Why is the Government planning to merge PRSI and the universal social charge (USC)?
The move was signalled by Taoiseach Leo Varadkar in his leadership campaign. The approach being signalled is to provide people with greater benefits in returns for the social insurance payments they make, a move pitched by Varadkar in particular at the "squeezed" middle in the private sector.
At the moment people get a range of benefits – for example, redundancy payments, maternity leave and so on – in return for making PRSI payments, which kick in once you earn €352 a week. The USC, in contrast, was an emergency charge introduced in 2011 during the crisis to help close the gap between Government spending and revenue and operates like an additional income tax, or a special levy.
What about the promise to abolish the USC?
This commitment is being formally shelved now, though it was clear from the start that the huge revenue raised by the USC – more than €4 billion per annum – could never be easily replaced. Reductions in recent budgets have chipped a bit away at people’s USC bills, but the USC remains a significant imposition on incomes – and a significant revenue raiser for the exchequer.
While it may eventually be renamed as part of a merger with PRSI, the fantasy of USC abolition has now been consigned to the dustbin. The USC is here to stay. And in whatever merger goes ahead, Government officials will be keen to protect its revenue-raising powers, in particular as it hits some income which is sheltered from income tax. This helps to get tax from some higher earners in particular.
So has the Government given up on the idea of cutting taxes on income?
No. Minister for Finance and Public Spending Paschal Donohue was careful to stick to the script of the programme for government, which promised to direct tax relief at low- and middle-income earners. The Taoiseach has also said he favours cutting the top marginal rate on incomes – now 52 per cent for many – to below 50 per cent and ensuring that people hit the upper income tax rate only at higher income levels. There will be limited free cash in October's budget to achieve these goals – though possibly a bit more than originally expected – and under the agreement with Fianna Fáil two-thirds of the additional cash available must go to higher spending .
Unless the Government decides to raise new tax revenue in other areas, relief will be limited. And a report by the European Commission this week points out the difficulty of reducing the top marginal way in a way which is not regressive. So the Government will have a delicate balance come budget day and not a lot of spare cash to spend on cutting people’s tax bills.
And might we see the first moves towards the USC/PRSI merger?
Senior officials are now examining the feasibility of the merger, but it would certainly take some years. There are complex issues to get through in terms of who pays what, how it is organised and what people’s entitlements will be.
One possibility in October’s budget – and something which has already been examined by officials – is to give an income boost to some lower earners by raising the income level at which USC applies from about €13,000 now to just over €18,000. However, some of this benefit would be clawed back by imposing PRSI on this chunk of income – at the moment PRSI kicks in only at about €18,300 in annual earnings.
This would give lower earnings a small cash boost and also underline the intention of getting even those on modest earnings to contribute something towards future benefits such as parental leave and medical and dental benefits. The Taoiseach has also said that in the long term he would like to move towards a new pension system where employees would receive a top-up ahead of the State pension in return for having made contributions. He has also said that he favours the early extension of social insurance benefits in areas such as parental leave, dental care and other medical expenses, as well as the restoration of previous redundancy entitlement levels.
What is the politics of this?
Expect to hear a lot about the “contributory principle” and a new “social contract” under which people get more benefits from what they pay in and private-sector employees are given a higher level of security. One interesting social issue will be the gap in entitlements in some areas between those paying social insurance and those who are not. As ever, of course, voters will have one question: what’s in it for me?
