What intelligence do we have concerning the 2025 Budget, earmarked for presentation on the 1st of October? The original proposition promises extra steps equating to €8.3 billion, but it’s highly likely this number will elevate come budget day. So, what does the finer detail reveal?
One must interpret the subtext, yet this week’s preliminary budget papers assembled by civil servants – the so-called Tax Strategy Group documents – offer us a glimpse behind the budgetary scenes, identifying critical decisions and their implications. Here’s what we’ve deciphered so far.
1. The income tax quandary
A crucial consideration lies at the heart of budget costs and what can be achieved. If the income tax system doesn’t adapt to keep pace with inflation, the result is a marginal increase in the percentage of pay devoted to tax as wages climb over time.
This phenomenon is attributed to tax credit’s diminishing real value – functioning as a money-off voucher from your tax liabilities – becoming degraded. Moreover, as salaries ascend, a greater number of taxpayers find themselves in the elevated 40 percent income tax bracket and upper USC and PRSI divisions.
In the years following austerity, not adjusting the system to inflation meant an escalation in the income tax load. More recently, yearly increments in credits and banks have just barely balanced wage inflation. Illustrative support can be found in the Tax Strategy Group papers. Tax credits and the threshold for stepping into a higher tax rate have grown since 2021, coupled with USC reductions.
While new sources of income will invariably be realised during budgeting, choices are restricted.
Reflecting on average PAYE wages of roughly €44,900 in 2021 and €50,090 in 2024, calculations demonstrate a minor maximisation of the employee’s net income – the proportion of gross salary retained post-tax – elevating from 76.1 per cent in 2021 to 77.6 per cent present year.
Thus, the principal and vital takeaway for this year’s tax plan in the budget is the expense of modifying tax credits and the standard rate category completely for an anticipated wage inflation of 4.5 per cent. This so-called ‘cost of idle standing’ would consume most of the tax package’s funds – €1.125 billion from the €1.4 billion total.
Finance Minister Jack Chambers has several strategic routes available to him. The first strategy is adopting full indexation of the system, accepting the limited available wiggle room. The second approach involves slightly underestimating the indexation to allow additional financial resources for use elsewhere. His third option is exploring other potential avenues for revenue generation. However, it’s worth noting that the €1.4 billion is a net amount, thus finding substantive alternative sources of revenue might be challenging. Future budgetary decisions hinge on this decision-making process.
The question of sourcing additional funds is also important. Although new funds are typically generated during the budgeting process, the options are finite. A potential significant resource could be the increase in carbon tax, projected to yield about €143 million, provided the pre-planned annual growth remains intact. It’s a different story with the remaining options; their potential for providing additional revenue is somewhat restricted. For instance, the bank levy, which was increased last year resulting in a tax hike to €200 million annually, can’t be increased significantly further. Similarly, traditional sources such as tobacco taxes have limited scope of increase, as the Revenue Commissioners have alerted the government about the rise in imported and illegal cigarettes due to high taxation. This presently accounts for over a third of all cigarettes sold. The previous budget’s 75 cent increase in the price of a 20-cigarette pack was aimed at generating an additional €67 million of revenue.
While funds will be generated, there are certain factors that might decrease the tax collection. These need to be considered closely.
In addition, it’s important to discuss other ways households can receive tax allowances. Beyond the anticipated income tax reliefs, are there other tax benefits that can be afforded to families? One hard decision potentially lies in the renewal of the reduction in VAT, from 13.5% to 9%, on energy bills. This cut, initially introduced in mid-2022 and extended in two succeeding budgets, is set to expire at this year’s end.
The Tax Strategy papers suggest extending the current extension set to expire in 2025 would require a significant investment of €319 million. This may be met with resistance, due in part to increased fuel pricing as a result of previous excise cuts being rescinded and a larger carbon tax. Concurrently, considerations are being made for other costly actions such as extending the one-year mortgage interest relief system introduced in the preceding year – a move that would cost the treasury approximately €125 million. The likeliness of this happening appears to be decreasing steadily.
Airline fluctuations are to be expected, adding variables to the situation. Worth noting are whispers from the Fine Gael backbenchers, as they seemed to have informed both Taoiseach Simon Harris and Tánaiste Micheál Martin of potential inheritance tax concessions. With house prices on an upward trend, the argument arises that the current tax thresholds are comparatively lower. While the Tax Strategy Group remains neutral and offers no opinion, any one point decrease in the current 33 per cent rate could result in a €20 million hit to the exchequer.
A proposed rise in the €335,000 tax-free threshold for children inheriting from parents to €400,000 is estimated to set the treasury back €52 million. However, considering inheritance tax amounts to less than one per cent of total tax revenue, an increase in exemption limits would not be a shocking development. On the horizon could also be an increase in the renters’ tax credit, in a bid by the Coalition to broaden their appeal prior to the general election.
A significant financial group potentially under consideration is the higher-income self-employed individuals. The government’s programme has indicated an intention to abolish the 3 per cent USC surcharge on self-employed incomes exceeding €100,000 – reducing the top tax rate for this group to 55 per cent. This shift would entail a cost of €81 million. Additional tax credits, specifically those for home carers, might see an increase as well.
The Tax Strategy Papers encompass a variety of business support schemes and reliefs, with variations expected in due time. Concerns over the larger concerns, however, persist.
Demands from the hospitality industry for the reinstatement of the 9% VAT rate are causing a stir, as the Tax Strategy Papers authors vehemently disagree. They contend that the home economy is solid and the sector’s employment level remains stable, thereby making a lower VAT rate unnecessary.
The main point of contention is the financial implication, with official predictions placing the cost at approximately €764million in 2025. This figure approaches €550 million when only food and catering services are included.
The Department of Finance is staunchly against the lower rate on the grounds of potential long-term revenue loss, and equally resistance towards reducing VAT on new home constructions due to high costs and administrative challenges.
For Chambers, reintroducing the reduced rate for the hospitality industry would consume almost half of the total flexibility on tax reforms, potentially compelling him to make minimal cuts elsewhere or raise substantial additional income.
With the general election in view, significant tax concessions are unlikely. Another proposal could be considering Ibec’s proposal for a temporary employers’ PRSI discount for low-income workers. The lobby group estimates that by 2025 this proposal would cost around €300 million, contingent on the scope, putting money directly back into business owners’ wallets.
With tax cuts unlikely before the general election, especially after accounting for income tax indexation (even in part), where else can voters expect pre-election support? The Coalition may be tempted to provide more funding to households through recurring one-time policies like double child benefit weeks or a final round of energy credits. While these concessions could reduce this year’s budget surplus if distributed in 2023, they would not impact 2024. The allure may be too strong for ministers to resist.