The Coalition is pushing the boat out for its last budget, promising an €8.3 billion package. So will there be a bonanza for households?
Already there are clear hints of what to expect in terms of tax and welfare changes and also other pre-election “extras” provided in the Summer Economic Statement, published this week.
To understand the numbers in this key pre-budget document it is vital to look behind the headlines figures and focus on what will actually be available to provide money to households via tax cuts and welfare or other spending increases.
And to try to judge whether the Coalition will – in addition to what was announced yesterday – again provide once-off supports via things such as double child-benefit weeks or energy credits.
How much is there to spend on budget day?
A lot of the extra cash is being directed towards the health service, where an additional €1.5 billion is being allocated this year, and on top of this another €1.2 billion in 2025.
Key to understanding the Budget 2025 is to realise that this sharply reduces the room for manoeuvre elsewhere. So does the decision to take €6 billion “off the table” and put it into two new funds to save cash for the future.
While the headline figure shows a €6.9 billion rise in current spending next year, after subtracting the extra allocation for health and some other issues, just €1.8 billion is left on budget day for new spending measures, in line with Budget 2024.
In addition, some €1.4 billion is set aside for tax reductions, a bit more than last October’s package. These are “net” figures – in other words they could be increased by savings or tax hikes elsewhere.
What about income tax?
The income tax package looks likely to be fairly straightforward. Much of this, as Minister for Finance Jack Chambers said, will be to take account of inflation and ensure that as people’s wages go up, they do not end up paying a higher proportion in tax.
To do this tax credits will be increased again – benefiting all taxpayers, with credits effectively putting money back into people’s pockets. In last October’s budget, most earners benefited from a €200 rise in basic credits (a €100 rise in the personal credit applied to all taxpayers while PAYE and the self-employed benefited from another €100 increase in the two different credits which apply to them).
Another rise in the income level at which people enter the higher 40 per cent income tax rate is also on the cards. This rose by €2,000 last year to €42,000 for a single person or €51,000 for a one income couple.
Something similar can be expected this year, putting cash into taxpayers’ pockets. And special credits are likely to rise too – such as those for home carers. Last year the rental tax credit rose from €500 to €750 a year and another rise here is also on the cards.
Another rise in the income level at which people enter the higher 40 per cent income tax rate is also on the cards. This rose by €2,000 last year to €42,000 for a single person or €51,000 for a one income couple.
This is an expensive enough area – a similar or slightly higher increase is likely this year. A €2,000 rise in the band is worth €400 a year to someone who is earning enough to benefit fully from the increase – but it is not worth anything to many lower earners.
To spread the benefit to lower earners further reductions in the USC are likely – there are various ways to do this by adjusting USC bands and rates – last year the middle rate was cut from 4.5 per cent to 4 per cent and the income level at which it applied increased.
Fine Gael is pressing for an increase in the inheritance tax threshold for children, currently €335,000, on the basis of inflation. This will certainly feature in the pre-budget negotiations.
The bottom line last year was an annual €800 or so gain for a middle-to-high income single employee. Perhaps it might be a little high this year, but not much.
Any move to cut the actual income tax rates looks unlikely, given the cost of doing this. A one point cut in the standard rate would cost close to €900 million in the first year and a similar cut in the top rate would cost around €450 million. This looks unlikely.
It is vital to note that much of this income tax “relief” is only to take account of inflation and ensure that employees do not end up paying proportionately more tax as their income rises.
Non-indexing the income tax system fully has been a major earner for successive governments. Ibec, the business lobby, points out that the share of workers’ incomes that is actually paid in income tax, USC and PRSI has increased from 27 per cent to 29 per cent in the past five years as a result. Fully indexing the system would cost €1.1-€1.2 billion, so the scope for cuts in the real – or inflation adjusted – income tax burden is small.
And other taxes?
Fine Gael is pressing for an increase in the inheritance tax threshold for children, currently €335,000, on the basis of inflation. This will certainly feature in the pre-budget negotiations.
Business lobbies have also called for a cut in the capital gains tax rate of 33 per cent and for a range of incentives to help small business and investors. Keen to help SMEs, the Government may make some moves here, though the shape of these is not clear.
PwC’s head of tax, Paraic Burke, said there is a case to looks at rules surrounding areas such as pensions, tax relief for entrepreneurs and the costs and complexity of doing business.
Summer Economic Statement: Are the days of prudence well over?
One idea he floated was of a time-limited PRSI refund to businesses for lower salary employees, a proposal also mentioned in Ibec’s pre-budget document. It could be a way to help SMEs, who are hard to reach with assistance schemes.
It remains to be seen how far the new Minister for Finance wants to go in direct help for small and medium enterprises (SMEs). . Demands for a return of the 9 per cent VAT rate for hospitality and tourism – which would see cheaper prices in some areas for consumers – seem unlikely, Burke says, given that the annual cost would be more than €750 million.
Nonetheless, lobbying on this issue ahead of the budget will be intense. If the Government is to do this, it will have to pare back the income tax package and raise some extra funds elsewhere to balance things up. And that will not be easy.
What about social supports and pensions?
Significant rises can be expected here, at least in line with last year’s €12 per week rise in basic rates and pensions. Real negotiation hasn’t started here. Anyone for €15 a week?
The Government will also want to continue the increased supports directed at particularl areas, possibly including groups such as families on welfare with children, carers and lower-income working families.
Last year the Government added a whopping cost-of-living package of €2.7 billion. This involved additional energy credits to all households and a whole range of once-off payments.
There will also other interesting questions, affecting larger groups of people. Will the Government continue its support for families sending children to third-level education, for example, which included a €1,000 cut in student fees? And what about the 20 per cent discount on public transport, with more for younger users?
With an election approaching, you would expect these to be extended, as well as the further promised supports for childcare costs and underlining the consumer aspect of higher spending in areas such as health.
And will there be a cost-of-living package?
Last year the Government added a whopping cost-of-living package of €2.7 billion. This involved additional energy credits to all households and a whole range of once-off payments.
Some of these were wide-ranging, such as a double child-benefit week, and some were more focused, such as once-off payments to those who qualified for fuel allowances and the working family payment and the living-alone allowances. But will there be a repeat this year?
With inflation having fallen, the case for such special assistance looks much weaker – and there is a real risk of making such payments semi-automatic if they are renewed yet again.
Nonetheless, with an election approaching, there will a discussion about what to do here. One option would be to make some once-off payments focused on less well-off groups this year, which would reduce the 2024 budget surplus but have no impact on the 2025 figures. Another option is to go for another big package.
This negotiation has yet to begin, but there is a lot at stake here politically – and in terms of what the budget means for household finances, with the once-off supports in recent years offering more in gains to many than the permanent tax and spending measures.
