Every year, the pre-budget speculation seems to start earlier. There are already clear signs about the key tax alterations that are in the planning stages for the October package, and a myriad of possibilities are being suggested. Contextualising these in relation to both the short-term effect on post-tax wages and the long-term challenges for public financing is imperative.
Income tax credits and bands necessitate substantial amendments in order to prevent the tax load from increasing in line with salary growth. To put it differently, there have been several years when this wasn’t implemented, resulting in a surreptitious escalation in overall tax pressure.
Consequently, a large portion of the €1.4 billion reserved for the budget tax package will actually be used for adjusting the system in line with wage inflation. This adaptation will cost more than €1 billion and the capacity for facilitating genuine boosts in living standards via tax amendments elsewhere is restricted.
As such, the public should interpret talk of “giveaways” with a degree of scepticism. Although there will certainly be genuine tax reductions in the budget, they are likely to be somewhat minor.
The broader context also holds significant sway. Exchequer finances have been buoyed by an exceptional surge in corporate tax payments. It remains uncertain whether this trend will continue to rise, remain consistent, or indeed decline over the next few years.
Warnings from the Department of Finance should be heeded. They suggest that approximately half of all corporate receipts might be deemed “windfall” – that is, they have more to do with tax planning than with the actual Irish economy. However, it’s difficult to accurately assess the risk. The guiding fiscal policy principle should not be to use these unforeseen revenues to cover ongoing expenditure commitments.
With this backdrop, organisations including the Irish Fiscal Advisory Council and Commission on Taxation have advised that taxes are projected to increase rather than decrease in the medium term. This is based not solely on the ambiguities of corporate tax but also on future looming costs related to an ageing population and climate change.
Irish lawmakers have yet to acknowledge reality. Aside from proposals for a slight augmentation in PRSI and a rise in carbon tax, scant measures have been taken towards readiness or identification of potential sectors for additional taxation. The Taxation Commission’s comprehensive report on this matter hasn’t received the scrutiny it warrants.
The prevailing concern is that the 2025 Budget may exacerbate issues by constricting the tax base even further, as could be the case with alterations in inheritance tax or an expanded duration of the misguided mortgage interest relief reintroduced the previous year. Tax earnings are now predominantly reliant on corporation tax and on income tax from upper-income brackets. In the event of an economic slowdown, treasury finances could once more be jeopardised.