Budget 2023 is likely to be remembered as the “Cost of Living Budget.” While housing, health and education remain high on the political agenda, the pressures being felt by ordinary people when it comes to paying household bills, in particular the cost of energy, have come to overshadow everything else. It is an emerging issue too for businesses, causing strain particularly for some sectors which are still in recovery mode post the pandemic.
Indeed, when the media is carrying stories about families having to choose between paying for energy or food, the political priority is clear.
Against this rather gloomy backdrop, the recent very positive reports on the exchequer finances have been very welcome for the Government. They allow the two Ministers some room to manoeuvre in terms of the mix of spending and taxing measures they can deploy.
The tricky bit will be in making decisions against the background of significant economic uncertainty. Predictions of a looming recession coupled with warnings from the Fiscal Advisory Council in relation to over-reliance on Corporation Tax and a narrow income tax base make decisions on how much spend and how much to set aside for the future that bit more difficult.
And when it comes to spending, there is the balance to be struck between “one off” measures and ongoing commitments. A number of “one off” measures aimed at alleviating the pressures caused by rising inflation have already been announced. These include the credit against certain energy bills.
What to expect?
It is becoming increasingly likely that we will see further such measures announced on Budget Day. These may include another energy credit, payable in the psychologically important run-up to Christmas, special social welfare “bonuses” such as increased fuel allowances, and top-up payments during winter months.
These will likely be accompanied by broader, permanent social welfare increases with the state pension, job seekers allowance, and other welfare payments likely to see significant rises.
It is conceivable that we will see additional tax measures aimed at addressing cost of living rises. There may be extensions to the existing reductions in excise duties on fuel, for example.
Broader measures on income tax will probably include a widening of tax bands to reflect wage growth and an increase in tax credits which will be felt in pay packets from the beginning of 2023.
There is also the much-trailed proposal on the introduction of a 30% income tax rate. Depending on the breadth of any new band, this could have the effect of taking some middle-income earners out of the top rate completely while reducing the portion of that others pay at that rate. The proposal doesn’t appear to have garnered much public or political support, so it will be interesting to see how this plays out.
Broadening of tax base unlikely
It’s unlikely we will see the introduction of measures to broaden the tax base. Despite widespread acceptance that Ireland’s excessively narrow tax base was one of the key factors in the fiscal crisis that hit the country in the wake of the global financial crash, there have been scant measures to broaden it. The main initiatives being the introduction of Universal Social Charge (USC) and Local Property Tax.
Other measures such as the attempted introduction of water charges failed quite dramatically. The most important thing that we can probably hope for on this occasion is that the Budget does not cause a further narrowing of the tax base.
The Ministers will need to be cautious, however. While they will wish to do all that they can to help people facing very real financial difficulties they must not increase disposable income to the extent that it risks adding upward pressure to the inflationary spiral.
Inflation will continue to hurt
Inflation will continue to present challenges to the Government long after Budget 2023, which will be very difficult to fix. First, much of the current cost of living rises relate to energy. Ireland imports a significant portion of its energy supplies and is a price taker in that respect. The Government has few options available when it comes to tackling that aspect of the current inflationary spiral and measures to soften the blow through temporary price subventions and so on are probably the best it can do.
One effect of the current energy crisis may well be the acceleration of measures to improve energy efficiency for people and businesses which would reduce consumption so it may be that the Budget sees signposting of some of these longer term proposals.
The other question facing the Government when it comes to inflation is whether it is a temporary or longer lasting phenomenon. In the temporary situation, short-term measures will go some way to helping people until inflationary pressures ease. If inflation is likely to persist in the longer term, however, deeper, structural measures will be required both to reduce our dependence on imported energy and to address underlying inflationary pressures within the domestic economy. But, by their nature, these will take time to have any significant effect.
In the meantime, the Ministers should be thankful for the quite rude health of the public finances. It is unlikely that the same conditions will prevail when it comes to framing Budget 2024.