Five things to expect from Budget 2018

Oct 09, 2017
Sunday Business Post, 8 October 2017

There have been better times to frame a budget.  At home, the feel-good factor which should accompany economic recovery is missing.  More people are in employment but wages are edging up only gradually.  Housing shortages and hospital waiting lists are a real source of pressure for many people, and rural communities are witnessing the decay of their local towns and villages.  Brexit is having the dual effect of eroding export margins due to the fall in sterling, while eroding business planning confidence due to the uncertainties.  Weaker than expected exchequer figures this month signal that there will be no bonus from tax yields in 2017 which, in previous years, was a useful source of spare money to improve budget largesse.  Some of the slack that might have been available from underspending will go towards refunds of water charges. 

Of course Budget 2018 will be about much more than just taxation.  It’s about how the country will spend its resources to look after citizens, it’s about borrowing requirements and the scale of our national debt.  Nevertheless the interests of the population as a whole will lie on the tax changes.

The Minister has been remarkably consistent in his messaging in recent weeks.  The government has set out four priorities and on the top of the list is managing the deficit followed by a commitment to invest in infrastructure.  According to the Summer Economic Statement the capacity for incremental spend on tax measures is limited and, whatever else might happen, it’s not going to be increased by borrowing.  The €200m to €300m which is available doesn’t go terribly far for 2.5m earners, of which 1.8m are earning enough to be paying tax.  Think €2 per week, if averaged out.  So if there are to be meaningful changes, he has to find some cash from somewhere. 

Against that backdrop, what should we be looking out for on Tuesday next?  Here’s five suggestions.

Who will benefit most?

One of the priorities is, in the Minister’s words, to “make steady and affordable progress in reducing high rates of tax for low- and middle-income earners”.  Here is the snag.  The average wage in Ireland in 2017 is around €37,500.  That income level is also above the point (€33,800) at which single people move from the 20% tax band to the 40% tax bracket.  So anyone on the average wage getting a pay rise, or doing overtime, or getting an extra bonus or commission loses half of the extra earnings in tax, USC and PRSI.  While any small increase in the 20% tax band will help, it’s costly to do because the change ripples up all the way through the tax system.  I expect to see some change in the 20% tax band; the question is by how much. 

Another group which could benefit further are lower income earners.  A further USC reduction is on the cards, possibly by raising the entry threshold of €13,000.  USC reductions are an element of the government’s confidence and supply arrangements with Fianna Fáil and, when addressing the Oireachtas Budgetary Oversight Committee some weeks ago, the Minister was particularly clear he would be honouring that arrangement.  Another previous commitment he should but might not honour is to bring the earned income credit of €950for the self-employed into line with the PAYE credit of €1,650 for employed people.

That said, Budget 2018 won’t be a bonanza for anyone. 

The Old Reliables

An increase in some of the old reliables – alcohol, fuel and tobacco – is likely, cigarettes being the most likely target.  It won’t have escaped Paschal Donohue’s attention either that the amount of excise collected in 2017 looks like being less than what was collected last year.  Either we’re all being more temperate, drinking, smoking and driving less, or we’re buying more north of the border.  With a weaker sterling exchange rate, excise duty isn’t the gimme it used be.  

Speaking of drinks, a sugar tax is by now a certainty.  However if sugar tax brings in a lot of money it will have failed as a policy instrument.  It should be designed to change production and consumption patterns for soft drinks and not as a tax raising measure.  I expect a plan for a sugar tax to be announced on Tuesday, to apply to sugar sweetened drinks, and not just fizzy drinks.  It might not take immediate effect though. 

The New Reliables

Then there’s the new reliables, the “wealthy” in this country.  Earning more than €50,000 per annum puts you in the top quarter of income earners.  If you’re in this fortunate group, you are one of the ones who account for more than 80% of all the income tax collected.  “Tax the rich” is not an empty slogan in Ireland. 

Recent budgets have focused on taking people out of the tax net on the lower end of the income scale, while maintaining or increasing the tax take from higher earners.  One idea in play at the moment is that the personal tax credit of €1,650 might be withdrawn from earners over a certain income threshold, say €100,000.  Estimates provided to the Tax Strategy Group, the civil service tax think tank, suggest that such a move could bring in amounts counted in the hundreds of million euro.  It was inevitable that the Tax Strategy Group would analyse the issue – it features in the Programme for Partnership Government. 

Even better from a government perspective, it’s not a new idea so it’s lower risk.  A similar restriction has been operating in the UK for several years.  In this country the high earning self-employed are already paying a surcharge in the shape of an 11% USC rate. 

The Brexit Effect

The least worst outcome from Brexit now appears to be some kind of transitional deal which will defer some of the bad trading consequences beyond 2019.  All exporting businesses could do with some help.  Remember, when the UK leaves the EU, the total EU market shrinks by one eighth so it’s not just UK trade which will be affected.  That said, Ireland cannot create business supports which in effect result in our subsidising the UK.  However, a change to the VAT import rules could feature.  This would allow Irish businesses to defer some of the tax due on UK imports until they are sold on, and would be of real benefit. 

Outside of the tax arena it would be good to see funding being provided in the Budget for export market development.  The Taoiseach’s announcement over the summer that there would be improvements to the embassy and consular network is of critical importance and I hope to see some follow through on this in the Budget figures.  This is where the last of the four priorities – supporting future planning - could feature. 

The International Effect

The pressure on our foreign direct investment offering has never been greater with the repeated encroachment of Europe on our tax sovereignty, coupled with the prospect of significant but as yet unspecified tax reforms in the US.  It is hard to see how last week’s decision by the EU Commission to refer Ireland to the EU Court of Justice for delays in collecting the €13bn under dispute is not part of a pattern of concerted challenges at EU level on Irish tax policy.  The decision came within days of Ireland’s rejection of the latest European initiative to look to tax companies in the digital economy by charging a levy on their customers.  

Last month’s Trump Corporation Tax framework puts US tax reform back on the cards.  It’s therefore likely that the Minister will announce a series of public consultations towards reinforcing the Irish tax base in the area of anti-transfer pricing, while further rejecting EU tax harmonisation moves.  

The Budget is a rare opportunity for the political system to resonate with the voters.  No other action by any other Minister, the Taoiseach included, commands more attention or elicits more public response.  This mightn’t be the ideal time for a government to be putting forward a Budget, but the Minister will have to seize this opportunity to confirm it is still in charge.

Brian Keegan is Director of Public Policy and Taxation with Chartered Accountants Ireland