Wide range of measures makes it harder to see the big picture

The net loss to households after the budget is 1.5% but more time is needed to work out the overall impact

Minister for Finance Michael Noonan (right) and Minister for Public Expenditure and Reform Brendan Howlin at a post-budget press conference. photograph: aidan crawley

Minister for Finance Michael Noonan (right) and Minister for Public Expenditure and Reform Brendan Howlin at a post-budget press conference. photograph: aidan crawley

Fri, Oct 18, 2013, 01:00

The wide range of measures announced in Budget 2014 means it will take some time to come to firm conclusions about its overall impact on the distribution of income.

Switch, the ESRI tax-benefit model, which we use to measure the distributional impact of the budget each year, will require a substantial investment to deal with such issues as the changes in medical card eligibility and the new Housing Assistance Payment, and to estimate the distributional impact of indirect taxes.

With such investment, it will also be possible to track these effects more accurately and to monitor the impact of actual and potential future changes in policy on work incentives facing key groups.

What can be said at this stage about the impact of Budget 2014 on household incomes?

The net loss to households is close to 1.5 per cent, compared with a neutral budget that indexed tax credits and welfare payments in line with expected wage growth of 1.4 per cent.

This reduction is similar in scale to budgets 2010 to 2013, and substantially less than the impact of the two budgets for 2009, which in a single year gave rise to losses to households of over 4 per cent.

Budget 2014 is more unusual in the wide spread of measures used to generate revenue and reduce expenditure, making it more difficult to monitor the overall impact on the income distribution. For this reason, we do not attempt today to produce a “flash estimate” of the income distribution effects, but instead focus on a number of specific areas where our analysis can help to understand the likely implications.

Effects on older people
We look first at the effects on older people. The abolition of the “free telephone” element of the Household Benefits package has attracted considerable attention.

It is useful to put this change in the broader context of the overall impact of welfare changes over the recession on the full value of the cash and Household Benefits Package elements received by older people as compared with payments for other welfare recipients.

Since 2008, the cash element of the state pension rose by 3 per cent, and has remained at this level since then. Abolition of the Christmas payment and reductions in the value of the Household Benefit Package – including abolition of the telephone allowance – mean that the net overall value of the package has fallen by 1.25 per cent.

This contrasts with a fall of 6¾ per cent for most other welfare recipients.

This is just one example, and we are conscious of the danger that examples may not be representative. However, a full analysis using the ESRI tax-benefit model, which is based on a large-scale, nationally representative survey, arrives at similar conclusions: reductions in income arising from welfare policy have been smaller for older people than for other groups of welfare recipients, and less than income losses for those in employment who have faced higher taxes.

Young unemployed people, aged 22 to 25 inclusive, will now face lower payment rates on Jobseeker’s Assistance. The consequences for these individuals are likely to vary significantly depending on the availability of suitable training – in which case they can obtain a higher payment – and their family situations.

The best indication that we can obtain at present suggests that about 40 per cent of these young people are in households that are in the bottom 30 per cent of the household income distribution.

The consequences for these individuals in low income households – whether as independent households or in a low income family – seem likely to be more severe than those for the young unemployed living in households with above average incomes.

Next year will see further action on the restructuring of support for housing costs, with a move, on a pilot basis, towards a new Housing Assistance Payment.

This is designed to address the disincentive effects of the current Rent and Mortgage Supplement scheme, identified clearly in earlier work by the ESRI and others. The task is a difficult one, needing to balance concerns about incentives, adequacy of the support, and cost. Close monitoring of this new scheme will be required to arrive at an optimal design and implementation.

Broadly progressive
On the taxation side, there are three measures in this budget that can be expected to have a broadly progressive impact. The first is the set of restrictions on tax relief for high-valued pensions, which are strongly associated with high incomes. The second is the increase in Dirt, as such evidence as is available suggests that high-income households have a large share of total bank deposits, and low income households rather little.

A new CSO Survey on Household Finance and Consumption is currently under way. Statistical results based on the anonymised data from this survey are expected next year, and will help to shed light on these issues.

The third element is the restriction on tax relief for health insurance premiums – something which we will investigate in future work.

By contrast, the move to a property tax on a full-year basis is likely to be regressive, bearing somewhat more heavily on low income groups, as few households appear to be taking up the deferral option, and deferral itself does no more than shift the tax liability to a future year.

Several positive features of the implementation of the property tax might also be noted; here we mention two. The property tax did bring in substantial revenue in its first (half) year of operation, despite earlier concerns about this issue. Furthermore, the provision of multiple payment options, including direct payments from pay packets, has made budgeting for the tax much easier than the much unloved rates system, with its two large payments per year.

We expect to provide a more detailed analysis before the end of the year. Based on the evidence available today, I would anticipate that the broad result will not be far from losses which are equal in percentage terms across the income distribution, though with considerable variation between households at the same income levels.

Tim Callan is a research professor
at the ESRI

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