Wealth taxes, PRSI hikes and more sugar taxes could follow if Budget gamble doesn’t pay off
Cuts to pension tax breaks and PRSI hikes for pensioners could be on the way
Wealth taxes, more sugar taxes and green taxes, PRSI hikes and cuts in pension tax breaks could be on the cards in the coming years – if the giveaway gamble unveiled by Finance Minister Paschal Donohoe in his Budget last Tuesday doesn’t pay off.
An overhaul of the tax system – where more low earners are brought back into the tax net – could also be in the pipeline, tax experts have warned.
Between its €5 weekly increase for the state pension and other welfare payments, free GP care for six- and seven-year-olds, rise in the student grant, half-price public transport for the under-24s, free contraceptives, €4m extra hot school meals and modest tax cuts, Budget 2022 very much had the feel of ‘one for everyone in the audience’.
Dubbed the ‘giveaway gamble’, Budget 2022 is betting that the tax intake will recover considerably and the country will bounce back from Covid-19 with no major setbacks.
This is despite Ireland being fresh from the blows of the pandemic, with a record national debt of €240bn meaning that €50,000 is now owed by “every man, woman and child in the country”.
By contrast, the Budget delivered by Donohoe this time two years ago – about five months before the pandemic first hit – was a remarkably cautious one characterised by a dearth of giveaways in income tax and social welfare.
“A budget of modest tax cuts and extra spending commitments is not typically what you would expect towards the end of a generational crisis, but that is exactly what Budget 2022 was,” said Neil Gibson, chief economist with EY Ireland.
“Time will tell if Ireland can avoid the tax increases that many other economies are having to apply to repair their finances.”
Interest rates have been at record lows for over a decade and so the Government is servicing its national debt at very low interest rates. There are concerns that interest rates could start to rise in the coming years and should this unfold, it would put huge pressure on Ireland’s public finances – something the Government is well aware of.
Donohoe has already signalled that further steps will have to be taken to repair the Covid hit to the public finances.
A €240bn national debt “is not where we want to be when interest rates start to rise again”, said Donohoe when delivering his Budget speech.
“That is why we need to repair our public finances, and put them back on a sustainable footing.”
Many did not expect Budget 2022 to be a tough one as such an approach might well have derailed the country’s recovery from the pandemic.
However the giveaway nature of last week’s Budget begs the question: was the Government simply kicking the can of tough decisions and tax hikes down the road?
The Government will eventually have to tackle the huge Covid hit to the country’s finances – and some believe tax increases are unavoidable in the coming years. 2023 could be the year that such hikes start to creep in.
So what tax hikes could Irish people be hit with in the coming years if the Government’s Budget 2022 gamble doesn’t pay off?
PRSI hikes – tax increases in all but name – could well be on the cards.
“There was no mention of PRSI in Budget 2022 and no indicators in relation to future increases in the tax but it is certainly an area that we can expect to see some increases in future years,” said Nicola Quinn, tax partner with PwC.
The self-employed could be hit with major PRSI hikes if the Government takes recommendations from the Pension Commission and its Tax Strategy Group on board.
The Pension Commission is suggesting a phased rise in PRSI for self-employed workers from 4pc to 10pc by 2030 to boost the Social Insurance Fund – the pot which helps pay the state pension and other welfare benefits.
PRSI hikes, if brought in, would likely hit more than the self-employed though. The Tax Strategy Group has argued there is scope for increasing PRSI charges for workers and employers in Ireland, saying they are markedly lower than in other EU countries, added Quinn.
“The Government may look to increase PRSI to pay for necessary health services as our PRSI rate is relatively low compared to our continental neighbours and Covid has shown that we need to invest in our health service so that it can cope with potential further shockwaves in the future,” said Michael Rooney, tax partner with EY Ireland.
“The rate of PRSI for employers is currently 11.05pc in Ireland and if you compare this to the UK, where it is currently 13.8pc for employers and will rise by 1.25pc for employees and employers from April 2022, our rate is relatively low.”
As the rate of income tax is already high in Ireland, the Government may seek to increase the PRSI rate for employers only, added Rooney. “If the Government also increases the employee PRSI rate, it might be for high-earning employees only,” said Rooney.
PRSI for pensioners
PRSI hikes for pensioners could be in the pipeline – with those aged 66 and over possibly facing PRSI for the first time in the coming years.
