We are in the strange position today of knowing the broad content of the next four Budgets. For example, we know that by 2012 the average household will be worse off by almost €400 per month, primarily via additional taxes and charges. This is roughly the equivalent of a €7,500 per annum reduction in salary.
Add to this the expected increases in mortgage interest rates, coupled with the gradual phasing out of tax relief for such interest, and the long-term outlook is bleak for many.
It is easy to see how the above statistics could result in a mass exodus from these shores. To counter this, we are going to need a combination of strong leadership and a sustained period of growth.
The Finance Minister is likely to announce a reduction in tax credits tomorrow, the broad objective of which is to ensure that more people become taxpayers and everybody pays more tax.
We can also expect to see a change in the tax bands in 2011. What this means is that people will start paying tax at the high rate earlier.
So how much additional income tax will the average worker pay in 2011? While the four-year plan was short on detail, a best guess is that the average worker will pay €100 tax per month more in 2011.
For those holding pensions, the news gets worse.
Middle and higher earners will be hit with: 1) an increase in the after-tax cost of making pension contributions, 2) a reduction in the taxable income from which these pension contributions can be deducted, 3) a reduction in the allowable size of their pension fund for tax purposes, and 4) a reduction in the amount that can be taken out tax free on retirement from pension funds.
At a minimum, the after-tax cost of making a pension contribution will increase by between €5 and €8 for every €100 invested in 2011.
Given the decimation that pension fund values have suffered in recent times, the above changes are unwelcome and will represent a significant disincentive to making further contributions to your pension fund.
Removal of tax reliefs
A further change expected in the Budget is the plan to retrospectively amend certain existing tax reliefs, for example, property-based schemes. While unlikely to garner much sympathy from the public at large, for those affected this has significant implications.
Take an individual who invested in a property scheme in 2008 entitling him to €100,000 of allowances over a 10-year period. The allowances would be primarily available to shelter rental income from the property. The overall return on these projects factors in the tax breaks and typically an investor will pay for half of the value of the allowances. The investor is now faced with the removal of these allowances in 2011 and subsequent years, resulting in a likely overall negative return on his investment.
Looking ahead, things are set to get worse in 2012 with the introduction of a site valuation tax, the doubling of carbon tax and progressive increases in the VAT rate in 2013 and 2014.
It is the combination of all of the above, together with cuts to child benefit and college support, that will result in an additional burden of circa €4,500 for an average household by 2014.
While economists may argue that growth and tax hikes are polar opposites, the exchequer figures released last Thursday were interesting and point to a far better than expected performance by Irish companies in 2010.
Let's hope that tomorrow's Budget does not reverse the recent trend of more encouraging economic figures and that we can safely navigate our way to 2014 without having suffered a significant brain drain en route.