Brian Keegan: Very difficult to secure targeted reliefs in budget from soaring inflation via income tax measures

Party political considerations are of course driving the debate but giving priority to individual cohorts of voters depending on which party they are most likely to support does not guarantee the fairest results.

During the pandemic, the Government rightly introduced relieving measures like the Pandemic Unemployment Payment, or PUP. 

In the interests of speed of delivery, the PUP was paid largely irrespective of the personal circumstances of the recipient. 

Untargeted reliefs, because they are so broad, can also go largely unnoticed, which is neither good economics nor good politics. 

Does anyone now recall the six-month reduction in the rate of Vat from 23% to 21% in late 2020, at an exchequer cost of some half a billion euro?

While everyone feels the impact of inflation, particularly fuel price inflation, the better off are relatively unscathed compared with their lower earning neighbours. 

For instance, a 2% pay increase for a higher earning family, say €100,000 combined, can cover this year’s increase in home heating costs. 

A 2% increase for a single person on the average wage is of little benefit in real terms this. Targeted help is required to help people deal with inflation.

The priority for next month's budget should be to increase existing targeted supports for individuals, where eligibility and need have already been established. 

The social welfare fuel allowance is a good example of a benefit that could be extended efficiently; the recipient has already met the eligibility criteria, and fuel price inflation is particularly acute. 

Similarly the monthly child benefit payable in respect of children up to 18 years of age could be increased, even temporarily, as a targeted relief. 

The same principle applies to any such benefits which target the general cost of living, even though the particular item itself has not been particularly affected by inflationary pressures. 

The refund threshold of the drugs payment scheme, recently lowered to €80, could be reduced further.

A systematic targeting approach would also have a bearing on the taxation measures which might be introduced in the budget. 

While there has been considerable comment on the contents of the Tax Strategy Group papers, which give some indication of the ideas under consideration by the Government, the bottom line is that it is very difficult to provide targeted relief from inflationary pressures through the income tax system. 

This is because the Irish income tax system operates under the 80/20 rule — about 80% of income tax is paid by the top 20% of earners. 

Changes to the income tax system are therefore of most benefit to just one in five of higher income taxpayers, which is hardly a targeted approach. 

That said, focused income tax reliefs, for example for private individual landlords and their tenants, have a role in managing spiralling rental costs, and should feature on budget day.

There has been insufficient recognition in the debate thus far that government is only in a position to help citizens thanks to the buoyancy of tax receipts. 

Ireland’s exchequer is mostly funded by consumer activity, income tax receipts from higher earners, and corporate profits. 

Whatever measures Ministers Michael McGrath and Paschal Donohoe propose on budget day must preserve these sources, otherwise no one will ultimately benefit.

• Brian Keegan is director of public policy at Chartered Accountants Ireland