Cuts in USC must be funded through tax hikes, warns EU
Any reductions in the Universal Social Charge (USC) will have to be funded through tax hikes in other areas, EU experts have warned.
As the Cabinet met to discuss plans for Budget 2018, ministers were warned that USC cuts will have to be balanced out by raising the tax bands, cutting tax credits, or hikes to indirect taxes like VAT. Another option would be to bring in a third income tax rate set at 35pc, an EU Commission report said.
The study was released as ministers were being briefed by new Finance Minister Paschal Donohoe on his strategy for the October Budget.
It is understood the minister made a presentation informing colleagues there will be in the region of €500m available for tax cuts and new spending, including commitments made during the recent public sector pay talks.
"The message was positive but cautious," said one source afterwards.
"We are aiming to have a balanced budget for the first time since the economic crash."
Ministers were asked to bring forward proposals for areas where monies already being spent could be better allocated.
The Irish Independent understands Taoiseach Leo Varadkar set out that middle-income workers and parents should be the biggest winners from the budget.
After the special meeting, Mr Donohoe said the economy is "growing strongly, with domestic demand now driving the recovery".
"While there is much focus each year at budget time on the fiscal space, or the capacity for increased spending, it is crucial that we also look at the totality of what we are spending to ensure that we are getting best value for every cent of taxpayers' money.
"This will ensure we can provide the services our people need, lower the tax burden in an affordable and sustainable way, keep our economy on the right track and build a society that provides opportunity for all," he said.
The minister will release an economic statement next week which will formally set the parameters for the budget.
At that launch he is expected to again stress the need for reduced marginal tax rates, which yesterday's EU study acknowledged are among the highest in Europe.
The EU Commission suggested a third income tax rate set at 35pc.
This would mean a set amount of income would be taxed at 20pc, another slice of income would be taxed at 35pc, with the rest taxed at 40pc.
On scrapping the USC, the EU said: "The analysis showed that it would only be possible to recover a substantial part of revenue losses by lowering the entry-point to the tax system via a reduction of the tax credits.
"At the same time, the introduction of a third, intermediate, tax band would help to reduce the marginal tax rates in such constrained set of policy choices."
The EU said this country faces a 'trilemma' when it comes to changes to its income tax system. This is because it has three competing aims of trying to continue to generate revenue, maintain the progressive nature of the tax system, and avoid high marginal tax rates.
Mr Donohoe indicated earlier this week that the Government no longer intends to completely abolish USC but will instead integrate it into PRSI.
The move was described by Sinn Féin's Pearse Doherty as "the biggest U-turn in my lifetime in terms of the financial cost of it".
The USC raised €4bn last year, with the tax set to yield €5.6bn by 2021 if it is not changed from the way it operates at present.
Meanwhile, Mr Varadkar has signalled his intention to appoint three Fine Gael backbenchers who missed out on ministries as chairs of Oireachtas committees.
Fergus O'Dowd, Alan Farrell and Josepha Madigan will take up new positions which come with an allowance of €9,120 each.