Budget to focus on income tax increases

INCOME tax increases will generate the bulk of extra exchequer revenue in 2011 when Finance Minister Brian Lenihan introduces the budget in the Dáil on December 7.

And yesterday, Mr Lenihan confirmed that €3 billion in cuts will be made in next year’s budget

“The figure agreed and indicated is €3bn. The Government has already pencilled in €1bn of that,” he said.

Goodbody Stockbrokers’ economist Dermot O’Leary said there is speculation that increased taxes will form part of the budget and he expects that income taxpayers will bear the brunt of the extra taxes.

“It is becoming increasingly difficult to eke out savings in this area, especially given the agreement to freeze public sector pay up to 2014. Indeed, even outside of pay rates, approximately €2.2bn of identified savings in last year’s McCarthy report on current spending, out of a total of €5.3bn have already been implemented.

“It is not a huge surprise, therefore, that there is now speculation that increased taxes will form part of the budget package to be announced in December,” he said.

“With VAT and corporation tax to be left unchanged, this means the burden will be placed on income tax again.

“There will no decision on this for some time, but one would hope that further tax increases will only be considered after all spending options are exhausted.

“Given the recent deterioration in Ireland’s perceived credit-worthiness, there certainly should be no wavering on the targets set out,” Mr O’Leary told clients yesterday.

The Goodbody economist said that last week’s exchequer returns show little slippage on targets set for the public finances in Budget 2010. He said we can take it that longer-terms plans for reducing the budget deficit remain the same.

“The target, agreed with the European Commission, sees Ireland returning to a budget deficit of under 3% of GDP by 2014. To achieve this, policy changes amounting to €5.5bn must be announced in the next four annual budgets (with €2bn in capital spending cuts already identified).

“With Budget 2011 only three months away, discussions on next year’s package are in full flight. We know already that €1bn of the €3bn package will come from savings in the capital budget, with the rest to come from reductions in current spending and/or tax increases.

“Expenditure reductions are a preferable means of reducing the deficit, and indeed a lot has been done on that score already,” he said.

“With just 50% of income earners currently paying income tax, it seems clear that, if the income tax yield is to be increased, then more workers will have to be brought into the tax net.

“With the top 4% of earners paying close to 48% of all income tax and the top marginal tax rate now effectively 52%, lower paid workers and more workers are expected to be asked to pay more income tax in 2011.”

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