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WHILE THE GOVERNMENT budget for 2025 will be announced tomorrow, the dance started weeks ago.
Thoughts have been aired, submissions sent and reports published by the usual grandees and interest groups. Some of those ideas have been sensible, and some will never happen.
Many changes that will be announced have already been leaked. It is difficult to discern an overall strategy in budget briefings so far – but that could still change if the government is racing to the polls this side of Christmas.
There is certainly lots of money to go round. Tax receipts this year are up a whopping 12.6% on last year, and interest rates are falling. So everyone will likely see a bit of upside in the announcements.
But – with one exception, as we’ll see – there is little obvious appetite in the government for real financial reform of the hard problems in Irish society right now, such as lack of accommodation, transport infrastructure, controlling runaway costs on capital projects, public sector costs and efficiency, or dealing with our changing demographics and ageing population profile.
That’s why the result looks likely to be a mishmash of minor tweaks, inflationary increases and measures for certain special interest groups. As ever with the budget, it all depends on where you’re standing.
So how will budget 2025 affect you?
The government seems anxious to create the sense that inflation has moved into the rearview mirror, jumping on recent data suggesting annual price increases are at their lowest in three-and-a-half years. So you can expect little in the way of fresh cost-of-living measures.
From the leaks, it seems that some of the one-offs from last year will be repeated but at a lower level. That could include a €250 energy credit (€450 last year) and a doubling of child benefit and fuel allowance.
One inflation-busting change that would help consumers would be the reversal of the increase in VAT on restaurant bills. While VAT on food in Ireland is generally zero, if you buy it in a restaurant, the supplier must add 13.5%. That’s up from 9% for much of the last decade and has made a significant difference both to restaurant owners trying to plan their business, and consumers trying to battle inflation.
Households in Ireland on the median income (around €55,000) look set to benefit from tax changes to the tune of around €1,000. It seems changes to the universal social charge will be the main vehicle for this, both moving the point at which higher percentages kick in and reducing the rates themselves.
It’s also likely the threshold for paying top-rate tax will also be increased. Last year it rose from €40,000 to €42,000. A similar increase is on the cards again. There is no suggestion the income tax rates of 20% and 40% will be adjusted.
Is it any good? A change of €1,000 represents 1.8% raise for a household living on the median income. That’s bang in line with inflation, which is presently 1.7%, leaving most people roughly in the same position as they were a year ago.
For those looking to buy a house, it looks like existing supports will be continued and extended. That includes the rent tax credit (currently €750), as well as help-to-buy, and mortgage interest relief.
The effectiveness of many of these interventions is questionable, as often they simply pump up the value of housing assets, funnelling money to existing owners and developers. But once offered, these tax tweaks prove hard to take away.
Housing supply – and transport infrastructure to reach it — are the real issues. But little has been said about measures to increase the number of housing completions, which, while on the right track, will take several more years to come through.
It’s safe to say higher-income earners are not a major priority when it comes to the budget. The government has been clear that there is still a need to support middle- and lower-income earners to deal with the cost of living.
The most significant change these workers can look forward to – starting in 2026, is a gradual move to increase the amount they can save free of tax in their pensions. By 2029, the maximum pension pot (aka standard fund threshold) is set to be €2.8 million.
This is still a long way below the level of the cap when it was first introduced, and is as much about attempting to address the yawning gap between public sector benefits and the private sector as it is about helping higher earners. But as it’s the first move in the pension cap in a decade, it will be welcome.
Another tax limit which has stood still for many years is inheritance tax (aka capital acquisitions tax).
The main issue is that a son or daughter pays tax on any lifetime inheritance or gifts over the value of €335,000. In short, if you inherit your parents’ house, there’s a good chance you will face a large tax bill – and potentially require you to sell the family home. That’s a consequence of rising house prices, but also because the €335,000 limit has been static since 2011. €335,000 isn’t what it was 13 years ago.
An adjustment to the tax level itself – currently 33% – seems less likely. (Until the financial crisis, the rate was just 20%).
Sadly, the national debt never sends a pre-budget submission. To quote the government, “At just over €42,000 per person, Ireland still has one of the highest gross public debt levels in the world”.
Given our favourable tax receipts position, it would be good to see some serious attempts to address that. But it seems unlikely in 2024. The national debt doesn’t have a vote.
Major reform is never likely to come from Ireland’s finance ministry. So it’s notable that perhaps the most radical financial kite flying was from the Taoiseach himself, who indicated last week that universal free childcare could be introduced as part of his party’s election promises. That would be a reform on a par with Donogh O’Malley’s introduction of free secondary education in 1966.
It wouldn’t be cheap. But this change would have huge implications for the finances of young families, for early years’ education, and for women in the workplace. It could happen; after all free secondary education only happened half a century ago because it was announced to the public without consultation with the Department of Finance, leaving them powerless to resist.
Ralph Benson is a chartered accountant and qualified financial advisor. He is co-founder and head of financial advice of online investments and pensions advisor Moneycube.ie.
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