Currently pensioners aged 66 or more don’t have to pay PRSI on private income (such as income from a job, private pension or investment property) – however a controversial proposal put forward by the Pension Commission suggests removing this exemption.
The Government is facing huge difficulties to fund the state pension going forward and the proposal to hit those aged 66 for PRSI is just one of a number put forward by the Commission to address that challenge.
“There are currently around four people of working age to support each person aged 65 and over,” said Quinn. “This number is expected to fall to just over two by 2050.”
Chop in pension tax breaks
Another way the Government could boost State coffers is to cut tax reliefs – and pension tax breaks could well be targeted here.
Tax relief on pension contributions or on pension lump sums could be curbed – as could the extent to which investment growth on the money in an individual’s pension pot can accumulate tax-free, according to Quinn.
With auto-enrolment – where most employees will be automatically enrolled by their employer into a pension scheme – on the horizon, the Government could move to limit pension tax relief soon. Auto-enrolment is set to start in 2023.
“The auto-enrolment of workers to pension schemes will increase the cost of pension contribution relief going forward because more personal income is being taken out of the charge to income tax through pension contributions,” said Jonathan Ginnelly, tax director with Deloitte Ireland.
“Given the huge cost of pension contribution relief, caps on – or reforms of – the level of relief available for such contributions may be introduced.”
More in the tax net
Those earning less than €50,000 represent 75pc of the workforce and pay just under a fifth of the Government’s intake from income tax and the Universal Social Charge (USC), according to Quinn.
The Government could target these workers for extra tax if it comes under pressure to raise money, she warned.
“The Government may look at broadening the tax base as it has narrowed in recent years by excluding lower earners,” said Quinn.
“More lower earners could be brought back into the tax net. The easiest way to do that is to not increase tax bands or credits and then as wages go up people would automatically end up paying more tax. That is not current Government policy so I wouldn’t expect that to happen but it is something that could be on the table in a worst case scenario.”
(Tax bands determine when you’re hit for the higher 40pc rate of income tax while tax credits dictate the amount you can earn before getting hit for tax.)
Rooney also believes the Government could overhaul the income tax system so there are more people within the tax net — if it needs to raise taxes. “Nearly 40pc of Irish workers are exempt from income tax which means the burden of taxation falls on 60pc of the population,” said Rooney.
Budget 2022 saw yet another hike in the carbon tax. With carbon tax increases to be repeated every year until 2030, those who don’t – or can’t afford to – change to more environmentally-friendly ways of driving or heating their homes will feel the financial pinch .
“Environmental taxes will impact those who are engaged in heavy industry, agriculture and farming,” said Ginnelly.
“Those required to travel for work, and who cannot avail of working-from-home arrangements may also be impacted by increasing costs.”
Given the increased public awareness of and concern about environmental issues and the Government’s stated commitment to addressing climate change, other green taxes could well be on the cards in the coming years.
The Government could introduce a wealth tax in a bid to rake in more tax.
“While Ireland’s income tax system is among the most progressive internationally, our overall tax base is quite narrow,” said Ginnelly.
“Other than the local property tax, Ireland does not currently have any significant property or wealth taxes on accumulated wealth. Many other countries would have greater levels of wealth or property tax compared to Ireland. Any increases in taxation measures in this area will however need to be considered in the context of increased global mobility. If personal taxation and taxation of wealth becomes too excessive, there could an exodus of wealth from the country.”
More sugar tax
Although a sugar tax was introduced in Ireland in May 2018, it may well be extended. The sugar tax currently applies to sugar-sweetened drinks – and certain plant protein drinks and drinks containing milk fats. Some argue that it should be extended to confectionary and chocolate – as a way of tackling childhood obesity and diabetes. Growing levels of obesity in Ireland could see the Government bring in more sugar taxes.
“Levies such as sugar taxes might be introduced as a health intervention measure and to assist meeting the significant funding requirements of the Department of Health,” said Ginnelly.
A quick economic recovery could stave off any tax hikes – and that is certainly what the Government bet on with Budget 2022.
Let’s not be naive though.
It’s only a year-and-a-half since Donohoe warned the recession caused by the Covid-19 pandemic would be the worst global economic crisis since the Great Depression of the 1930s.
Yes the country is starting to recover from Covid, and the Central Bank is bullish on Ireland’s economic growth prospects.
But it’s early days and there could be other black spots on the horizon.