Brian Lenihan: to reform the 'inbalanced' income-tax system

AS the nation spends this weekend digesting the bitter pill that Minister Brian Lenihan dispensed on Wednesday – when he told us "the worst is over" – it is pertinent to borrow another phrase from Fianna Fáil parlance: Lenihan has "a lot done, more to do".

Lenihan has introduced a number of measures aimed at slashing exchequer spending by just over €4bn in 2010. But the budget in 2011 will not be much better. Ireland Inc has given the European Commission a commitment to further cut public spending in 2011. Lenihan has more to do and he dropped a number of hints to that effect last Wednesday.

While he did say that "this country is turning the corner", 2011's budget will be tough. On Wednesday he said: "The effort demanded of every Irish citizen in this budget is substantial, but none as big as today's. Having already provided for an adjustment of €1bn in capital spending, we have penciled in an adjustment in day-to-day spending of about €2bn for 2011."

So a year before the next budget, what can we expect to hear from the Minister for Finance in December 2010?

Undoubtedly one of the most dramatic announcements made by Lenihan last week was the reform of the income-tax system. It is radical and he will announce the details in next year's budget as the much talked-about widening of the tax base finally happens.

Lenihan outlined that the income tax system, in its current format, is "very unbalanced" as almost half of income earners will pay no income tax and 4%will pay almost half of the total yield next year.

His radical reforms aim to reverse this imbalance and he indicated that he will introduce a new system of just two charges on income in 2011.

"A new universal social contribution will replace employee PRSI, the health levy and the income levy. It will be paid by everyone at a low rate on a wide base as a collective contribution to public services," he outlined.

"Income tax will apply on a progressive basis to those with higher incomes, reflecting their capacity to make a greater contribution."

As well as the new income- tax system, it is most likely that 2011's budget will also see further cuts to the public-sector wage bill – unless reform of the entire public sector happens.

In the 24-hour period after his budget speech, Lenihan and two other cabinet ministers all delivered a very pointed message to the public-sector unions.

The message was simple. Public-sector pay has been cut and further savings are essential. Public-sector workers can either agree to reform or have their pay cut further.

So the implementation of reform will be high on the political agenda for 2010 and is sure to feature in 2011's budget.

In Lenihan's first budget in October last year, he introduced a tax for the owners of Non-Principal Private Residences (NPPRs) or second homes.

Brought into law on 31 July this year, a €200 tax now has to be paid on investment properties and holiday homes in a move that is expected to raise €40m annually for local authorities.

As county and city councils will struggle to raise revenue in 2010, it is expected that the second-home tax will be increased.

As it stands, €200 is not an excessive amount for anyone who owns a second home to pay annually so the fee will be increased now that the mechanism is there to collect the revenue.

As the Commission on Taxation report recommended the carbon tax that was introduced in Wednesday's budget, the structure is now in place for the government to collect this tax and it is likely increase it next year.

Other charges that may be addressed in 2011 are water charges and property tax – which were both promised in the revised programme for government.

The logistical nightmare and cost of installing water meters to every home in the country means that that plan could be put on the long finger past 2011. Similarly, the political minefield that a property tax would open up for a government that is already one of the most unpopular in history makes it an unlikely prospect for Lenihan's next budget.

The government introduced a new prescription charge of 50 cent per item under the medical-card scheme last Wednesday to reduce the state's medicines bill. The potential for small increases to this new charge are there for budget 2011.

On a lighter note, while 2011's budget is 12 months away, bookmaker Paddy Power placed Lenihan as the ½ odds-on favourite to deliver the next budget speech on Wednesday evening after he completed his speech.

It remains to be seen whether Lenihan's comment that the "worst is over" will hold true but the odds on another 'mini-budget' in 2010 stand at just 2/1.