Sunday Times MoneyComment - December 11, 2011

Posted by Jill Kerby on December 11 2011 @ 09:00

We’ve all been mugged and Minister Noonan knows it


Well, thank goodness that’s over for another year.

The 2012 austerity Budget has been delivered - and perhaps even amended by now in the case of the controversial cutting of the young claimant’s disability allowance. Your bottom line income has been left untouched, the Finance Minister Mr Noonan with assured the nation. 

By the end of his speech last Tuesday, he certainly looked pleased with himself.

Anyone who looks at their bank balance a few days after they get paid may not agree.  A motorist who bought petrol on Wednesday morning wouldn’t even have to wait for payday: the 2% increase on VAT would have been applied to his purchase.  By 1 January, his car and carbon tax will also cut into his bottom line.

If the driver has more than two children, the family income will fall by at least €228 in 2012 as a result in the cuts in Child Benefit for third, fourth and subsequent children under age 18.  If he lives in a rural area and the children rely on the school transport scheme, he’ll have to find another €100 per child out of is income to meet that cost or perhaps drive them to and from school himself.

Since many older children from rural areas must live away from home to go to college, the rural family may also have to find the extra 3% that has been cut from the capitation grant their child may have received on top of the extra €250 contribution fee that every third level student will have to pay.

Everyone with private health insurance will also have to find more income (or savings) to cover the higher government charge for private beds in a public hospital this coming year. 

The idea behind this announcement was, incredibly, to raise more income for the state hospitals.  Perhaps someone should have reminded the civil servant in the Department of Health who came up with this budget wheeze that thousands of people dropped their private health cover last year after the same beds were surcharged in last year’s budget.

The more insured people who return to the public health system, the greater the cost to the public system, and to the taxpayers who fund it.

Nobody I have spoken too, except the Minister for Finance and his colleagues, believes this budget is income neutral.

 The €100 household charge is going to have to be paid out of earned income, savings or social welfare benefits.

Pensioners who already spend every penny of their old age pension will have to dip even deeper into their savings (if they have any) to pay this charge. With only those homeowners in receipt of Mortgage Interest Supplement or living on unfinished ghost housing estates exempt, even householders who are in negative equity will have to find €100 from their already inadequate incomes to pay this tax.

What happens in 2014 when the household charge is replaced by the property tax that the coalition has promised the troika it will introduce once a proper valuation survey of properties and sites is done? 

If thousands of householders struggle to pay a mere €100, how likely are they to find the income to pay a tax based on the market valuation of their property?  Especially if that valuation is anything like the sort of property tax people in most other western jurisdictions pay, which can often account for 0.5% to 0.75% of its market value.

The Minister may have convinced himself that he protected the incomes of the citizenry last Tuesday, but an old bruiser like Michael Noonan should know that if it looks like a mugging and feels like a mugging, then it is a mugging.


Political Capital


The increase in capital taxes in the Budget was well-flagged before Tuesday’s announcement.


The Minister has settled on 30% as the new standard capital tax with the capital gains and capital acquisition or inheritance/gift tax-free rates going up from 25% to 30% and the CAT threshold being further reduced to €250,000, less than half what it was in 2008. 

Raising these taxes isn’t going to result in any huge windfall for the government since there isn’t much profit in selling assets these days, but no one has much sympathy either for people who inherit or benefit from unearned income.

However, the new 30% deposit interest retention tax will hit certainly savers who should also expect interest rates to come down in the near future if the ECB does what so many expect them to, and follow up last month’s 0.25% reduction with another one or two in the early new year.

The only consolation for them is that the Minister didn’t impose PRSI and USC on these non PAYE earnings (or rental income) as had been expected.


An age-old problem


If we still have our own Finance Minister next year – and not a clever German one assigned to us by the European Union - chances are that his 2013 Austerity Budget may finally have to address the elephants that were ignored in this one: the huge state pension bill and the still growing cost of social welfare benefits, the latter alone being worth €21 billion, or two thirds of the entire tax take of the state.

Reducing the guaranteed 50% of final pay that public servants retire on isn’t something that any politician would choose to do, since he’s one of them.  The finance minister will also no doubt try to cut other expenditure before he takes on old age pensioners.

It’s hard to work out where else the next four billion euro that must be cut from the 2013 budget will come from if the pensions and welfare bills are not reduced. (The Croke Park pay deal must remain until 2014).

Meanwhile, one of the only good things that came out of this year’s budget is that private pension savers did not lose their top rate pension contribution tax relief.  It may only be a one year reprieve until the threat to bring it down to the standard rate begins, but it’s something. 

The savings the government set out to make by cutting back on pension incentives has already been exceeded – between the €457million taken from existing pension savings by the 0.6% levy, and the other €250 million or so achieved by the new funding limits introduced last year, and the lower level of overall pension contributions this year, the pressure to cut the tax relief was avoided.

“It’s the only good news I’ll be sending my clients,” one pension advisor told me last Wednesday. “They have another year to maximise their pension contributions, assuming they have any spare money to save.”


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