How Budget will leave us poorer
ESRI confirms what the Mail revealed – inflation will devour Donohoe’s so-called tax ‘giveaways’
Those in the middle are 0.4% worse off
FAMILIES will be worse off next year after the Budget, the ESRI has found. The Government’s own think tank has revealed that the Budget will actually cost us money because it doesn’t take inflation into account.
Inflation is currently low but is expected to rise next year to 1%, with some experts predicting it could go as high as 2%.
‘Initial analysis shows that Budget 2018 leads to small losses at all income levels,’ Professor Tim Callan of the Economic and Social Research Institute said.
On Wednesday, the Irish Daily Mail highlighted that the Budget had taken more money out of the pockets of people paying income tax than it had put in.
The Mail highlighted that supposed tax cuts of €335m were more than outweighed by the failure to account for even the 1% inflation level forecast for 2018.
The ESRI has now gone even further, saying a 3% increase should be factored in across the tax and welfare systems if we are to account for pay rises next year in our budgetary arithmetic. If we don’t do so, taxpayers pay more tax than they should and pension and welfare recipients lose out.
Worst hit by the failure to do so were the two-fifths of all people in the two lowest-income brackets, who ended up over 0.5% worse off, according to the ESRI analysis.
Those in the middle were 0.4% worse off, while the highest earners were least hit, with declines in income of just 0.2%.
This is a far cry from the Budget giveaways trumpeted by the Government.
Prof. Callan explained yesterday: ‘Personal tax credits were left unchanged in Budget 2018, but would have risen by €50 under indexation. While the [lower rate] tax band was increased by €750, indexation would have implied a rise of €1,050.
‘Welfare payments rose by €5, while indexation would have required an increase of €6, or €7 for pensioners.’
Indexing is when the Government increases the threshold at which you enter the lower and higher rate of tax to take inflation into account. The vast majority of tax credits remained unchanged.
And welfare payments won’t be increased until March 26, which means that the announced ‘fiver’ rise is just €3.75 when averaged out over the year as a whole.
With inflation at even 1%, a contributory pension, for example, should go up by €2.30 over the whole year to account for this.
This means that the real increase in the pension next year is just €1.45, after inflation – while pensioners are losing out to the tune of €2 compared to most workers, according to the ESRI’s reckoning.
Child benefit – the main welfare payment to the ‘squeezed middle – stayed the same, which meant that it effectively fell by €4.20 per child, according to the ESRI.
Family income supplement went up by €10 for two or three children, which means that it effectively barely budged after inflation and went down for bigger families.
Prof. Callan wrote in the Irish Times yesterday: ‘While there have been a number of improvements in the transparency of Ireland’s fiscal policy over recent years, the opening Budget still operates on the basis of unchanged credits and bands in nominal terms.
‘We do not argue that indexation is necessarily the best policy. It does, however, provide a more informative benchmark against which to measure the distributional impact of actual policy than the unindexed policy.’
Tax expert Alan Murray, of Mazars accountants, described the subterfuge of not index-linking bands and credits as a form of ‘stealth tax’.
But a Government spokesman said: ‘People will have a modest amount more, whether as a result of the tax changes and/or the increases in pensions and other State payments such as to the disabled, lone parents, carers and the unemployed.
‘This increase will be greater than projected price inflation and before any wage increases achieved as a result of a recovering economy.’
The ESRI estimated the impact of the Budget on a representative
sample of 8,000 households. It reckoned the indexation of tax bands, credits and welfare payments would have cost in the region of €1,100m.
But this did not happen. Instead, Finance Minister Paschal Donohoe disingenuously ignored wage inflation and took credit for doling out €600m worth of benefits.
In effect, we were short-changed to the tune of €400m, according to the ESRI.
The ESRI’s comparison was made between Budget 2018 and a neutral, wage-indexed benchmark with 3% pay increases.
The latest inflation statistics show a decline in September overall due to sterling’s fall, which benefited clothes and food imports. But inflation is expected to pick up next year.
Prices on average, as measured by the Consumer Price Index, were 0.2% higher in September, compared with 12 months earlier.
While motor insurance fell, health insurance costs rose, driven upwards by controversial Government levies and a ‘stealth tax’ on private patients, who are now being charged fourfigure sums per night for hospital stays, with the costs passed on by health insurers to the customers.
Budget Day: The Mail’s report
Report: Professor Tim Callan
Leo Varadkar: ‘Allowing people keep own money’