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THE DIRTY DOZEN a delicate balancing act
Sunday, April 05, 2009
1 Income tax, PRSI and levies

The government has a number of ways of taking cash from our pay packets through the main income tax system, PRSI and a range of special levies, such as those introduced in last October’s budget.

While the collapse in tax revenue has been most marked in property related taxes, hikes in income taxes are the easiest and quickest way for the government to raise cash to replace these. So substantial increases are likely on Tuesday. The only question is what exactly the government will do.

Changing income tax rates - currently 20 per cent and 41 per cent - in the middle of a year would be administratively complex. For this reason, the government looks set to increase the special levies announced last October and currently at 1 per cent on incomes up to €100,100, 2 per cent on the balance up to €250,120 and 3 per cent for income above this level. These rates could be doubled, raising about €750million.There had been speculation that the government could then signal that, from 2010, some or all of these levies would be removed and income tax rates would increase.

However, it now appears more likely that the levies will remain, perhaps giving taxpayers hope that they will be removed at some time in the future.

If, in addition, the government chooses to remove the ceiling on employees’ PRSI - currently the 4 per cent rate is charged only on incomes up to €52,000 - then there will be a heavy hit for middleto higher-income earners. This could be introduced immediately or phased in over a couple of years.

There have been calls to concentrate the burden on higher earners, and certainly these will suffer most.

However, the difficulty for the government is that raising substantial sums means hitting middle - and possibly lower - income earners too. The government has hinted that some of the 38 per cent of lower earning taxpayers exempt from paying income tax could be pulled into the net. Again, this would probably be a matter for the 2010 budget.

Hiking the lower tax rate would automatically bring some people into the income tax net, while cutting tax credits could raise significant sums by taking a small amount of extra tax from a large number of people.

Cliff Taylor

2 Business community

The business community was aghast at Brian Lenihan’s first budget, which it claimed increased the tax burden while simultaneously reducing competitiveness. Businesses will be hoping for better news from Lenihan’s second attempt.

Employers’ group Ibec has called for no increases to corporation tax, employers’ PRSI , excise levies or Vat. In three of those four areas, it seems likely that they might get their wish, or even do better. The government seems likely to hike excise duties on the ‘old reliables’ to raise additional finance.

However, it will certainly leave the corporation tax of 12.5 per cent unchanged. Many businesses argue that employers’ PRSI should be reduced. The argument is simple - it increases payroll costs and therefore reduces the number of people a business can employ. A small concession by the government is possible as it seeks to boost employment.

There have also been whispers in government circles that the minister might reverse last year’s decision to increase Vat rates by half a percent. Lenihan has acknowledged that it did not have the desired effect, and the minister might reverse it. One thing is certain, a further rise in Vat is unlikely.

The business lobby is also hoping for further tax breaks for research and development and innovation. This is one of the few areas for which tax breaks do not require the permission of Europe, and the government has increased the reliefs available in successive budgets. Further moves here appear possible.

On a broader level, the business community is seeking government assurances of support. Helping to reduce payroll costs would be one way of doing this.

Ian Kehoe

3 Health

The plan to end the system of free medical cards for the over-70s in last October’s budget resulted in public uproar and protests that forced the government into an embarrassing climbdown.

The government will be keen to avoid being accused once again of targeting the most vulnerable in society when it unveils its emergency budget on Tuesday, but the Department of Health is one of the most expensive departments and more fat is likely to be trimmed. The challenge for the government is to minimise the impact of cuts on services, which are already being affected by an existing deficit.

With a total deficit of about €1 billion, the Health Service Executive (HSE) has already begun implementing ‘‘value for money’’ savings measures.

The cuts include reductions in temporary staff, cuts in overtime and allowances, bed closures, cancelling operations and reducing community services.

