Tuesday 26 September 2017

Richard Curran: Noonan's plan to cut income tax is a high-stakes gamble

Expectations are mounting around a package of tax cuts in the Budget this October. It might be a little early to predict just what might be in it but, with local and European elections around the corner, the Government is doing little to dampen the sense that sizeable and real tax cuts are on the way.

Writing last month, Jobs Minister Richard Bruton said he would like to see a medium-term goal of reducing the point at which people pay the higher rate of income tax, and the rate itself.

But Taoiseach Enda Kenny has been talking about prioritising some tax relief for hard-pressed families since last December. More recently, Finance Minister Michael Noonan entered the fray by saying that reducing the level at which the higher rate is paid would be a government priority over the next two budgets.

So, things are moving pretty quickly. However, Labour leader Eamon Gilmore talked about how early it was to discuss tax breaks, and that they should be considered "as financial circumstances permit."

Economic data, combined with exchequer figures, points to a performance that is a little ahead of target. We would all love to see our income tax bill coming down, but two questions arise – can we afford it and, if so, how should it be allocated?

The plan is have a budget deficit of 4.8pc for this year and around 2.8pc next year. That means we will end up borrowing around €150m per week this year. Our national debt is due to "fall" to 121pc of GDP this year and 120pc next year. The interest bill on national debt is running at around €8bn per year.

It doesn't sound like we can afford to cut anything based on those figures. But that is a matter of perspective.

Exchequer figures for April show the tax take running €222m ahead of target. Income tax returns in the first four months of the year were €106m ahead of target. Corporation taxes and excise were also ahead of target. So, large companies are making money. We are still smoking, boozing and driving aplenty. The higher numbers in employment is lifting income tax receipts.

The one, crucial tax type running behind is VAT, which is €451m below target. Despite good progress, the population as a whole is not spending enough money. The gamble is therefore, 'put more money into pockets through income tax cuts and the State will get it back anyway, as consumers go our and spend it.'

It is a gamble, given that the exchequer forecasts do not leave much room for slippage in growth, external shocks or significant energy price increases compliments of Vladimir Putin.

Other, less dramatic threats persist. For example, PwC said last week it was in talks with more than 100 multinationals about re-locating their headquarters to Britain on foot of improvements in the UK tax regime. How many of them are currently here and how much could it cost us in corporation tax receipts in the years ahead?

It sounds as if the Government has already decided the Exchequer can afford to cut taxes. So, how should it be done?

Both Mr Noonan and Mr Bruton have signalled changes to the tax bands, effecting when the top rate of tax kicks in, but probably for different reasons.

Mr Bruton has to have his eye on Ireland's competitiveness in attracting foreign direct investment. Big multinationals, which announced more jobs last year than in the previous nine years, don't like the idea of trying to hire the right staff when the top marginal rate of tax ends up at 52pc.

However, gearing up income tax cuts to placate this group could be politically toxic, and deeply unpopular with the Labour Party. Mr Bruton has said he would like to see hard-pressed families assisted, but has also talked about the need to be internationally competitive. The top rate of tax in the UK doesn't kick in until you earn €38,000 compared to €32,800 here.

Mr Noonan may feel that an above-target tax take so far this year gives him more options. But he has other factors at play. He is due to lose the pension levy on income next year.

The additional 3pc in Universal Social Charge paid by the self-employed above €100,000 per year, is also scheduled to end. He would have to make a deliberate intervention to retain those measures, which would probably defeat the whole idea of trying to cut income taxes in the first place.

The Government has held it together on the spending side where, with the exception of health, things are going to script. Sabre-rattling by public sector unions to restore previous pay levels is likely to be listened to and then ignored, at least until the end of the Haddington Road Agreement.

The ESRI has estimated that the Government will only have scope for €360m in tax cuts in the Budget. With 1.9 million people working, that would be worth an average of €190 each per year, if it benefited every worker in equal measure.

A targeted approach seems more likely and that is where coalition differences will be heightened.

One independent international body with a forensic knowledge of the Irish exchequer position is the International Monetary Fund. It says that if the Government wants to balance its budget by 2018, through flat government spending and higher tax revenues via better growth, it will have a lot to do.

The agency wants the Government to stick to a €2bn budget adjustment in October to consolidate hard-earned credibility.

The economy is in a much better place than it was two years ago. But it will take more than just a "feelgood factor" to get us through the last part of this difficult journey. We need a cushion in case there are further bumps along the road.

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