Claire Davey, Tax Director, sits down with Allan Shine CEO of Kildare Chamber of Commerce to talk about the crucial upcoming 2023 Budget. With inflation rising sharply and the current cost of living difficulties, how will the government seek to future-proof Ireland’s economy? Claire also talks about the need for innovative supports for our SME sector, incentives to encourage and support the growth of renewable energies in Ireland, and highlights the need to enhance aspects of our personal tax regime to make Ireland as attractive as possible for mobile talent.

With the possibility that the cost-of-living package could rise to €2bn or even €3bn, Claire Davey, Tax Director in KPMG, looks forward to some of the changes which we can expect in Budget 2023.

Balancing inflation

The crux of the challenge facing the Government is the need to balance measures aimed at alleviating inflation and the cost of living difficulties currently being experienced by people in Ireland while sustaining responsible medium-term economic recovery. The fear is that if the Government opens its wallet too wide in an effort to ease the cost-of-living crisis, it could fuel further inflation down the line. Nevertheless, action needs to be taken, and the forthcoming Budget will be extremely important in that respect.

Indeed, the Government has already acknowledged the urgency of the need for action by bringing the Budget forward to September 27 from its usual date in October.

Cost of living Budget

That decision reflected both the adverse effects of rapid price rises for many individuals and households, as well as the pace at which events are moving. The government issued its Summer Economic Statement in July and announced that it intended to exceed its own self-imposed expenditure increase cap of 5% by 1.5% in 2023. So, in summary, it was expected that an overall budgetary package of €6.7 bn would be available of which €1.05bn is expected to be available for appropriate taxation measures and reliefs.

Within weeks, it had now become clear that the proposed expenditure increase of €1bn to combat the increase in the cost of living would not be sufficient and that the government has now forecasted that it would need to spend €2bn to alleviate the pressures caused by the increase in the cost of living.

Much of this additional spend is expected to come in the form of once-off measures such as social welfare 'bonuses', energy bill credits, and temporary excise duty and tax decreases. The immediate crisis facing Irish families at present is the sharp increase in food and energy, so hopefully, this additional spend will quickly address those pressing issues to those who need it most.

Tax changes

Turning to tax changes, we should not expect anything particularly radical on this occasion. There will be a widening of the income tax bands to take more people out of the higher rate, and there will be some increases in tax credits which will have a positive impact on take-home pay from January 2023. There may be some tweaks to the Universal Social Charge (USC) as well.

There is a strong case to be made for the permanent indexation of tax bands and credits so that they at least keep pace with wage inflation regardless of any additional measures at Budget time. A move in that direction on September 27 would be very welcome.

While the proposal for a new 30% rate of income tax has not been formally taken off the table, it is unlikely that it will form part of Budget 2023.

There is also the possibility of some moves on capital taxes. There have been many calls for a reduction in the current relatively high capital gains tax (CGT) rate of 33% to bring this down to 25% or even 20% for investment in active Irish trading businesses. History shows that when a market is buoyant, receipts arising from a lower rate of CGT increases the tax collected overall. A reduction would therefore be a very welcome move.

In the absence of any reduction to the headline rate, the Government should at least consider the reintroduction of indexation relief for CGT purposes to ensure that tax is paid on real gains on the sale of assets. Similarly, indexation of Capital Acquisitions Tax (CAT) thresholds should be considered in the interests of fairness, if nothing else.

Addressing the housing crisis

Beyond the cost-of-living crisis, the chronic housing shortage of housing will need to be addressed. It is hoped that the Ministers will introduce appropriate tax measures and incentives to help alleviate this problem by stimulating an increase in the supply of houses for sale and rental in Ireland.

Sustaining recovery and growth

In order to underpin the underlying strength in the Irish economy (but from a domestic and multinational company perspective), it will be critically important to continue to create and maintain employment. In this context, any increase in the cost of employment would have a profoundly detrimental impact. It is, therefore, to be hoped that we don't see any increase in the employer PRSI rate at this time.

There is also a need to maintain Ireland's attractiveness for mobile talent. One helpful measure here would be the removal of the earnings cap for Special Assignee Relief Programme (SARP) claimants to increase the value of the relief while also extending the period during which non-Irish domiciled individuals can avail of relief. At present, SARP will not be available for qualifying individuals who arrive in Ireland from 1 January 2023 onwards, unless the programme is extended as part of the enactment of the upcoming Finance Bill. We expect SARP will be renewed for a further number of years as part of Budget 2023.

Finally, the energy crisis has once again highlighted our over-dependence on fossil fuels and the pressing need to switch to alternatives. While the scope for further carbon taxes increases is limited, as indeed is their utility, there is a strong case for the introduction of further tax incentives to encourage and support the growth and development of renewable energy generation in Ireland.

After all, Ireland is geographically and climatically uniquely well placed to be a global leader in wind and marine energy generation technologies. Yet, we are lagging far behind many of our less well-endowed competitors in that regard. The introduction of targeted incentives and supports could help to address that situation as we progress on our shared decarbonisation journey.

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