The HSE has met stiff resistance from the unions, with the Irish Medical Organisation (IMO) taking a High Court case over proposed cuts to junior doctors’ allowances and overtime payments. Meanwhile, the Irish Nurses’ Organisation (INO) warned that 20,000 posts could be left vacant in the health sector in the coming months, although the HSE said this was wide of the mark.

Last year, in a bid to cut the HSE’s growing operating costs, the government decided that a targeted voluntary early retirement/ redundancy scheme would be introduced.

Recent reports suggest the government cannot afford to cover the cost of a redundancy programme, which was primarily to target surplus management and administrative staff.

The government could try to generate more income for the HSE by increasing A&E and public hospital charges, as well as imposing higher fees on private health insurance companies for the use of public beds.

This would have a knock-on effect on health insurance premiums. There may also be a reduction in fees paid to GPs and pharmacists, and a curbing of state-subsidised drugs schemes.

Susan Mitchell

4 Motor industry

The motor sector has been one of the hardest hit by the recession, and there has been widespread speculation that the government may provide a boost to the industry in Tuesday’s budget. Just 19,792 new cars were sold in the first two months of this year, compared to 57,251 in the first two months of last year, traditionally the busiest time of the year for the industry.

The Society of the Irish Motor Industry (SIMI) has said that nine car dealerships have already gone out of business this year, and up to 100 could disappear if the current slump continues. Approximately 1,000 jobs have been lost since the start of the year, and more are threatened in a sector that employs 46,000 people.

The SIMI has been lobbying heavily for the re-introduction of a scrappage scheme, which it feels would provide a shot in the arm for the ailing industry. It is proposing that motorists be given a 50 per cent rebate on vehicle registration tax (VRT) if they scrap a car aged ten years or more.

A total of 64,500 vehicles went through the last scrappage scheme, which ran for two years in the late 1990s. Fewer vehicles are likely to be scrapped this time around, because of the recession and the fact that there are more modern cars on the road. Nevertheless, any purchase generated by the scheme would produce about €6,000 for the exchequer in VRT and Vat, based on the average cost of a new car.

The government may be reluctant to hand out tax breaks at a time of fiscal crisis, but VRT receipts slumped by 74 per cent in the first two months of this year - to €108.2 million from €417.4 million - so it may conclude that introducing an incentive could boost sales.

One wrinkle could be the environmental angle and the government’s commitment to cutting back on CO2 emissions. There is some speculation that any scheme could be confined to the purchase of cars in the low emissions bracket.

Dick O’Brien

5 Tax reliefs

Special tax reliefs and allowances are going to be cut significantly. That was the clear message from Taoiseach Brian Cowen in comments made last week about Tuesday’s budget. Cowen used the jargon phrase ‘‘tax expenditures’’, but this refers to the range of tax reliefs designed to affect our behaviour or exempt specific pockets of income from Revenue.

All income earners benefit from normal tax credits and PAYE credits and, while some of this may be adjusted, doing so is really just increasing income tax. Separate consideration will go to special reliefs and allowances on everything from pension contributions to rental payments to landlords to the exemption of child benefit payments from tax.

Two approaches are likely here. First, the government may hit some of the exemptions and reliefs seen to benefit high-rollers most. While many of these are on the way out anyway, there will be political mileage in being seen to close off any remaining loopholes, even if the amount of cash expected to be raised is not massive. Rules relating to tax exiles may also be tightened for similar reasons.

However, to raise real cash, the government will have to look at reliefs which deliver significant benefits to large numbers of people. All will be sensitive, however. It could raise several hundred million if it abolished rental relief for property landlords, for example, though this would be a further blow to the property market. Some €500 million could be raised by making child benefit liable to tax, though of course this would be hugely politically sensitive.

The most significant tax relief is on money people pay into their pensions.

This costs about €600-700 million a year in terms of employee relief (and considerably more in terms of relief to companies and to pension funds themselves, though presumably these will remain). Restricting relief on employee contributions to the standard 20 per cent rate would raise several hundred million. However, there are wider questions here on the future of pensions policy, both in the private and public sector. Changes may be signalled here, but probably within a wider framework.

