Unemployment Payment is gradually tapered out.
“We would like to see continued focus on retraining and reskilling,” says O’Doherty, noting that there is a new training and skills programme in place, “which is very welcome. There is probably more they can do in terms of subsidies, apprenticeships and State-sponsored programmes”.
Additional training may also be needed to power the housebuilding boom that most believe is necessary to relieve the housing crisis.
“In order to deliver that, we’re going to have to upskill people, incentivise people to go into trades,” says Whelan, noting that he doesn’t see how home construction targets will be met if we’ve “the same amount of fuel in the tank”.
Remote working
Given the Government’s intention to encourage remote working in the post-pandemic world, there have been expectations that if there are any tax give-backs to be had in this year’s budget, this is where they could be.
At present, employees can either claim €3.20 a day from their employer, tax free – if the employer is amenable to it, and few are – or file a tax return to claim a proportion of home expenses back, which delivers a much lower figure.
“I would be hopeful that we would see something in particular around remote working/hybrid working from home,” says O’Doherty, adding that she would like to see tax incentives aligned “more practically” with remote working.
This would mean a tax deduction for expenditure on equipment such as a desk, which currently isn’t possible under the remote working regime, as well as a change to the rules in relation to travel and subsistence reimbursement.
At present, Revenue’s view is that one’s home doesn’t qualify as a normal place of work; this makes it difficult to claim expenses when travelling for work purposes when you’re working from home.
Instead, O’Doherty suggests the introduction of an additional tax credit of €250 to individuals who work from home for at least two days a week or 10 days per month. Such an approach would also take the admin out of it for employees – a not inconsiderable task involving working out broadband and electricity bills, as anyone who has filed a claim of late will attest to.
“It plays to the Government strategy overall,” says O’Doherty, “it widens the talent pool around the country, and lessens pressures in cities”.
With the earned income credit now at the same level as that enjoyed by PAYE workers, there may be little on the day for those who work for themselves
Whelan also hopes that there will be some announcement on this front come budget day. He would like to see incentives go one step further by introducing some form of scheme, akin to the Home Renovation Incentive which offered VAT back of up to €4,050. He could see such a scheme being introduced to facilitate people renovating attics, or building units in their gardens, for home working.
However, if the Government follows the advice from the Tax Strategy Group, they could be disappointed. It has stated fairly bluntly that there was little economic argument for improved tax relief for home workers – largely because anyone who will work form home is already doing so without enhanced relief.
Boost in tax-free bonus
PwC would also like to see an increase in the Small Benefit Exemption for employees. The exemption is used by employers to gift up to €500 to employees tax-free in vouchers. It wants the exemption to be lifted from €500 to €1,500 a year, provided that the €1,000 "uplift" is directly applied to support the hospitality sector.
Capital taxes
As a revenue-raising measure, increasing tax on gains from investments may appear to make sense. The amount raised from capital gains tax (CGT) continues to rise, reaching a high of more than €1 billion in 2019, according to latest Revenue figures.
However, as O’Doherty notes, there is no guarantee that increasing CGT from the current rate of 33 per cent will have “an immediate impact on exchequer returns”.
“I don’t think it’s a sure fire way to raise additional revenue,” she says, noting that in the past, it was actually lowering the CGT rate, to incentivise people to crystallise gains and thus pay taxes owed, that has generated more in tax revenue.
Elsewhere, changes to tax-free thresholds for inheritance tax (capital acquisitions tax) are seen as unlikely this year. Increasing the parent to child (group A) tax-free threshold to €360,000 from the current level of €335,000 would cost €16 million in a full year for example, according to the Tax Strategy Group.
Self-employed
With the earned income credit now at the same level as that enjoyed by PAYE workers, there may be little on the day for those who work for themselves. And this may be good news.
It had been suggested that the self-employed could be facing a sharp hike in the rate of PRSI they pay – up from 4 per cent to 11 per cent by 2030 – a move that would affect more than 330,000 people. And the prospect of higher PRSI is certainly supported by the Tax Strategy Group. However, Varadkar has since expressed his opposition to such a move.
Other
Carbon tax, currently levied at a rate of €33.50 per tonne, is set for a further increase. It is expected to rise by €7.50 every year until 2029 and by €6.50 in 2030, bringing carbon tax to €100 per tonne at that point.
Increases in tobacco, and duties on alcohol, are also possible, while excise on petrol and diesel may also go up.
When it comes to VAT, the hospitality industry is currently enjoying a lower rate of 9 per cent, which is due to run out at the end of this year. It would be a surprise if this was not extended until at least September 2022, the end of the next summer season.
“That sector has been hit badly,” says Whelan.
