The Coalition’s final budget, proposes an €8.3 billion package; spurring curiosity on potential household benefits. Indications of impending adjustments to tax and welfare, as well as extra outlay for pre-election incentives, were highlighted in the Summer Economic Statement issued this week.
Scrutiny of the core pre-budget document’s figures is crucial to comprehend what funds will be pooled to families via tax relief and boosts in welfare and other spending. It is equally important to assess whether the Coalition will continue to offer one-off assists such as prolonged children’s benefits or energy credits, in addition to what was proclaimed previously.
The question of how much is available to expend on the budget day arises. Much of the surplus finance is geared towards the health sector, with an extra €1.5 billion allocated for the current year and further €1.2 billion planned for 2025.
Understanding the 2025 budget requires acknowledging that this significantly restricts flexibility in other areas. The intention to withdraw €6 billion and deposit it into two novel funds for rainy days further contributes to this.
The initial figure indicates a rise of €6.9 billion in regular spending for the coming year, however, after deducting the added allocation for health and other matters, a mere €1.8 billion will be left over on budget day for novel spending initiatives, in agreement with Budget 2024. Interestingly, another €1.4 billion is set aside for tax reliefs, a minor increase from last October’s package. These net figures could be amplified by budget cuts or tax boosts elsewhere.
So what about income tax? It appears the income tax package will be relatively simple. As the newly appointed Finance Minister Jack Chambers mentioned, much of it will be to adjust for inflation and ensure that as people’s salaries increase, their tax proportion doesn’t.
By increasing tax credits again – a benefit to all taxpayers, as credits effectively remit money back into their wallets. There was a €200 increment in basic credits in the last October’s budget benefiting most workers (a €100 rise in the personal credit applied to all taxpayers while those in PAYE and self-employment enjoyed another €100 boost in the two distinct credits).
We can anticipate another increase in the earnings threshold at which people start paying the upper 40 per cent income tax rate. Last year saw a €2,000 increase, bringing the threshold to €42,000 for individuals and €51,000 for single-income couples. The likelihood is that a similar adjustment is due this year, providing taxpayers with more disposable income. It’s also probable that there will be increases in specific credits, like the ones for home caretakers.
The rental tax credit experienced an increase from €500 to €750 annually in the previous year, so it’s probable that a similar rise is set to occur this year.
Though beneficial for those earning enough to fully leverage these changes, a €2,000 increase in the tax band amounts to an extra €400 per annum. However, for those on the lower end of the earnings spectrum, such an increase translates to little or no benefit. As such, additional cuts to the Universal Social Charge (USC) are projected to more evenly distribute the advantages. Last year saw a drop from 4.5 per cent to 4 per cent, alongside an increase in the earnings threshold it applies to.
Moreover, Fine Gael is lobbying for an escalation in the children’s inheritance tax threshold, currently at €335,000, in line with inflation. This will certainly be a part of pre-budget discussions.
All these adjustments culminated in an €800 annual gain for mid to high earning individuals last year, a figure that may see a modest increase this year. Yet, a reduction in the actual income tax rates may not be plausible due to the cost implications. For instance, a single point decrease in the standard rate would near €900 million in the first year, alongside approx €450 million for a similar cut in the upper rate. Both seem rather untenable.
It is important to highlight that these income tax ‘easements’ are fundamentally to account for inflation and to prevent earners from paying a progressively larger portion of their income in taxes as their wages increase.
The failure to wholly index the income tax system has proven to be a significant revenue source for consecutive administrations. The industrial lobbying group, Ibec, highlights that the proportion of workers’ salaries going towards income tax, Universal Social Charge (USC) and Pay Related Social Insurance (PRSI) has grown from 27% to 29% over the recent five-year span, partially due to this reason. It would cost between €1.1 and €1.2 billion to fully index the system, so the opportunities for reductions in the real, or inflation-adjusted, income tax load are limited.
What about other tax types?
Fine Gael is advocating a raise in the inheritance tax exemption for children, which currently stands at €335,000, accounting for inflation. This matter is expected to be included in the budget discussions.
Business interest groups are also suggesting a reduction in the capital gains tax rate, which is currently at 33%, and various incentives to support small enterprises and investors. The government, interested in assisting SMEs, may take some measures in this regard, though the specifics are uncertain at this moment.
As per Paraic Burke, PwC’s chief of tax, there is an opportunity to reconsider regulations pertaining to issues such as pensions, tax relief for business founders and the expenses and complexity of conducting business.
He proposed a temporary PRSI reimbursement for businesses employing lower wage workers, an idea also highlighted in Ibec’s pre-budget publication. This could be a strategy to aid SMEs, which are difficult to target with support programmes.
The extent to which the new finance minister will propose direct aid for small to medium businesses (SMEs) remains to be seen. Calls for a reversion to the 9% VAT rate for the hospitality and tourism sectors – potentially resulting in reduced consumer prices in certain areas – seem improbable, Burke suggests, considering the yearly cost would exceed €750 million.
Regardless, intense lobbying on this topic is anticipated ahead of the budget. If such a move is to be made by the government, it would need to scale back the income tax package and source additional funds elsewhere to maintain balance – a task not easily achieved.
What is the situation with social support and pensions?
Significant increases in these areas are likely, potentially matching or surpassing the previous year’s increase of €12 per week in basic rates and pensions. Talks are yet to commence in earnest. Could we see a rise of €15 a week?
The government has expressed an interest in maintaining and possibly expanding the support aimed at designated sectors such as families with children on benefits, care-givers, and working families with lower incomes. Last year, there was a significant rise in their cost of living package to €2.7 billion, offering additional energy credits to all households, and a variety of single payment benefits.
More extensive issues that will likely affect larger populations are also under consideration. As an example, the government might prolong their assistance for families with children in higher education, which previously featured a reduction of €1,000 in student fees. Moreover, there are questions about the continuation of discounts like the 20% off public transport fares, with even more significant savings for younger users.
Given the upcoming elections, it is anticipated that these benefits will not only continue but additional ones will be promised, especially in areas like childcare expenses. The emphasis here is also on the consumer angle of increased expenditure in sectors like healthcare.
The question whether there will be another cost-of-living package arises repeatedly. As mentioned before, the previous year saw a considerable cost of living package of €2.7 billion, incorporating far-reaching allowances such as a double child benefit week, as well as distinct payments for those eligible for fuel and living-alone allowances and the working family allowance. However, it remains to be seen if this will be replicated.
Now that inflation has declined, the need for this unusual support is already not as clear. Repeated renewals may inadvertently make these payments a habitual occurrence.
However, the upcoming elections suggest otherwise, indicating a possibility of once-off payments aimed primarily at less affluent groups for this year. It will decrease the surplus of the 2024 budget but not impact the 2025 figures. Alternatively, a more substantial package could be considered.
Negotiations are yet to begin, but there’s a tremendous political stake and regarding what the budget signifies for personal finances, with the one-off support in recent years providing more gains to many compared to the long-term tax and spending policies.