‘Squeezed middle’ to gain from tax changes amid Central Bank warnings

The “squeezed middle” is set to benefit from tax band changes in next month’s budget, amid Central Bank warnings that tax rises may be required to rein in an overheating economy.

Low and middle-income earners should see increases in their take-home pay, with plans announced to raise the threshold at which earners pay the higher rate of tax.

Finance Minister Paschal Donohoe confirmed the move during a speech yesterday in which he also announced plans to merge the universal social charge with PRSI.

Speaking in Longford later, Taoiseach Leo Varadkar said the budget will feature relief for middle-income earners in particular.

“People in Ireland pay that high rate of income tax on very modest incomes, often incomes that are at or below the average wage, so we want to change that and have fewer people hitting that higher rate of income tax,” he said.

However, the move could put the Government on a collision course with Fianna Fáil due to the cost of the tax change plan, and because its confidence and supply deal makes no reference to merging USC and PRSI.

In a speech at the Kennedy summer school, Co Wexford, Mr Donohoe said he would not return to the “shock and awe” boom-era promises. But he said the widening of tax bands, raising of the higher tax threshold, and the merging of USC and PRSI will be among the policies announced on October 10.

“A taxation system that takes more than 50% of the income of someone just above the average industrial wage is not fair, it is not efficient and it is not sustainable,” he said.

“I want to gradually increase the standard rate cut-off point for income tax.”

Fianna Fáil’s finance spokesman Michael McGrath said his party wants to reduce the USC, not merge it, and he said the tax changes could cost €200m if fully imposed next year.

However, Central Bank governor Philip Lane has warned that tax rises and delaying capital spending projects may be required to rein in an overheating economy if growth continues at its current strong pace.

In a letter to the finance minister, Mr Lane pointed out the dangers of the Government injecting too much money into the economy, should full employment be reached in the coming years.

In a written reply, Mr Donohoe said he agreed with Mr Lane’s assessment.

“While we are not yet at full employment, if the pace of output growth continues to surprise on the upside, more severe imbalances could emerge,” he said.