Cliff Taylor

6 Excise taxes

Excise duties in a number of areas are almost certain to be raised by the government on Tuesday. Last October, an extra eight cent was levied on a litre of petrol, while a bottle of wine and packet of cigarettes each saw a 50 cent increase in excise duty.

Other forms of alcohol, such as spirits, stout and beer, are likely to be subject to a new hike, but finance minister Brian Lenihan has hinted that cigarettes might not increase in price in the context of ‘‘the law of diminishing returns’’.

Excise duties have taken a hit in recent times - with income falling from €922 million in the first two months of 2008, to €619 million so far this year.

As vehicle registration tax (VRT) is a component of excise duties, the huge fall-off in new car sales this year accounts for most of this. A scrappage scheme may be announced to boost sales in this sector [see motor industry panel].

Last year, excise taxes contributed €5.4 billion to exchequer finances, and it is likely that the government will seek to increase this figure.

However, up to €100 million in excise duties have already been lost as a result of people buying goods in the North, and increases in excise are unlikely to stem this.

Representative groups such as the Vintners’ Federation of Ireland (VFI) and the Restaurant Association of Ireland (RAI) have lobbied for excise duties to be reduced, and say Vat and high excise taxes are hurting businesses in this area.

Nicola Cooke

7 Property

Estate agents are hoping that measures will be introduced in Tuesday’s budget to help stimulate the ailing market. House prices have dropped by about 40p er cent from their peak in 2006, and agents fear that prices will continue to drop if the government does not take action.

But there is uncertainty as to what measures will be implemented - and the mooted possibility of property taxes being re-introduced from 2010 has left agents and homeowners anxious.

According to many agents, there are plenty of incentives the government could introduce to get the market moving again and create activity in both the new and secondhand markets. Many have called on the government to address the Vat and stamp duty rates for those purchasing properties. Reform of Vat is high on their lists, but others believe the government should sort out the banking issues, which would in turn solve problems in the property market.

The Irish Auctioneers and Valuers Institute (IAVI) has urged the government to consider tax relief, or a rebate of Vat, for first-time buyers and said that banks should continue to pass on ECB rate cuts to all homebuyers and investors. The IAVI and many of the agents it represents believe there should be some relief on Vat on new homes.

Agents argue that the Vat rate of 13.5 per cent should be halved to incentivise the market and make buying property more attractive, create confidence and put money back in the economy. Other agents believe incentives to encourage older buyers to trade down could be introduced as a means of creating some activity in the market.

Ken MacDonald of Hooke & MacDonald said stamp duty should be halved for the rest of the year and that a deposit ‘‘top up’’ of €7,00 0 should be given to first-time buyers to help them bridge any gap between the mortgage and purchase price.

IAVI president Edward Carey said that, if the government decided to reintroduce some form of property tax, it must reduce or abolish stamp duty. He believes any hope of activity in the market would be quashed if a property tax is introduced in addition to the current ‘‘penal’’ stamp duty rates.

However, Simon Ensor, director of Sherry FitzGerald, expects the budget will have little effect on the property market. He believes the government will defer introducing property tax until December’s budget.

But he warned that if such a move was made, stamp duty should be reduced.

8 Carbon tax

With the government committed to a 20p er cent reduction in greenhouse gas emissions by 2020 under the Kyoto Treaty, and the Green Party now in power, a carbon tax has long been on the agenda. The basic concept is that, by taxing carbon emissions, an incentive will be provided for businesses to cut back on their output. With the exchequer now strapped for cash, Tuesday’s budget could be seen as a perfect time to move on this. However, while the minister may put some immediate petrol excise increases under the cover of being environmentally friendly, a full carbon tax is not likely until 2010.

