Exchequer costs of the magnitude announced in Budget 2021 would normally bring us back to the worst days of the last recession. That recession required the introduction of what is now the Universal Social Charge (USC) and a curtailment of many other tax reliefs.
owever, the ministers were quite pragmatic on Budget day.
They spoke of our borrowing levels for 2020 and 2021 not being out of line with peer countries – creating a sense that this is manageable, despite the significant figures involved.
Looking ahead to future budgets, what might we expect to see? It is virtually impossible for the Government to predict the future.
Three key issues loom large.
First, we need to get through the worst of the Covid-19 health challenges. The Budget messages suggest the Government believes that it will be late 2021 or 2022 before we can move forward with confidence.
Second, businesses need to trade normally – thereby allowing unemployment levels to stabilise and indeed move back towards the record low levels of just last year. This could drive up tax receipts again and reduce the level of social welfare support that must be funded.
Finally, Brexit is looking like it is heading for a cliff edge in December.
It may be next summer before the Government can make any realistic judgment call on these challenges: the Pandemic Unemployment Payment promises needed, wage subsidy extensions and the myriad of other demands.
If at that time, the minister for finance looks to raise further tax revenue, there is no obvious place to look.
The starting point may well be to raise the lower USC rates or reduce the USC bands (therefore increasing the USC bills faced by many) – given this is where the majority of tax cuts have been focused in the last five budgets.
This could widen the tax base and increase the number of income earners asked to contribute – thereby spreading the pain across all taxpayers.
A tightening of the 20pc income tax band – which would see people hit for the higher rate of income tax earlier – is another mechanism which would have a greater impact on higher earners.
When you consider 82pc of the income tax and USC yield comes from 24pc of income earners (that is, taxpayers earnings over €50,000), could the finance minister look to increase the burden for this group perhaps?
A tax increase for those earning €50,000 or more would not impact 76pc of workers.
From a capital taxes perspective, it may sound contradictory, but lowering the Capital Gains Tax rate has previously driven more transactions and generated higher tax yields.
Finally, many of the costs building up are putting pressure on the social insurance pots.
PRSI increases could also be on the cards, but this could be risky. The last thing any government will want is to discourage employers from hiring, but that is precisely what could occur if the 11.05pc employer PRSI rate is raised again.
The Government will be hoping that significant progress can be made in tackling Covid-19 and that a Brexit deal is secured.
Those factors will be key for our economy to return to growth so that these realities do not have to be faced when framing Budget 2022.
Pat Mahon is tax partner with PwC