Taoiseach Leo Varadkar is back talking about tax cuts. Minister for Finance Paschal Donohoe is playing down any expectations of tax reductions in the budget, but the Taoiseach seems to be pushing for some concessions, saying in Los Angeles that there are "lots of different ways to put money back into people's pockets".
But in truth this Government has made its choice long ago – extra resources have gone into pushing up spending, not reducing the tax burden. And it will be the same next year, with €2.1 billion of the €2.8 billion available in additional resources for 2020 already committed to higher spending – and much of the remaining cash likely to go in this direction too. This is before we take account of extra spending to be allocated for use if a no-deal Brexit happens – a kind of contingent emergency fund.
The Government has had a flood of resources into the exchequer during its term in office, but the vast bulk has gone to extra spending, particularly to meet the demands of the continually overspending health service. Investment spending has also been pushed sharply higher. These were the political choices that were made and it is simply too late for this administration to make a late run to present itself as one that slashes your taxes.
Just look at the figures. Ibec, the business group, calculates that corporation tax in the years 2015 to 2018 came in cumulatively €14.25 billion ahead of expectations at the start of the period. On the spending side of the ledger, supplementary estimates, extra spending provisions made towards the end of the year to account for overspending departments, came to €11.7 billion over the same period.
So the vast amount of the extra resources from above-target corporation tax have gone to cover the financial hole created by overspending, particularly in health.
Inflation ignored
Government spending did need to rise in many areas in the wake of the bust – particularly for investment. But the Government can’t have it both ways. Tax has been tweaked in recent budgets, but there has been no overall cut in the burden. In fact, the Economic and Social Research Institute in its annual calculations on who gets what out of the budget has repeatedly pointed out that tax bands and tax credits need to be adjusted to take account of inflation, if a slightly higher proportion of people’s wages are not to be taken in tax. And this has not happened.
The ESRI calculates that indexation of the tax and welfare system for consumer price inflation for the 2020 budget would cost the exchequer €462 million, while indexation for wage inflation – which is now higher – would cost €1.2 billion. This simply won’t happen. Whatever is done on income tax, it will be modest and the main way the Government will put money in voters’ pockets next year is via higher public sector pay. Some concessions in areas like childcare are also possible – and probably a better political move than paltry tax cuts.
The Taoiseach, presumably, is thinking more of setting the ground for the next general election and Fine Gael’s promise that it will cut your taxes. People always want lower taxes, of course, but it is arguable what priority they would put on this in the next election compared to, say, the housing crisis. The core issue in the general election is surely likely to be competence – delivering on housing, lower rents and better services – not tax cuts.
Depending on how Brexit works out, the budget projections for the next few years may, in theory, leave some cash for tax reductions. But in practice spending demands will keep sucking up the cash, as the State is – inevitably – pulled more directly into housing provision and demands continue elsewhere. What room there for a message of a smaller government and lower taxes?
Squeezed middle
Tax cuts can also be funded from new revenue raised elsewhere, of course. And there are some possible targets to give more room for manoeuvre this year and fund some modest income tax relief. But real reform – moving a significant part of the tax burden from one area to another – is a non-runner. The Government had promised, for example, in its programme after it was elected to increase taxes on better-off people by limiting their use of the personal tax credit. This was part of a drive to reform and lower the burden on the squeezed middle and “the continued phasing out of the USC [universal social charge]”. It never happened.
Now, plans to increase the carbon tax are also politically sensitive – it remains to be seen if the budget clearly commits to the path of successive increases recommended by just about every expert group . And the local property tax is such a hot potato that any decision has been kicked out until 2020.
So, with big spending demands and a limited ability to raise new revenues, don’t expect the tax take from your income to change much. Interestingly, as pointed out in a recent blog by economist Séamus Coffey, new OECD data – which changes its measure of average income here – suggests that the average tax take on average incomes here is pretty much bang in line with the international average. Meanwhile, tax on lower incomes are relatively low and on higher incomes relatively high by OECD standards.
Despite the difficulty of delivering, the Taoiseach's intervention, nonetheless suggests he still wants to push the tax cuts agenda. However we don't hear much now about Fine Gael's promise to phase out the USC. And Varadkar's 2018 commitment to increase the rate at which a single employee enters the 40 per cent tax net to €50,000 over three budgets is off the table. Voters are entitled to greet any future promises of tax cuts with considerable scepticism – and shouldn't expect to notice anything beyond a bit of extra change in their pockets after Budget 2020.