If you think Budget 2024 will be a giveaway Budget, be prepared to be disappointed as the Government must not risk fuelling inflation warns Doone O’Doherty from PwC.
Budget 2024 will be delivered against a backdrop of record-breaking corporate tax receipts, an upcoming general election and continuing cost of living challenges.
The Government is under pressure to deliver substantial tax savings. However, with just €1.1bn set aside for tax cuts—down slightly from last year’s €1.13bn—there isn’t much to play with.
“Budget 2024 comes at a time when the business community is focused on supporting the workforce with the cost of living crisis, while managing increasing costs of doing business”
The balancing act for the Government is to put more money in people’s pockets without further fuelling inflation.
Budget 2024 will likely include a number of once-off cost of living measures that support families. This gives the Government the opportunity to improve households’ finances without long-term consequences for the Exchequer or the economy.
Income tax and the Exchequer – no major giveaways
For the first seven months of 2023, income tax yielded €18.2bn in tax receipts for the Exchequer—up 8.8% on the same period last year.
Against this really strong backdrop, the Government must respond to taxpayers who want to know how much less tax they will pay in January 2024 compared to today.
But with only €1.1bn set aside for tax cuts, we shouldn’t expect to see any major giveaways.
No decreases likely in income tax rates
We probably won’t see any decrease in income tax rates, as this would be an expensive move. Cuts to both the 20% and 40% rates would, by themselves, exceed the €1.1bn available.
There was much debate in 2022 about the introduction of a third rate of income tax. However, there is little expectation that we will see its introduction with the Government opting instead to increase the standard rate band.
Last year, the threshold at which people moved into the 40% tax bracket increased by €3,200 to €40,000. A further increase of €1,500, as modelled by the Tax Strategy Group (TSG), would cost €298m in the first year (€343m for a full year).
Increases to tax credits are also on the table. Budget 2023 increased the Personal Tax Credit, the Employee Tax Credit and the Earned Income Tax Credit by €75 each and the Home Carer Tax Credit by €100. The TSG estimates that a €50 increase in each credit this year will cost €242m.
The TSG also examined the concept of refundable tax credits. However, this would be a fundamental change to the Irish personal tax system, requiring careful consideration of policy, administration and cost implications.
Linking personal tax system with inflation would be expensive
The Programme for Government undertook to index-link bands and credits from Budget 2022 onwards.
A recent report from the OECD on income taxes showed that 17 of the 38 OECD countries already automatically adjust personal income tax systems in line with inflation.
Such a move would be expensive, but it would keep take-home earnings in line with inflation. Otherwise, it is hard to see how proposed tax cuts would be actual tax cuts, given the levels of inflation seen in the economy of late.
USC burden likely to fall
We expect the USC burden to fall. A USC rate cut would be expensive, however. A more likely (and cheaper) option is widening USC bands. The abolition of the 3% USC surcharge for self-employed people would be welcome.
Retaining Ireland’s attractiveness
Ireland’s personal tax system must compare favourably to other countries around the world to retain Ireland’s attractiveness.
SARP continues to have a temporary placement on the statute book (it currently runs to 2025). A signal in Budget 2024 of the Government’s commitment to extend and enhance SARP would be welcomed by businesses.
Higher employer PRSI in some form in the years ahead seems inevitable
There is a continuing need to raise more social insurance revenue as the population ages. Options include a higher PRSI charge for the self-employed and employers.
This would not go down well with small businesses, in particular, who face increases to the minimum wage, high energy bills, additional sick pay provisions and upcoming pension auto-enrolment for employees, which will be introduced in 2024. Higher employer PRSI in some form seems inevitable in the years ahead, though perhaps not in this budget.
Easing cost of living and housing
The €1.1bn set aside for tax cuts excludes once-off spending measures to help people with the cost of living. These are expected to include a repeat of last year’s energy credits.
For landlords, the Minister for Housing has stated that he will consider “efficient and effective” measures to attract and keep them in the Irish market. For renters, we may see a repeat of (and maybe an increase in) the €500 rent credit introduced last year—although uptake has been lower than expected. Mortgage holders will be looking for some relief in light of recent rate increases, which could include a targeted form of mortgage interest relief. And for first-time buyers, an extension of the Help to Buy Scheme (due to expire at the end of 2024) could be on the cards.
A widening of the capital acquisitions tax-free threshold would be welcome
At present, children can inherit €335,000 tax-free from their parents, but there is an acknowledgement that this may not be enough to cover the cost of a typical family home. A widening of this tax-free threshold would be welcome.
Budget 2024 comes at a time when the business community is focused on supporting the workforce with the cost of living crisis, while managing increasing costs of doing business.
At the same time, businesses are focused on attracting, incentivising and retaining key talent, and on upskilling their workforce to meet changes in business practices—particularly technological disruption. Businesses need support through this challenging time.