Sunday 23 October 2016

Dan White: Dear Mr Noonan, here's the Budget 'dos' and 'don'ts'

Michael Noonan
Michael Noonan

With a general election likely to be just weeks away Finance Minister Michael Noonan is under enormous pressure to make the Budget as voter-friendly as possible.

Here's five things Mr Noonan should do next Tuesday and five things that he absolutely shouldn't.

• Do make childcare more affordable.

Ireland has the highest childcare costs of any developed country, with the OECD calculating that it swallows up to 35pc of family's income, as against an EU average of just 12pc. Mr Noonan should use some of the extra tax revenue to cut childcare costs.

• Do cut marginal tax rates. Ireland's top marginal tax rate (that's income tax plus PRSI and USC) is now a towering 52pc, very high by international standards.

Even worse, this marginal tax rate kicks in at just over €33,000 - the average industrial wage - for single people.

• Do cut capital gains and inheritance tax rates. The Left never forgave Charlie McCreevy for halving capital gains and inheritance tax rates from 40pc to 20pc - not because the rate cut failed but because it succeeded so brilliantly in raising revenue.

The rates went back up to 33pc during the recession.

• Do end the tax discrimination against the self-employed. When it comes to tax the self-employed are second-class citizens.

They are denied the tax credit (€1,650 for single people and €3,300 for couples) for which PAYE workers qualify and they also pay a top USC rate of 10pc as against 7pc for other workers. Such discrimination is impossible to justify.

If he is serious about encouraging enterprise, Mr Noonan should end this tax discrimination against the self-employed immediately.

• Do raise the inheritance tax threshold. During the recession the Government cut the inheritance tax threshold from €542,000 to just €225,000. It justified this cut on the grounds that house prices had fallen sharply during the recession .

The family home or a share of it is what most people who receive an inheritance will inherit. With house prices now rising strongly once again even those who inherit modest homes are being clobbered by large inheritance tax bills.

• Don't increase child benefit. Mr Noonan announced a €5 per month increase in child benefit in last year's Budget and all of the indications are that he will unveil a similar increase next week.

While the increase will go down well with many voters it will be an expensive waste of money, as child benefit is payable to all families regardless of income. The €70m which the increase will cost should be targeted at children in poorer families instead.

• Don't remove more workers from the USC net. Although it is by far the most hated of the new taxes introduced following the 2008 crash, the basic principle behind the Universal Social Charge (USC), that all workers should pay at least some tax, is a fair one.

Modify USC to make it fairer but ensure everyone still pays something.

• Don't increase the excise duty on cigarettes. Mr Noonan is widely expected to increase this duty by another 20 cent, a move that will no doubt be loudly applauded by the health lobby. Don't do it Minister.

An excise duty increase will merely increase the illegal cigarette trade, which accounts for an estimated 25pc of all consumption and already costs the exchequer €250m in lost revenue.

• Don't do anything to further overheat the property market. As the Central Bank's tough new mortgage lending rules begin to bite, the political pressure on the Government to 'do something' about soaring house prices in the Budget is mounting.

This would be a very, very bad idea. The financial equivalent of pouring petrol on a blazing fire.

• Don't exceed the €1.5bn ceiling for tax cuts and spending increases.

With the Exchequer awash with cash from a booming economy - tax revenue was up €2.7bn in the first nine months of the year - the temptation for Mr Noonan to dole more financial goodies in advance of the election is very, very strong.

The Minister should ignore this pressure and be the party pooper instead.

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