ESRI analysis shows the Budget was the most progressive for many years as poorer households did better than rich ones, writes Tim Callan.
Budget 2006 boosted overall household income by about €2,500 million per year, when tax reductions, welfare increases and childcare support are taken into account. How were these resources distributed across different income groups and families of different types?
ESRI analysis indicates that this was perhaps the most progressive budget package for many years - poorer households did proportionately better than rich ones.
In order to examine the distributive impact we use SWITCH, the ESRI tax-benefit model which is based on information from a large-scale, nationally representative survey, and which is able to "simulate" the rules of the pre- and post-Budget tax-benefit systems.
For each family in the survey, the model estimates the gain or loss in disposable income brought about by changes in tax and welfare policy. The model is used by the Department of Finance in "poverty-proofing" the Budget, and further analysis of the impact of Budget 2006 is reported here.
The pattern and magnitude of these changes must be evaluated by reference to an appropriate benchmark situation. Perhaps the most useful such benchmark is one which specifies that the percentage change in disposable income would be similar across all income groups.
In practical terms, a tax and welfare policy indexed to average earnings growth would approximate this outcome. The graph shows the impact of Budget 2006 across the income distribution, measured against this benchmark.
Families are ranked from poorest to richest, with incomes adjusted to take account of the greater needs of larger families. The graph then shows the average percentage gain of each of five equally sized income groups, from the poorest one-fifth of families (quintile) to the richest. There are substantial gains for the lowest two income groups - about 7 per cent for the poorest fifth of the population, and 4 per cent for the next fifth. Gains for the top half of the income distribution are modest, at a little over 1 per cent.
How does the distributional impact of Budget 2006 compare with its predecessors? Early indications suggest that this Budget has a more progressive impact on the distribution of income than any other in the past decade or more. For much of the 1987 to 1990 period, budgets boosted higher incomes at a much greater rate than low incomes.
In more recent years, the highest gains for the bottom quintile were between 3 to 4 per cent, compared with 7 per cent in this Budget. The rate of increase for welfare payments is the key driver in this respect, but increases in flat-rate universal benefits (such as Child Benefit and the new Early Childcare Supplement) also play a role in boosting the incomes of low earners at a faster rate than those of higher earners.
The structure of the Early Childcare Supplement mirrors proposals examined by the Commission of the Family in its 1998 report.
Tim Callan is a Research Professor at the ESRI
