Bearing in mind the political reality that the Government is facing the prospect of a national wage agreement which is expected to increase nominal wages by 5 per cent at least, the structure of our income tax system means that tax bands and credits would have had to increase proportionally just to leave people where they are in terms of take-home pay. It is difficult to predict an annual rate of inflation at this point for the short to medium term. But an inflation rate of between 3.5 per cent and 4.5 per cent seems realistic, especially in the context of rising grocery and energy costs.
So an increase in the basic income tax credits, the personal and PAYE credits, of €125 each is small beer by any standard.
For a self-employed person, an increase in the personal tax credit of €125 is equivalent to just over €2 per week. Likewise, increasing the standard rate income tax band by €2,500 a year makes much less difference in the context of general wage increases in the order of 5 per cent plus.
Social partners are exerting pressure on the Government through industrial action in the form of working to rule to bring about a nominal national wage agreement for the public sector of at least 5 per cent. Government, for its part, is hoping to peg a public sector wage deal at 5 per cent by sweetening it with adjustments to tax credits and tax band widening.
All this may avoid a public sector winter of discontent, if the Government is lucky. But with inflationary pressures and the cost of home heating, public and private transport costs, growing grocery bills and health insurance costs, there is little room for any feel-good factor going into the autumn and next spring.
The budget cut the carbon tax rate applying to home heating oil and gas to €48 instead of a planned rise.
The logic of carbon tax increases in the present circumstances would have been difficult to articulate. Ring-fencing carbon taxes to finance or subsidise sustainable energy grants and incentives may be a sacred cow for the green lobby. However, explaining any further increases in carbon taxes to households facing bills of €1,200-€1,500 for a refill of their oil tank was politically impossible.
In the context of a general acceptance that house prices are overvalued when compared to earning capacity, there has been increased pressure on the Government to adjust inheritance taxes. Raising the children’s inheritance threshold from €400,000 to €420,000 is required to prevent the State from taking an ever-increasing share of the capital value of family homes.
Experts are sharply divided as to whether increasing the Help To Buy assistance by €5,000, as the budget did, will have any significant impact on home ownership, much less homelessness.
It seems that a major relaxation on one-off housing development in rural areas could still boost homebuilding at little cost to the exchequer.
Taxation of capital gains is a battleground between theory and practice. Capital gains tax (CGT) was increased from 20 per cent to 33 per cent between 2008 and 2011 as a response to the financial crash. Many people have forgotten that when Charlie McCreevy reduced CGT from 40 per cent to 20 per cent in 1997, its exchequer yield rose from €450 million in 1999 to €3.1 billion by 2006. The real question in relation to CGT is its systemic effect rather than theoretical concerns with taxation equity. Put simply, the 33 per cent rate has acted as a major brake on capital transactions, which is not justified by doctrinal tax equity theory.
The 2 percentage point cut in CGT from 33 per cent to 31 per cent will not have any game-changing stimulus effect. On the contrary, nibbling CGT at the margin is politically and economically almost worthless.
Many families will have been watching carefully to see what the budget would do for their childcare costs. The Government should have adopted a pragmatic approach by increasing the amount that home-based childminders can earn tax-free and by addressing the cap on monthly childcare costs.
Right across Ireland, there are derelict and unused homes. In urban areas, unused building land and derelict sites still proliferate. Although there are relatively generous grants towards refurbishing derelict and unoccupied houses, uptake is still low. What is needed is a “carrot and stick” policy. Every local authority (every one of which is a housing authority) needs to carry out an emergency survey of its entire functional area to identify unused and derelict homes for reoccupation. We badly need an effective “use it or lose it” compulsory purchase regime that would put such properties on the market, if necessary, with the local authority as vendor. I would add that while we all get a warm glow watching a derelict cottage being refurbished on a TV programme like Cheap Irish Homes, the logic of grant-aiding such activity while prohibiting one-off rural housing is difficult to justify. Does it really matter whether the structure of a newly occupied rural home has been semi-ruinous, newly built or built by modular techniques?
Budget day, for all the hype, has lost all sense of excitement and has degenerated into an attritional struggle between ministers. To raise hope, we needed more than marginal tweaking of an underperforming State sector.