Between a rock and hard place on tax take
There’s going to be a big hole in the Exchequer coffers at the end of the year. Davy estimates a shortfall of €3bn by year-end, as tax revenues fall off a cliff. The slowdown in construction, consumer spending and corporate profits will leave rookie Finance Minister Brian Lenihan with a massive deficit if he wants to maintain spending and fully roll out the National Development Plan. Will he do the unthinkable? Might he raise taxes? Louise McBride and Nick Webb ask the sharpest minds in Irish business
“The Government needs to keep investing in the National Development Plan (NDP). I don’t think there should be a knee jerk reaction,” according to Finnegan, who runs the mobile operator, 3 Ireland.
"Retail footfall is down significantly, with some people saying that it’s down as much as 15 to 20pc. The Exchequer figures for VAT would seem to confirm this.
“But the last thing that the Government should do is increase taxes, which would hit consumer spending,” he said.
Finnegan adds: “Our gearing ratios are low by international standards, we may need to borrow more but these things come in cycles.”
National Irish Bank
“The incoming Minister of Finance is faced with a baptism of fire. The May Exchequer figures suggest that the economic downturn has taken a real grip, and that the housing slowdown is spreading to the wider economy faster than expected,” according to NIB boss Healy.
"Given that the next general election is still a few years away, raising tax would be the politically easier option – but it would be the wrong one.
"The difficult choices faced by the Government are in the partnership talks. Restraining wage growth here is the one way of reigning in government spending as well as protecting Ireland’s international competitiveness.
“In the current environment of high inflation, this means we will all have to take a little pain,” he added.
Dublin City University
“Lenihan is unlikely to increase the main income tax rates but stealth taxes could go up,” said Foley, a senior economics lecturer in DCU.
“This could include local authority charges, such as development levies on new houses, hospital charges, waste and water charges. All of these charges will quietly go up by about 20pc so that effectively, the tax burden goes up even though the official tax rates don’t go up. Lenihan could also do the usual fiddling by changing the limits on Pay Related Social Insurance (PRSI) and the health levy.”
Two years ago, the then Minister for Finance, Brian Cowen, increased the health levy from 2 to 2.5pc for those earning over €100,000 a year.
Foley said that the €1.2bn shortfall in tax revenues for the first five months of this year was “a much worse situation than we envisaged”.
“The figures the Department of Finance were working on six months ago were in ‘fantasy land’,” said Foley. "The Government shouldn’t raise taxes now as there usually is a price to pay for that. There may be room to increase capital gains tax, however.
“There is scope for a significant restructuring of public spending, such as the introduction of a public sector pay freeze and salary cuts at the higher end of the public sector, including for cabinet ministers, judges, secretary generals and so on.”
Hewlett Packard IRELAND
The computer giant’s boss said it would be a “mistake” to increase tax rates.
“The last thing this economy needs is measures that further increase the cost of doing business in Ireland and compromise our competitiveness,” said Murphy.
"The minister really needs to think laterally and invest in some long-term plays that will yield dividends. We need to stimulate revenue streams to ensure that the economy retains a level of buoyancy.
"We need to drive initiatives that build on the positive work that has been done by encouraging and stimulating small businesses, innovation and entrepreneurship.
"Let’s look at measures that encourage this – if that means curbing spending in some areas, it needs serious consideration.
“However, Lenihan should be very cautious about curbing spending in areas which have an obvious long-term economic benefit – most notably in education and science.”
Institute of Chartered Accountants in Ireland
“I don’t think that Brian Lenihan will increase tax rates in the upcoming Budget. But what he could do is what McCreevy did in 2003,” said Keegan, who is the ICAI’s director of taxation.
“In that year, McCreevy didn’t index tax bands or allowances and as a result, he got a higher tax yield,” Keegan explains.
"If you don’t index standard tax bands and allowances year-on-year, you get a higher tax yield. It’s easier to do this than to increase tax rates.
“If you want to increase your tax take by the rate of inflation, then you should leave the allowances and reliefs alone. You could raise approximately €80m by leaving the tax band for single people alone, or between €110m and €115m by leaving the tax band for married people unchanged.”
Keegan said Lenihan was unlikely to increase headline tax rates such as income tax, stamp duty or corporation tax.
"We’ve seen fairly conclusive evidence that a raise in tax rates tends to stifle economic activity while a reduction in rates encourages activity. There were significant reforms in stamp duty last year. It would be unusual for Lenihan to revisit that again.
"Stamp duty on commercial property is already 9pc – you’d kill activity in that sector if you increased it.
"However, stealth taxes are always an option though. Stealth taxes increase automatically by virtue of inflation. Just take Value Added Tax, for example.
“If there’s a 25pc increase in the price of petrol at the pumps, there’ll also be a 25pc increase in the VAT that the Government takes in on petrol.”
“I would be surprised if Lenihan increased taxes,” said White, economist with Davy.
“Income tax, corporation tax and capital gains tax are unlikely to change. It would go against Fianna Fail’s economic thinking. Given that business conditions are more difficult, I don’t think Lenihan will go the stealth tax route.”
White said the Government was more likely to cut back on public spending than to cut taxes. “The first thing Lenihan will make sure to do is to limit future liabilities in current spending by keeping pay deals pretty tight. The Government will have to look at wages in the public sector.”
Cowen’s pledge to reduce the top rate of tax to 40pc is unlikely to be fulfilled in the near future, said White. “It’s highly unlikely we’ll see the cut to 40pc in the next couple of years,” he said.
Dr John Considine
University College Cork
“Lenihan is more likely to prioritise some capital projects under the NDP than to increase taxes,” said Considine, an economics lecturer with UCC.
“It’s easier not to spend something that people have not had than to take something away that you’ve given to them.”
However, Considine said Lenihan could increase stealth taxes. “It would be easier to put a positive spin on some stealth taxes,” said Considine. "Lenihan could try to introduce some new health charges, such as a charge on those coming into accident and emergency units, or an obesity tax.
“If he introduces a green stealth tax, such as a carbon tax, people are more likely to accept it. An advantage of a “green” stealth tax is that two non-Fianna Fail ministers would take the rap for it.”
Considine said Lenihan was unlikely to introduce a new business tax, or increase business taxes, as this would put more pressure on companies in the current economic downturn.
“Lenihan should try to look at the tax system to see how he could stimulate the economy,” said Carr, managing partner with the accounting and consulting firm.
“He could introduce a small reduction in VAT to stimulate consumer spending. He could boost mortgage interest relief to stimulate the property market.”
Carr also said it was important for Lenihan to attract more foreign direct investment to Ireland. “He could look at the tax treatment of intellectual property to ensure we are as attractive as some of our EU colleagues are. I can’t seen him increasing taxes. However, he may consider holding the tax bands so he could get an increase (in the tax take) equivalent to the rate of inflation.”