The four-year plan: questions and answers
What’s all the fuss about?
The Government’s plan to put the State’s public finances in order has been released. The measures will see it cut €10 billion in spending and raise a further €5 billion by way of tax increases. As was announced, €6 billion of the cuts and tax increases are to be front-loaded in next month's budget.
The Government said it accepted that the four year plan would “negatively affect living standards of citizens in the short term”, it insists that failure to adopt it will “lead to greater burdens in the future for those who can least bear them and will jeopardise our prospects of returning to sustainable growth and full employment”.
So social welfare rates will decrease and the tax take will go up?
Pretty much. The plan says that once the spending reductions are put in place social welfare rates will be “slightly above 2007 levels” while income tax measures “will bring us back to levels prevalent as recently as 2006”.
How is the plan going to impact on my pocket?
It is likely to hit it very hard indeed. The affect it will have depends on an individual’s circumstances. People will face multiple negative impacts. When the plan is fully implemented, in excess of €3,000 will be lopped off the salary of a person earning €50,000 a year.
Where do we start?
The Government says it wants to reduce the minimum wage by €1 to €7.75. It says the current minimum wage, one of the highest in Europe, is a barrier to job creation.
What about taxes?
The standard rate of VAT will increase from 21 to 22 per cent in 2013 with a further percentage point increase a year later. The Government says this will raise an additional €620m in a full year The lower rate on labour intensive services will be retained in order to encourage and protect employment growth.
How will my take home pay be hit?
Again this is bad news. Under the plan an aggregate 16.5 per cent reduction in the value of tax bands and credits is to be introduced. This means that the entry point for income tax for a single PAYE worker will be approximately €15,300 down €3000 on current levels. In 2014, then, the net pay for a single person on €55,000 will fall by €1,860 per year or €36 a week, a drop in real terms by 4.8 per cent.
The net pay for a married one-income family on the same salary will fall by €2,310 or €44 per week, a drop in real terms of €5.4 per cent. For people who make tax relieved pension contributions, net income will fall a further 2.5 per cent at the income level of €55k in the private sector.
The overall tax wedge on average earnings for a single individual will increase from 28.6 per cent last year to 33.7 per cent by 2014.
Many Benefit in Kind entitlements will also be abolished next year including the exemption of employer provided childcare, relief for rent paid for private rented accommodation and the tax relief for trade unions subs.
Any other cuts in tax relief?
Yes. The plan proposes the abolition of 10 tax expenditures that will save €280 million in a full year. Rent relief, relief on trade union subscriptions and income tax age credit for people aged 65 and over are to go.
A further six measures, including artists income tax exemption and the tax-free status of ex-gratia payments and pension lump sums of more than €200,000, are to be curtailed saving a further €75 million.
Home loans taken out on or after January 1st, 2013, will no longer qualify for mortgage interest relief, which is to be abolished completely by 2018. This will generate full year savings of €485 million.
Will public service pay be cut?
No, under the Croke Park agreement, the Government can not cut public sector pay but it has announced a plan to reduce new entrant’s salary levels by 10 per cent. As there is a recruitment freeze in the public sector at present, this is unlikely to make a whole lot of difference .In addition a reformed pension scheme is to be introduced for new entrants to the public service.
How will pensions be affected?
There is no proposal on the table to change the existing State pension rate although it does seek to increase the age at which people qualify for the State pension to 66 in 2014, 67 in 2021 and 68 in 2028.
There is worse news to come however. There is to be a dramatic reduction in the tax relief available of pension contributions, a move which will hit higher earners hard. At present an employee who makes pension contribution is given tax relief at the top rate of 41 per cent and they also get tax relief on their PRSI and health levy payments. Under the plan the PRSI and health levy relief on pension payments will disappear immediately while over the course of the plan, employees who makes pension contributions will only get tax relief at the lowest rate of 20 per cent
The rate of income tax relief on pension contributions will fall from 41 to 34 per cent in 2012, to 27 per cent in 2013 and 20 per cent in 2014. This will give an annual reduction of €165 million or a cumulative reduction in pension tax expenditures of €700 million.
The impact this will have in real terms is enormous. At present it costs a person €51 to contribute €100 to their pension pot. Once the full impact of the proposed changes are felt it will cost €80 to make the same €100 contribution.
What about property, water and carbon taxes?
As widely predicted both property and water taxes are coming down the tracks and carbon tax is to increase. There will be a flat fixed property or site value tax of €100 in 2012 and a full value-based tax introduced in 2013. It is expected that this tax will raise €530m in a year. The plan envisages an average per household charge of €200 when it is fully implemented It will apply to 1.8m households and zoned land that equates to a further 700,000 houses.
Water charges will be introduced but not before meters are installed in all homes. Money taken from the National Pension Reserve Fund is going to be used to install the meters.
The price of Carbon will double to €30 per tonne over the course of the four years.
How will the education system be hit?
The student registration charge is to be increased by 33 per cent from €1,500 to €2,000. A range of supports to literacy and school completion programmes will be cut by five per cent cut. The number of Special Needs Assistants (SNAs) will be capped at the current level of over 10,000. Post Leaving Cert students will face a €200 charge and the overall education bill will decline by three per cent over the lifetime of the plan from €9.2 billion to €8.9 billion in 2014.
Is there any good news in the plan?
Hmmm, probably not. Although the Government will point to its commitment to “rigorous competition in the professions” and says it will introduce measures to reduce legal costs. It will take “decisive action” to reduce waste and energy costs, enhance the availability of broadband and “lead efforts to reduce office rents”. Competition in the professions will be promoted and overseen by an independent figure and restrictions on GPs wishing to hold GMS contracts to be abolished.
