Dis­pos­able in­come will get no sig­nif­i­cant boost in real terms

Ris­ing prices and wage growth likely to neu­tralise any pos­i­tive ef­fects

The Irish Times - Business - - BUSINESS NEWS - Claire Keane Dr Claire Keane is a se­nior re­search of­fi­cer at the ESRI

What was the com­bined ef­fect of yes­ter­day’s bud­get mea­sures, taken as a whole, on house­holds? Ul­ti­mately, it de­pends on what we take as the ap­pro­pri­ate point of com­par­i­son.

A bud­get that leaves tax cred­its, bands and wel­fare rates frozen in cash terms will fail to cap­ture the fact that ris­ing prices re­duce peo­ples’ pur­chas­ing power, while wage growth will re­sult in peo­ple pay­ing a higher share of their in­come in taxes. Like­wise, hold­ing ex­cise du­ties and car­bon taxes fixed in cash terms equates to a real-terms cut.

Freez­ing so­cial wel­fare rates in nom­i­nal terms will re­sult in the in­come of wel­fare re­cip­i­ents fall­ing be­hind the rest of the pop­u­la­tion and will ul­ti­mately lead to a rise in poverty and in­come in­equal­ity over time.

In­deed the Gov­ern­ment’s Roadmap for Pen­sions Re­form an­nounced the in­ten­tion to ex­am­ine re­tain­ing the State pen­sion at its cur­rent rate of one-third of av­er­age earn­ings.

Meet­ing such a tar­get would re­quire au­to­matic in­dex­a­tion in line with earn­ings. With prices ex­pected to rise by just over 1 per cent and wages by more than 3 per cent in the next year, sim­ply com­par­ing Bud­get 2019 mea­sures to last year’s tax and ben­e­fit sys­tem does not pro­vide a dis­tri­bu­tion­ally neu­tral bench­mark.

Such a bench­mark is pro­vided by com­par­ing bud­get mea­sures to what would have hap­pened if tax and ben­e­fit thresh­olds rose in line with fore­casted av­er­age wage growth. Rel­a­tive to this, Bud­get 2019 re­sults, on av­er­age, in small losses as a per­cent­age of house­hold in­come, rang­ing from -0.9 per cent for the low­est in­come group to -0.4 per cent for the high­est in­come group.

Com­pared with an al­ter­na­tive price-in­dexed bench­mark, the tax and ben­e­fit mea­sures in­tro­duced in Bud­get 2019 re­sult in no change in av­er­age house­hold dis­pos­able in­come, with a small gain of 0.1 per cent for the low­est in­come group bal­anced out by smaller changes fur­ther up the in­come dis­tri­bu­tion. Th­ese re­sults in­di­cate that the bud­get’s tax and ben­e­fit changes gen­er­ally kept pace with prices, but were not large enough to keep pace with wage growth.

Po­lit­i­cal de­ci­sion

It is worth bear­ing in mind, how­ever, that in­creas­ing tax thresh­olds and wel­fare pay­ments is costly, and the ex­tent to which this should be done is ul­ti­mately a po­lit­i­cal de­ci­sion.

Sim­ply in­creas­ing all tax and wel­fare pa­ram­e­ters by an­tic­i­pated 3 per cent wage growth would cost nearly €1 bil­lion, while in­creas­ing them in line with price in­fla­tion of 1 per cent would cost more than €300 mil­lion – money that would not be avail­able for in­creased spend­ing else­where such as on cap­i­tal in­vest­ment or pub­lic ser­vices.

One mea­sure that was widely ex­pected in the bud­get but did not ma­te­ri­alise was an in­crease in the car­bon tax, in­tro­duced in 2010 with the aim of re­duc­ing green­house gas emis­sions. At €20 per ton the rate re­mains well be­low the €80 per ton sug­gested as nec­es­sary by the Cli­mate Change Ad­vi­sory Coun­cil to meet the Gov­ern­ment’s own emis­sion re­duc­tion tar­gets.

Re­cent ESRI re­search es­ti­mates that even a dou­bling of the cur­rent car­bon tax to €40 would re­sult in only a 5 per cent de­crease in emis­sions, leav­ing Ire­land well be­low com­mit­ted tar­gets. De­lay­ing tak­ing ac­tion raises the prospect of large EU fines, along with the size of fu­ture car­bon tax in­creases that will ul­ti­mately be needed.

Hold­ing ex­cise du­ties and car­bon taxes fixed equates to a real-terms cut

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