Paul Hosford: Tax Strategy Group papers an interesting stop on road to October budget

In 10 volumes of discussion, there is plenty for this and future governments to consider, writes Political Correspondent Paul Hosford

The Department of Finance releases a swathe of research from its Tax Strategy Group which deliberates each year on the costs and gains to the exchequer from potential tax changes on budget day.

There are only two certainties in life, wrote Benjamin Franklin — death and taxes.

While the bifocal-wearing, hardened glass-harmonica-playing polymathic founding father of the US was pithy, he probably never accounted for another certainty — rows in Irish coalition governments about how to spend money.

For as long as there are competing priorities come October, the summer in Ireland will see rain, the GAA championships, and political parties looking to position themselves in pole position for the doling out of public funds.

The theatre of the budget is now pretty well established — in May, you see the first soundings about who wants want, late June or early July will see the summer economic statement lay out how much money is actually there to be wrestled over.

But the publication of the Tax Strategy Group papers is a moment which often goes a little more unseen by the public. The papers landed this week and while they picked up a decent amount of column inches, there was little in the way of public debate or discussion on what the documents actually laid out.

It is important to understand at this point what the papers are and what they are not. The Department of Finance releases a swathe of research from its Tax Strategy Group which deliberates each year on the costs and gains to the exchequer from potential tax changes on budget day. The papers are simply just a helicopter view of certain proposals and the inclusion or exclusion of certain measures — there was no eye cast over a €1,000 tax cut for middle-income earners, for example — does not mean that the Government will not opt for them come the autumn.

But within the 10 volumes of discussion, there will be plenty for this and future governments to grapple with.

Social Insurance Fund

The projection on the Social Insurance Fund is particularly grim. The report shows that the Social Insurance Fund, which takes in PRSI and pays out some social protection programmes, returned to a surplus in 2022 following the wind-down of covid-related supports.

However, the review shows that by 2040, this will be a deficit of €3bn a year if a "base case" is followed or €3.1bn if the Government's decision to keep the State Pension at 66 and other pension commitments are followed.

By 2050, this deficit moves to €9.6bn in the base case, €15.6bn in 2060, and €24.9bn in 2076. This could cumulatively lead to a €499bn deficit in the fund.

The report also warns that if the war in Ukraine continues and there is a multi-year recession coupled with lower-than-expected growth, this deficit would be over €1trn and the fund would become insolvent.

It says that one potential move would be to end the practice of some minimum wage earners not paying PRSI.

On the issue of PRSI for self-employed people, the papers say that an increase of €150 per year paid to €650 will generate a further €13.1m in income for the Social Insurance Fund; an increase to €750 will generate a further €24.4m.

Car tax

The papers, because of their nature, can grasp thorny issues and one which has proven unpopular with the public is the suggestion that a move towards a system of car tax based on the weight of the vehicle is now "likely”. Currently, Ireland has among the highest transport emissions per capita in the EU-27 and transport emissions are the second largest sectoral emitter behind agriculture. Part of the sell to those interested in electric vehicles has been the lowering of tax, though the papers do say battery-powered vehicles are exempt from the French version of this scheme.

The proposed electrification of the national car fleet will entail significant revenue risk, the group warned, with the exchequer estimated to lose around €1.5bn worth of revenue annually from motor tax, Vat, and fuel excise from internal combustion engines vehicles.

Vat

The papers also cast an eye on Vat, noting that Ireland applies a zero rate of tax on all seven categories permitted by the EU and a reduced rate on 19 of 24 categories. One such area which remains under the 23% rate is sports and exercise classes, though that sector is unlikely to get a lowering of its Vat rate. They add that it is not possible to provide an estimate of the cost of bringing these classes down to a lower Vat rate as there is no available data from existing Vat returns.

"The principle of fiscal neutrality means that any reduced rate applied to sports or physical exercise classes would need to consider whether a reduction of Vat for one type of class would give it an advantage in comparison to others. It would be challenging to provide a reduction on the basis of age or type of class."

Income tax

While those issues are large questions that will become problems down the line, the spectre of how to treat income tax looms large over the coming months. The aforementioned €1,000 tax cut for middle-income earners is not considered in the papers of the Tax Strategy Group, prompting some speculation, which was dismissed by the Taoiseach, that the plan had been abandoned entirely.

The much-debated move has caused division within the coalition, but its omission from the papers does not necessarily mean it will not be in October's budget. The papers do, however, show how much money would be spent on such a move.

In the report's 'ready-reckoner', the group examines two methods of expanding tax bands.

In the first scenario, the tax bands are increased by €1,000 at a cost of €231m per full year. In the second scenario, they are increased by €1,500 at a cost of €343m per full year. Last year's budget saw the standard band rate increase by over €3,000. An increase of €1,500 would see a single taxpayer saving around €300 per year in tax, far short of the demands by a trio of Fine Gael junior ministers.

The papers also examine whether or not to introduce a system of refundable tax credits, which have been argued for in order to alleviate in-employment poverty. However, the group balks at the €2bn estimated cost.

"The general thrust of this proposition is undoubtedly merited and could alleviate in-work poverty. However, the question arises as to whether the tax system is the most appropriate means to achieve this policy objective."

For the Government, the papers are not a final destination but are an interesting stop on the road to October. But, to take another Franklin quote — diligence is the mother of good luck.