Time to reduce income tax burden

THE Minister for Finance Paschal Donohoe will this week outline the Government’s Summer Economic Statement, the centrepiece of which will be, as we report today, a “significant ramping up” of spending on Ireland’s infrastructure to allow it to bring forward long-delayed projects. There is no doubt that there is now a case for expanding the public capital budget, much of which goes on infrastructure investment, after a period of severe downturn in which relatively little was spent. However, it will be several years before the fruits of this investment will materialise for the benefit of the people who have borne the brunt of austerity measures designed to get the country through the downturn period. It is this newspaper’s contention that those people, referred to as the “squeezed middle”, are due a dividend now that the economic recovery is firmly established.

The people to whom we refer may be somewhat disappointed to also read today that the scope of tax cuts, be it to the Universal Social Charge or personal income tax, may not be as significant as they had been led to expect from recent statements by senior politicians. That said, it may also be that the Government is now belatedly seeking to downplay expectations in advance of the Budget this October. At this stage it would seem that the Government will have somewhere between €250m and €500m to distribute by way of cuts to taxation. While we would always urge economic prudence, the Government should aim to maximise, insofar as the fiscal space allows, the scope for tax reduction, particularly the higher marginal rate to bring this country into line with competitor countries. The marginal tax rate is too high and people start paying it at incomes that are too modest. The Taoiseach, Leo Varadkar is correct when he states that the current marginal tax rate discourages people from working extra hours, doing overtime or seeking a promotion. Nobody should pay more than 50pc on income tax and social insurance on any euro they earn. As budgetary circumstances allow, the Government should also aim to reduce DIRT to encourage people to save and Capital Gains Tax to encourage enterprise and turnover in the property market.

However, the key words here are ‘as budgetary circumstances allow’. As our distinguished economic commentator Colm McCarthy states today the recovery from early 2013 has been vigorous and has exceeded expectations. He also argues that nothing should be done to place at risk that recovery. While the economy is doing well, statistical rules can encourage an exaggerated view of its performance. Ireland’s debt burden level is still over €200bn and remains excessive relative to future Government revenue. Furthermore, the budget is still in deficit so the debt continues to rise. Set against this background, there may be little scope for what is often termed a ‘give-away’ Budget. We prefer the term ‘give back’. The people in this country, particularly the squeezed middle, have been stoic in their determination to lift the country out of what were dire circumstances. In doing so, a new set of challenges have emerged, not least the demand for housing, both private and public. However, the time has also come to put some money back into the pockets of people and, at this stage, that is what should be the priority of the Government.