7 big questions about the Budget, answered by an expert

We spoke to KBC economist Austin Hughes about how the upcoming Budget will affect you day to day.

THE BUDGET WILL be released next Tuesday and there is a lot of anticipation about it all.

While all eyes will be on Minister Noonan to see how Budget 2017 will play out, we know the real question you want answered is, ‘How will this affect me?’

So, we spoke to Austin Hughes, chief economist at KBC Bank Ireland, about his predictions for Budget 2017 – and asked him how your pocket will be affected.

Will I see more money in my pay cheque next year?

shutterstock_426728689 Shutterstock / Tashatuvango Shutterstock / Tashatuvango / Tashatuvango

The short answer is, sadly, nothing significant. While the Government has indicated that there is €300 million to be made in income tax cuts, if you divide that by Ireland’s working population of two million it works out as about €3 each per week. Hughes considers this a ‘tax adjustment’ rather than a tax break, as it may prevent somebody who gets even a modest salary increase paying a higher tax rate.

As income taxes have increased on average by more than €3,000 since 2008 a tax cut of €150 per year is not going to make much difference to people’s spending power.

There may be some tweaking, some increased taxes elsewhere to deliver a tax cut of say €200 or so to the ‘squeezed middle’, but there isn’t scope for dramatic improvements.

Hughes says:

It is likely that the income tax cuts are going to be very modest and at the end of January people are most likely not going to notice that they’ve had an improvement. Indeed some people, if they get a slight rise in pay their effective tax rate, will move into a higher tax band so there is scope for some disappointment on income taxes.

I’ve heard USC will be abolished. What’s that going to mean for me?

shutterstock_380032543 (1) Shutterstock / Somchai Som Shutterstock / Somchai Som / Somchai Som

Hughes says:

While the Government plans to abolish USC, it won’t be abolished in one step. The tax concessions in Budget 2017 will be a very small step in that we are likely to see marginal reductions in the lower USC rates of around 0.5%.

He says that while it makes for good soundbites for the Government to promise to abolish the USC, in reality the situation may be more complex:

While the USC is unpopular, there is an argument that perhaps the commitment to just abolish it is a little too simplistic – and that the Government needs to be more careful and more nuanced in terms of how it adjusts taxes. It needs to ensure income taxes aren’t a barrier to people working, but the Government also has to be sure it can maintain a stable tax base that funds increases in public spending, education and infrastructure

Will people get more in benefits?

shutterstock_369962126 Shutterstock / Yulia Grigoryeva Shutterstock / Yulia Grigoryeva / Yulia Grigoryeva

Last year there was a child benefit increase of €5 per week, and Hughes expects that there will be a similar increase this year, if not slightly more modest. He says:

The Government is under pressure to come up with some plan for childcare. This is difficult both politically and economically. The question is whether they simply give everyone the same sort of increase in child benefit as last year, or come up with some targeted strategy that might include income tax relief for those with particularly high childcare costs.

He adds: “It’s a very contentious issue and the likelihood is they’ll go for the simple across the board increase in child benefit.”

Pensions are also likely to increase but only by about €5 per week.

I think the general sense is to try and improve the lot of those pensioners in very difficult circumstances. However, in this area too, it’s very hard to come up with targeted increases in the short term. So they will only give a universal increase and it’s difficult to imagine that being less than €5 a week.

What about extra services? How will my tax money be spent differently?

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Regarding hospitals and education, Hughes says:

There will be a commitment to spend more in these areas over the next while but I think it will be more of a commitment than any additional hard cash beyond what’s already been signalled.

“The difficulty there is that it’s politically hard to decide ‘We’re going to put the money into Area A rather than Area B’, so there tends to be an inclination to spread the butter very thinly across the bread.”

So, what’s this first-time buyer grant I’m hearing about?

shutterstock_370975130 Shutterstock / pogonici Shutterstock / pogonici / pogonici

It’s been well-flagged now that the Government will introduce some form of income tax relief for first-time buyers and the amounts range between €5,000-15,000.

The problem, as Austin sees it, is that this will be of little benefit except to raise house prices across the board:

The problem here is how you deal with a problem that is a shortage of supply, rather than a shortage of purchasing power. If two people both want to buy the same house and now they’ve both got an extra €5,000 in their pocket, they’re going to bid higher for that house.

Is there another way to fix the housing crisis?

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Austin believes the focus has to be on ensuring more houses are built, rather than putting money in people’s pockets.

Let’s look and see if there are other measures to support supply. If there are any measures on rent, or any talk of a building program to provide more social housing. Those would possibly make more of a difference than the First Time Buyer’s grant.

I also heard a rumour the full Christmas Bonus is coming back. What do we know about that?

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Austin hasn’t heard much about the Christmas Bonus, but thinks some bonus will be in the offing:

Nothing much has been said about this but it seems likely that some bonus will be paid – most likely at the same level as last year although a slightly smaller amount is possible. Relative to the fairly modest weekly increases that are being considered, the bonus payment is fairly expensive for the Government and the political kudos for paying may not be huge. However,  the political damage for ‘cancelling’ it would probably be considerable. So, some payment is likely.

So, to sum up…

shutterstock_337159031 Shutterstock / Vladyslav Starozhylov Shutterstock / Vladyslav Starozhylov / Vladyslav Starozhylov

The Government is in the unenviable position of having to spread not very much money very thinly. Austin says that:

This is probably going to be the toughest budget of the next few years. It’s not going to be an austerity budget but it could leave people feeling sore and disappointed. The problem is getting the balance right so that people don’t become unrealistic in their expectations of how much the Budget can give them, but it still delivers a small boost that encourages businesses and consumers to be more confident about the Irish economy and their own particular circumstances.
“There will be progress but it will be slow, it will be uneven, it will be more commitments than cash. They don’t have the money at the moment but they will have a little more scope in Budget 2018, 2019.”

How do you feel about Budget 2017? Let us know in the comments below.

For more pre-Budget commentary by Austin Hughes and a breakdown of what the Budget means for you and the broader Irish economy, click here.

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