The budget tax debate, now in full swing, is badly in need of some perspective. Amid talk of increases in income tax bands and credits and USC cuts, the relatively limited amount of money set aside to reduce taxes – €1.1 billion – needs to be kept in mind. Even if some additional tax revenue is raised elsewhere to allow income tax cuts to be a bit bigger than this, the scale of relief will be limited. This is appropriate, as the economy is close to full capacity. And in any case the bigger issues for voters are on the spending side of the budget, covering areas such as health and housing.
What is in prospect is not a reduction in the tax burden – or at least not one which most households will notice. Some senior ministers – including Taoiseach Leo Varadkar and Minister for Public Expenditure Paschal Donohoe – have put it more accurately, saying that the goal is to allow people to keep a reasonable amount of any wage increase they get. The Minister for Finance, Michael McGrath, has also correctly observed that the money available for tax cuts will only go so far.
When wages are rising, income tax credits and bands need to be adjusted if the taxation burden is not to rise – and that is probably all that can be achieved with the cash available this time around. Indeed, there is an argument to make that these adjustments for inflation, and similar ones in the welfare system, should be made automatically. This is one of the issues under consideration in a public consultation on the income tax system underway in the Department of Finance.
Ministers need to consider carefully what is done on budget day and what messages are sent out. Demonising of the USC, for example, is unwise, as it is a tax that covers more income than income tax, is harder to avoid via tax planning and is a vital support for the exchequer, raising more than ¤5 billion per year. It was introduced after the financial crash because the tax system was broken and is here to stay.
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This is part of a wider debate. There have been a string of warnings from economic forecasting bodies that due to the ageing population and climate change, Ireland will need more taxation in the years ahead, not less. The surge in corporation tax in recent years has meant this issue has been put on the back burner.
The Commission on Taxation and Welfare proposed a framework to address this, which has not received enough political attention because it involves difficult choices. Part of this involves increasing taxes in other areas – on property, capital and polluting activities, for example – to avoid hiking income tax. These issues would be much more easily dealt with by phasing in necessary changes at a time when exchequer resources are flush, as they are now. In the current political environment – and heading for a general election – this looks most unlikely.