Cliff Taylor: This is why the Fine Gael tax plan has started such a row

A central job of politics is how to raise and spend money. Ireland’s rollercoaster economic history has made this contested territory. The legacy of the tax hikes during the financial crisis live on in the pay packets of many, while the spending cuts at the time – particularly on housing – continue to cast a long shadow. In recent years government spending has rebounded strongly and the political understanding is that the vast bulk of additional resources in budgets should be directed to increased spending, rather than lower taxes.

This has left Fine Gael in a tricky spot. It wants to offer tax cuts to its middle and higher earning base, but scope has been limited in recent years, forcing it to row back on successive promises such as to phase out the USC – a crazy idea that would put a hole in our tax base – and to ensure people earning less than €50,000 don’t pay tax at the 40 per cent rate.

Now, however, with a €16 billion surplus forecast for next year, it has ambushed its Coalition partners with the early launch of a plan to provide a €1,000 boost to middle-earners in the budget. The bulk of the additional resources will still go to higher spending. But this budget is different because there is clearly enough cash to push up spending and have a tax cuts package bigger than seen for many years. And to also stow a few euro away for the future.

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In this year’s package, a single earner on €40,000 – or more – gained €831, while one on €30,000 got €191 extra. This is the sharp end of the politics of tax cuts

The odds are on a budget tax package of about €1.6 billion, compared with €1.1 billion last year. Much of this – the bulk of it – will be needed to effectively index link the income tax system, ensuring people don’t get pushed into the higher tax band as earnings rise and maintaining the real value of tax credits. But trying to work out the inflation-adjusted gains and losses in an economy where incomes are rising at different rates is complex. And so the focus tends to be on the top-line figures – who gains and loses in cash terms.

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And so we get to the €1,000 promise from the three Fine Gael Ministers of State. Fine Gael said it believed the cash should be delivered via a €4,000 increase to €44,000 in the income level at which single people start to pay tax at the higher 40 per cent income tax rate. There would be commensurate rises for one-income couples. They also want a €100 increase in personal tax credits, a cash amount that all income taxpayers can deduct from their bills.

When other likely tweaks are added in, the winners here would be similar to the 2023 budget. The bulk of the money would go to those who earn enough to pay income tax at the higher rate. In this year’s package, a single earner on €40,000 – or more – gained €831, while one on €30,000 got €191 extra. This is the sharp end of the politics of tax cuts.

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Deciding to give all earners the same cash benefit in the 2024 package by spending the money on increasing tax credits – rather than most of it on widening the band – would cost a lot more money, probably close to €2.5 billion.

The economic case for widening the standard rate tax band is that the Irish tax system is unusual in charging people high income tax rates on relatively modest income levels. But the Fine Gael move looks to be more about politics and appealing to the party’s support base. Revenue Commissioners figures show that about 750,000 people pay tax at the higher rate and so would benefit from the increase in the standard rate band. Fine Gael estimates that 1.3 million taxpayers would gain from this measure, taking into account those who do not earn enough to gain fully from the measure. This figure seems high – and Fianna Fáil sources say it is an overestimate.

But whatever the precise number, the Fine Gael package is directing the vast bulk of the money available for tax cuts at the 23 per cent of people who pay tax at the higher rate, rather than the 41 per cent who pay only at the standard 20 per cent rate. The remaining 36 per cent do not earn enough to pay any income tax, another peculiarity of the Irish tax system.

Tánaiste Micheál Martin has pointedly said that a focus needs to be put on lower-wage employees and those most in need

It will be interesting to see how the Fine Gael plan survives the heat of budget negotiations. If the Summer Economic Statement, due in July, allocates about €1.6 billion to a tax package, then the party’s plan would use almost all of that cash. Does the fact that Fine Gael would then claim credit mean Fianna Fáil, in particular, will dig in and seek a package that spreads the gains a bit more widely, even if leaving middle and higher earners with a bit less? Or, along with the Greens, will it concentrate its political fire more on spending commitments, feeling that progress in areas like health, housing, childcare and climate change will resonate more with voters ? Tánaiste Micheál Martin has pointedly said that a focus needs to be put on lower-wage employees and those most in need. Many lower earners who do pay tax are renters, so extra tax help to this group could be one way forward in budget talks on tax?

There is also a wider context. Given the spending bills facing the State in the years ahead – and despite the big surpluses forecast – bodies such as the Fiscal Advisory Council, the Commission on Tax and the Department of Finance warn that over the medium term we will all end up paying more taxes to fund an ageing population, climate change bills and so on. And the Commission on Taxation strongly and correctly makes the case that extra tax should largely come from other areas apart from income.

There are big political questions and decisions to come. But in the budgetary bubble in which we now find ourselves, and with a general election likely next year, the Coalition parties will feel they can have it all in Budget 2024 – spend more, tax less and put a bit of cash aside to look prudent. The budget Ministers, Michael McGrath and Paschal Donohoe, have their work cut out keeping all this in check, because a Fine Gael-style boost to higher earners would inevitably curtail across-the-board demands elsewhere.