Una Maguire, a director of the Irish Taxation Institute, pointed out that the proposed carbon tax was being examined by the Commission on Taxation, which is not due to make its report to the Minister for Finance before the end of September. ‘‘The most likely thing that will happen is that they will heavily flag it next week, but won’t introduce it until December’s budget,” she said.

She added that the measure would generate limited revenue for the government. The Commission on Taxation’s terms of reference stated that any new carbon tax should be revenue-neutral, though this is now likely to be forgotten in the hunt for cash. ‘‘It could be revenue-generating in the short term but, like the plastic bag levy, it is designed to change behaviour,” Maguire said.

She also argued that any move to turn the carbon tax into an additional long-term source of revenue could damage Ireland’s competitiveness, if firms were faced with a higher taxation burden than those operating in other economies. In addition, there is also an EU emissions trading system, in which many big companies are already involved. Expecting these firms also to pay a carbon tax would amount to double taxation, she said.

Dick O’Brien

9 Social welfare

With lengthening dole queues, social welfare is one of the government’s largest financial headaches, and there has been much debate over whether the axe will fall on a host of payments. The latest exchequer figures show state spending on social welfare was €2.35 billion in the first three months of this year, so the government might look to claw back some of that in Tuesday’s budget.

At just over €200, the weekly jobseekers’ allowance for a single person is considered among the most generous in Europe. Last week, Ibec and three of the major stockbrokers in Ireland called for a reduction in social welfare payments because of the predicted 5 per cent drop in consumer prices this year. Ibec estimates that a 3 per cent cut will save €400 million this year, and the stockbrokers warned that a 1 per increase in unemployment will cost the state €225 million.

While cuts to the widows’ and widowers’ allowance - and old age pensions - are all on the table, the government is likely to want to avoid such controversial decisions.

Instead, it has been mooted that the €996 early childcare supplement for all children under five will be reduced, and possibly the monthly children’s allowance for all children under the age of 16 - or up to 18 for those in full-time education. The current rate is €166 per child.

With the cost of welfare likely to grow by another €500 million this year - and a shortfall in government coffers of €3.7 billion for the first quarter of 2009 - few sacred cows can be spared. Social and family affairs minister Mary Hanafin is likely to have to force through some tough cuts in her department’s budget.

Nicola Cooke

10 National Development Plan

It is now a given that sections of the National Development Plan (NDP) will be parked, shelved or axed when finance minister Brian Lenihan delivers his budget. The problem is that it may not be at all clear on the day exactly what has been put on the long finger.

Up to now, the government has set aside a capital budget for projects as the money is required. The figure to watch out for will be the total capital spend in the budget for this year and references to the next couple of years. It is extremely unlikely that the minister will refer to specific projects in the budget, but he will have tinkered with the infrastructure and overall capital spending.

For example, Metro North, even if it does go ahead, would not have required a significant capital spend this year. Most of the estimated €6 billion cost would come in a few years’ time. However, projects likely to be in the firing line include Metro North and the Western Rail Corridor.

Department of Finance figures show that, at the time of Budget 2008, capital spending from exchequer funding and public-private partnerships was expected to top €47 billion between 2009 and 2012. By Budget 2009 last October, that figure had been pared back by €6.1 billion, made up of revisions of €3.8 billion in exchequer spending and €2.3 billion less from public-private partnerships.

There is an argument that a dramatic cut in the NDP could be counter-productive by taking further activity and spending out of the economy. In the event of a major scaling back, as is now likely, lobby groups believe that labour-intensive projects, using Irish materials, such as road-building projects, should be retained over the likes of rail projects using foreign materials. Any cutbacks to rail infrastructure projects are likely to be strongly resisted by the Green Party. But financial necessity may ultimately dictate the final outcome.

Richard Curran

11 Education

The education sector took a major hit in last October’s budget with many grants - including those aimed at helping the disadvantaged - scrapped, and class sizes increased. Teachers themselves have also been hit, with the public sector pension levy and last week’s moratorium on promotions.

