Win­ners and losers of Bud­get 2018

Bud­get did not do enough to pre­pare for wage in­fla­tion

The Irish Times - Business - - BUSINESS - Tim Cal­lan ESRIver­dict Tim Cal­lan is a re­search pro­fes­sor at the ESRI

Wages and salar­ies are ex­pected to rise by about 3 per cent in 2018. A neu­tral bud­get – in­creas­ing tax cred­its, tax bands and wel­fare pay­ments in line with ex­pected wage growth – would trans­late into 3 per cent in­come growth for all house­holds.

Mea­sured against this neu­tral bench­mark, ini­tial anal­y­sis shows that Bud­get 2018 leads to small losses in in­come at all lev­els.

The usual bud­get nar­ra­tive is about gains from tax cuts and wel­fare in­creases. This is be­cause the “opening bud­get” is one in which tax cred­its, bands and wel­fare rates are all frozen in nom­i­nal terms. Un­der this opening bud­get, av­er­age ef­fec­tive tax rates would tend to rise as in­comes grow, as more peo­ple are drawn into the tax net and more tax is paid at the higher rate of tax – a phe­nom­e­non known as “fis­cal drag”.

Many coun­tries have adopted bud­getary rules which raise tax bands and cred­its in line with in­fla­tion in or­der to en­sure that in­creases in tax­a­tion must be ex­plicit. 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.

There are par­al­lel is­sues in terms of wel­fare pay­ment rates. A freeze on wel­fare pay­ment rates in nom­i­nal terms – im­plicit in the opening bud­get – would mean a de­cline in real terms, and rel­a­tive to other in­comes in so­ci­ety. This is in­con­sis­tent with the poverty re­duc­tion goals of the national ac­tion plan for so­cial in­clu­sion.

Our anal­y­sis is based on a neu­tral bench­mark, in­dex­ing tax bands and cred­its, along with wel­fare pay­ment rates, in line with wage growth. Key dif­fer­ences be­tween Bud­get 2018 and sim­ple in­dex­a­tion in­clude the fol­low­ing. Per­sonal tax cred­its were left un­changed in Bud­get 2018, but would have risen by €50 un­der in­dex­a­tion. While the 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 for pen­sion­ers, €7.

It is these gaps be­tween the changes re­quired by in­dex­a­tion and the ac­tual bud­get changes which gen­er­ate the losses ob­served in the chart. 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.

Squeeze

We es­ti­mate the im­pact of Bud­get 2018 on a na­tion­ally rep­re­sen­ta­tive sam­ple of al­most 8,000 house­holds in the CSO’s sur­vey on in­come and liv­ing con­di­tions – a key re­source for the anal­y­sis of pub­lic pol­icy. For each of these house­holds, Switch, the ESRI tax-ben­e­fit model, cal­cu­lates the tax li­a­bil­i­ties and wel­fare en­ti­tle­ments un­der the bench­mark pol­icy and Bud­get 2018 pol­icy.

Our es­ti­mates sug­gest that in­dex­a­tion of tax bands, cred­its and wel­fare pay­ments would cost in the re­gion of €1,100 mil­lion. The re­sources used in Bud­get 2018 for per­sonal taxes and wel­fare pay­ments were some €400 mil­lion lower than that fig­ure, re­flect­ing the par­tic­u­lar squeeze on re­sources dur­ing this bud­getary year.

Our anal­y­sis takes into ac­count most of the ma­jor per­sonal tax and wel­fare ini­tia­tives in Bud­get 2018 in­clud­ing the widen­ing of the tax band, re­duc­tions in USC, in­creases in the self-em­ployed and home carer tax cred­its, and re­duc­tion of mort­gage re­lief to 75 per cent of its 2017 lev­els.

On the wel­fare side, we take ac­count of the €5 per week in­crease in per­sonal pay­ment rates for all wel­fare schemes, the mea­sures to sup­port low in­come fam­i­lies in and out of work, the in­crease in the earn­ings dis­re­gard for lone par­ents and the new phone al­lowance.

While work is on­go­ing in the ar­eas of Hous­ing As­sis­tance Pay­ment and Af­ford­able Child­care Sub­sidy, they are not in­cluded in the cur­rent anal­y­sis. Sim­i­larly, the im­pact of in­di­rect tax changes can­not be in­cluded at present, though a new joint pro­ject with the Depart­ment of Fi­nance will im­prove an­a­lyt­i­cal ca­pac­ity in this area. The im­pact of the rise in the min­i­mum wage is not in­cluded, but is small.

Our anal­y­sis, like sim­i­lar mod­els in­ter­na­tion­ally, looks at the im­me­di­ate distribu­tive im­pact of di­rect taxes and cash ben­e­fits be­fore any re­sponses in labour market or other be­hav­iour. We rank house­holds by their in­come, ad­justed for num­bers of adults and chil­dren in the house­hold. We then di­vide the house­holds into five equal-sized groups or “quin­tiles”, from low­est in­come to high­est in­come.

Aus­ter­ity The chart shows the per­cent­age gain or loss for each of these quin­tiles for Bud­get 2018 com­pared with a neu­tral, wage-in­dexed bud­get. The av­er­age in­come loss is close to 0.4 per cent, with some­what greater losses for the low­est two in­come groups (close to 0.6 per cent) and lower losses for the 20 per cent of the pop­u­la­tion with high­est in­comes (losses of about 0.2 per cent).

These changes are small com­pared to the losses im­posed by aus­ter­ity bud­gets, and the gains from bud­gets dur­ing the boom years.

Two is­sues in the wel­fare area de­serve at­ten­tion. First, as we rec­om­mended in a pa­per to the ESRI’s Bud­get Per­spec­tives con­fer­ence, the in­tro­duc­tion of ma­jor re­forms to the struc­ture of in­come sup­ports for low-in­come fam­i­lies has been de­ferred, and ex­ist­ing mech­a­nisms used to in­crease sup­port.

Our ar­gu­ment is that new de­vel­op­ments in tax ad­min­is­tra­tion are likely to pro­vide in­for­ma­tion which will help with both the de­sign and the im­ple­men­ta­tion of re­form.

The dan­gers of at­tempt­ing re­form with­out an ad­e­quate devel­op­ment of the ad­min­is­tra­tive sys­tem are well il­lus­trated by the prob­lems cur­rently plagu­ing the in­tro­duc­tion of univer­sal credit in the UK.

Sec­ond, the in­creases in earn­ings dis­re­gards for lone par­ents are welcome. Eco­nomic anal­y­sis in­di­cates that taxes are raised more ef­fi­ciently if they are lower on in­di­vid­u­als whose eco­nomic be­hav­iour is likely to re­spond more to the tax.

It is known that lone par­ents’ de­ci­sions re­gard­ing em­ploy­ment are more re­spon­sive than oth­ers to the eco­nomic in­cen­tives they face. This makes a case for a tax/trans­fer regime which is more sup­port­ive of lone-par­ent em­ploy­ment, and the rise in the earn­ings dis­re­gard con­trib­utes to this.

PHO­TO­GRAPH: NICK BRAD­SHAW

PwC head of tax Joe Ty­nan ad­dress­ing the PwC Bud­get Break­fast yes­ter­day in Dublin.

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