Bulk of budget boosts to be held back

It is a measure of how far the economy has progressed in the last 12 months that most people now expect to be better off after next month’s budget.

There’s a renewed sense of confidence in where the economy is heading and a view that austerity budgets are a thing of the past.

But with such a wide range of forecasts in terms of the level of adjustment to be announced, what exactly should we expect in the minister’s speech?

What looks very likely is that the point at which people start paying tax at the 41% rate will be raised, removing many lower/middle-income earners from the top income tax bracket. An increase in tax credits is also likely. In nominal terms this will benefit all earners equally but will be relatively more beneficial to those on lower incomes.

While any movement in tax rates looks unlikely, it is possible that the existing higher rate paid by self-employed individuals will be brought into line with the rate paid by employees.

One factor that got some coverage over the weekend is the significant Vat windfall that the exchequer will receive over the next four years as a result of European Vat changes. The changes relate to the way that Vat is charged on digital services, such as music downloads.

When you add in the fact that this time next year there will be a general election looming, it’s not unreasonable to expect that more significant tax cuts will be kept in the bag for next year. These will help mitigate some of the pain from the new water charges that kick in from January 1.

Tax cuts introduce more money into an economy and help boost activity in the same manner as tax increases take money out of circulation and stifle activity. Provided that the current positive economic climate remains, tax cuts should drive activity in the economy, itself creating additional tax revenues.

The last thing that the minister wants to do is derail the progress made in recent times by holding back growth in the domestic economy. Consumer confidence has improved significantly in recent months but it has lagged well behind other positive indicators, such as employment growth. It took a long time for people to feel confident enough to move from saving to spending mode.

All of the above points to relief for taxpayers next month but with the caveat that the bulk of the good news is likely to be reserved for 12 months’ time.

* Peter Vale, partner and head of tax, Grant Thornton