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News : Irish Economy Last Updated: Aug 27, 2014 - 10:38 PM

Irish Budget 2015 & Economy: More demand for tax cuts
By Michael Hennigan, Finfacts founder and editor
Aug 21, 2014 - 8:21 AM

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ESRI Budget Perspectives 2014 [pdf]

Irish Budget 2015 & Economy: The renowned American baseball player Yogi Berra (b. 1925) once quipped "It's déjà vu all over again" and there is that sense about the continuing drumbeat of demands for tax cuts in next October's budget.

The chart above shows that there is a need to adjust Irish income tax bands as the top rate threshold is at a low average income level. However, just in the past 24 hours Dermot O'Leary, chief economist at Goodbody, called for a cut in the 52% top rate of income tax (including social charges) that applies to an individual's taxable income above €32,800 as part of measures to "increase the medium-term potential of the economy" while the Irish Times reports that a tax relief for landlords that was phased out after the collapse of the housing market should be reintroduced to help tackle the student accommodation crisis, UCD Students’ Union has said.

Dermot O'Leary's claim that "the higher rate of tax...including the universal social charge, is one of the highest in the EU" is not correct as the chart above illustrates and while the top headline income tax rates of 40% and 45% in the UK, suggest that Ireland is out of line, when the incremental loss of the personal tax allowance and a total loss kicks in at £120,000+ earnings coupled with benefit impacts, the effective UK marginal tax rate is 60% (including national insurance).    

Last month Ibec, the principal business lobby, produced  a laundry list of new business tax breaks despite Ireland having the lowest corporate tax and employer social security rates in Western Europe.

Remember the magic of low taxes and how the gallery of fools argued that the halving of the capital gains tax rate to 20% had more than doubled the revenue take?

That was ostensibly true just as a gambler can sometimes win in the casino.

It was the time when  Maurice O'Connell, Central Bank governor, was issuing letters to bank chiefs pleading for credit restraint.

We reported last month that the Bank's 1999 annual report noted: "Institutions were...advised that it remains vitally important for them to take a medium term perspective and to reckon with the potential consequences of rising interest rates and a return to lower rates of growth in the economy. All institutions gave assurances that there would be no slackening in prudential lending standards."   

It doesn't take much wisdom to understand that cutting taxes is easy while increasing them is very difficult - - Jean Baptiste Colbert (1619–83), a French finance minister during the reign of King Louis XIV reputedly said: "The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing."

Absent a boom, there is a limit too to the scope for raiding pension funds (Kenny and Noonan are each entitled to draw 3 public pensions) and the like.

EU tax/ social security burdens

Last June Eurostat published the 2014 edition of 'Taxation trends in the European Union' [pdf] which details EU tax & social security burdens in 2012.

Ireland is a middle ranking tax country.

Tax & social security revenue as a ratio of GDP was 28.7% in Ireland and 35.2% of GNP (gross national product) -- mainly excluding the inflated profits of the significant foreign-own sector.

The ratio was more than 40% of GDP in Denmark (48.1%), Belgium (45.4%), France (45.0%), Sweden (44.2%), Finland (44.1%), Italy (44.0%) and Austria (43.1%).

The UK was at 35.4%.

In Ireland with a dual public-private health care system, the cost of private health insurance can also be viewed as a tax.

Besides debt reduction over time, the public capital budget has taken a big hit since the economic bust and while project management has been poor in the past, there will be a need for more spending in coming years.

Labour costs

In 2013, average hourly labour costs in the whole economy (excluding agriculture and public administration) were estimated to be €23.7 in the EU-28 and €28.4 in the Eurozone (EA-17).

The Irish rate was €29 compared with €30.5 in Germany and €20.1 in the UK.

Irish prices are about one-fifth higher than the EU average despite being the only economy to have experienced an actual price fall in 2008-2012.

There are two economies in Ireland and the foreign-owned exporting sector and its eco system with knock-on impacts on public sector charges, contrasts with the typical private sector worker who is an indigenous SME, is not a trade union member, is low paid and has no occupational pension. 

A government minister has promised to review public service austerity era pay and pension cuts but with silence on pay rises in the private sector, there is the promise of cake!

Recent reports on the economy:


Goodbody [pdf]

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