Quarterly Economic Observer - Autumn 2013 - "Budget 2014 - Income Taxes and High Earners"

This edition of the NERI’s Quarterly Economic Observer (QEO) outlines our latest expectations for the economic outlook in the Republic of Ireland and Northern Ireland (Section 3) and develops the NERI’s proposals for the forthcoming Budget 2014 fiscal adjustment planned in the Republic (Section 4).

In particular, we focus on the potential to raise additional taxation revenue from income taxes focused at those in the top 10% of the income distribution.

Economic Outlook

The economic outlook for both parts of the island of Ireland remains uncertain. In the Republic, there are mixed signals pointing towards stability, even tentative recovery, alongside concerns on export growth, domestic demand, continuing long-term unemployment and declining GDP. In the North, there are some positive economic signals, reflecting recent developments in the UK economy as a whole, although these positive trends are recent and at this stage any recovery is at best fragile. In both economies challenges remain given high, if declining, unemployment and weak levels of household spending and investment.

Based on the assumptions and expectations outlined Section 3, our current projections for the Republic of Ireland include:

  • Depressed but positive GDP growth of 1% in 2013, increasing marginally to 1.2% in 2014, 1.8% in 2015 and reaching 3% in 2016.
  • Modest employment growth of 1.4% in 2013, rising to 1.7% in 2014 and 2.2% in 2015.
  • A steady decreased in unemployment out to 2016, with a 2013 figure of 13.8%. By 2016 we expect unemployment to reach 12.1%. High structural unemployment remains a core policy challenge.
  • The national debt peaking as a % of GDP in 2013 (123.6% approximately €207 billion).

The improvements in the labour market impact positively on exchequer finances with the General Government Deficit falling to 4.6% in 2014, reaching 3.1% in 2015 and 2.4% in 2016.

Budget 2014, Income Taxes and High Earners

We reiterate our recommendations for the scale and composition of the fiscal adjustment planned for Budget 2014, first outlined in our Summer 2013 QEO:

  • The Budget 2014 fiscal adjustment should be €2 billion rather than €3.1 billion with the saving on the Promissory Note restructuring used to reduce the Budget’s scale.
  • The remaining adjustment should be re-orientated towards taxation measures with the only expenditure cuts being those already agreed and announced under the two public sector wage agreements.
  • The Budget should be accompanied by an Investment Stimulus which would assist in counteracting the negative impact of the Budgetary adjustment on the domestic economy.

In this edition we focus on potential to raise additional income taxation revenue from the top of the income distribution. Section 4 outlines that:

  • Budget 2014 could raise an additional €400 million from households in the top 10% of the income distribution (above €109,000 gross income per annum).
  • Currently the top 10% of households have an average effective tax rate of between 22.5% and 27.5% (overall average 25.6%).
  • A 1.5% increase in this rate would raise €400m in a full year, equivalent to an average of €46 in additional income taxes per household per week.
  • The spread of income within the top decile suggests that these increases should be designed to be progressive; those within that decile with higher income should experience a greater increase than those with a lower income.
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