Teaching union heads believe that the sector cannot take anymore pain to frontline services, but there is an acknowledgement that economies will probably be made in background areas.

As one of the high-cost areas - expenditure in education is to increase by 3.2 per cent to €9.6 billion in 2009 and capital spend will be up 10 per cent this year to €889 million - the government will be hoping to trim some of the fat.

The cuts at primary and second level in October included increasing the pupil-teacher ratio. Teachers fear that another one-point rise (to 29 at primary level and 20 at post primary level) could be on the cards. Teachers say schools could not cope with this, especially combined with the ban on promotions. It would lead to massive class sizes at primary level and the dropping of subjects at second level. This could also affect services for special needs, disadvantaged and newcomer children. Services in these areas, such as the scrapping of book grants, Traveller grants and cuts in language-teacher supports, have already taken place.

At third level, the government is already taking a tough line, telling colleges they will have to reduce their deficits (UCC and UCD have a combined deficit of over €35 million), imposing a recruitment ban and warning colleges that funding could be reduced if reform is not made.

To try to claw back some of their deficits, universities have been closing libraries early and cutting back on student services. But education minister Batt O’Keeffe is likely to maintain his hard line to achieve tighter financial control of this sector.

An audit of higher education spending is already being carried out by the Comptroller and Auditor General. University heads have welcomed moves to reintroduce third level fees - which O’Keeffe is likely to bring to cabinet within the next week - as they believe it will help generate income. However, it is more likely that the money saved by this move will go back into the state coffers.

12 And finally . . .

Text tax

The prospect of a tax on text messages was raised last month by Green Party TD Mary White, and health minister Mary Harney seemed to back the plan, saying that all options had to be considered to raise tax revenues. Figures from ComReg, the communications regulator, show that just over ten billion text messages were sent in Ireland last year, so a 1 cent tax per message would raise more than €100 million.

Technology entrepreneurs and industry bodies have reacted angrily to the suggestion. The Irish Cellular Industry Association, which represents mobile operators, said there was ‘‘no logical reason’’ why text messages should be targeted. The operators are worried about the difficulty in implementing such a tax, as many mobile phone packages offer ‘free’ text messages to customers. Any text tax would hit young people, the biggest users of texts.

Overseas aid

Ireland’s spending on overseas aid reached a high of €900 million a year during the economic boom, but that funding has come under fire as the public finances tightened.

According to Dóchas, an umbrella group for Irish aid organisations, the overseas aid budget has been cut by €155 million in the last nine months - with a €45million cut last July, followed by a €15million cut in the October budget and a €95 million cut in February.

The aid agencies fear that more cuts could be on the way in Tuesday’s budget. While the government has pledged that Ireland will meet a UN target for spending 0.7 per cent of GNP on overseas aid in 2012, political sources argue that, because Irish GNP is falling, it is possible to give less money but still reach the UN target.

The aid agencies are unconvinced by that argument. ‘‘The government could find €7 billion to assist a reckless banking sector, and is now seriously considering making the world’s poorest people pay the bill,” said Hans Zomer, director of Dóchas.

Selling state assets

Like any person in a tight financial position, the government is likely to be looking at what assets it has and how much they might be worth - if it can find anyone to buy them.

In last October’s budget, finance minister Brian Lenihan outlined plans to close and sell off several army barracks. Those closures took place in January. Tuesday’s budget may contain similar plans for other state facilities, although the problem for the government is that property and asset values have fallen and buyers are thin on the ground.

The same issues arise if the government were to try to sell off any semi-state companies, as has been suggested by the opposition parties.

Asset sales have worked in the past, however. About €600million-worth of state properties have been sold since the government announced its controversial decentralisation plan in 2004.

They included prime properties such as the former Department of Justice building on St Stephen’s Green in Dublin, which was sold for €52.3 million.

Gavin Daly

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