Brian Keegan: A crisis budget for third year in a row
Keegan Policy Ireland At Of Accountants Is Brian Director Public Chartered
Most of us are very clear on where our money goes. On the mortgage or on rent, paying for heating and motor fuel, buying food and clothes, and a holiday or some entertainment. And, of course, in taxes. Of all these costs, only taxes on individuals are expected to fall in next week’s budget.
Over the next few days, the kites that have been flown in recent weeks about possible budget changes will be replaced either by leaks or by authoritative statements of intent from senior figures in Government. This process has already started.
The expectation now is that the income tax package in the budget will include increasing standard income rate bands so that more income is taxed at 20% instead of 40%.
Some tax credits may also increase. An increase in tax credits directly and immediately reduces the amount of income tax we pay irrespective of the rate. USC rates might also reduce. There will also be social welfare increases. Any or all of these will be welcome.
Ironically, the Government will be able to fund tax reductions and direct assistance in part because of the hikes we have been experiencing in our other costs of living, especially fuel costs.
As prices increase, so too in particular do Vat receipts, as Vat is calculated as a percentage of the price we are being asked to pay. Not only that, Ireland is no longer a small economy. Our industrial output is such that it is now a factor when calculating the output of the eurozone as a whole.
This is just as well, because another hoped-for source of exchequer funding, an EU-wide windfall tax on energy producers, is likely to disappoint. The price of gas has a disproportionate bearing on the price of electricity.
The Russian response to Western sanctions has made gas a scarcer commodity, thereby driving up the price, but in turn driving up the profits of those electricity suppliers who are not reliant on gas to power their generators.
These gains, along with other extraordinary gains across the energy sector, are to be confiscated. What is being proposed could be better described as a gas-fall tax rather than a windfall tax.
While the EU is not calling the windfall tax a tax (the preferred terms are “revenue cap” and “solidarity contribution”), most taxes require a common approach across the EU, which is never easily achieved.
Nor have similar taxes levied in the past been a resounding success. In the early 1980s, the US government charged a windfall tax on its oil companies. This was an attempt to capture some of the record revenues the industry was earning because of an embargo by major oil exporting countries.
Just as now, that embargo was triggered by a war — not in Europe, but in the Middle East.
While the US windfall profit tax survived the inevitable constitutional challenge, it was difficult to administer and collected much less than originally anticipated.
However, not all taxation policy is about raising money. Tax policy is also about prompting behavioural change.
Sometimes it is about reassuring those of us already firmly within the tax net that attempts are being made to ensure that other activities are being netted too. This may be the significance of the current EU attempts to impose solidarity contributions and revenue caps.
In the meantime, Government here will have to intervene using our own resources to help individuals and businesses alike through the current price crisis. This will be the third year in a row when extraordinary measures will be announced on budget day to deal with a crisis.