What will the budget do to respond to the big squeeze on your income?

Inflation has changed everything. All the normal language we use around budget time is redundant. Forget the usual script about handouts and who wins on budget day. This budget will be a rescue mission for households who are seeing their spending power slashed by surging prices. It is all about damage limitation. And, politically, that is a dangerous game.

Households will be better off after the budget than they will be before it – there will be a lot of “give” and not a lot of “take”. But most will still be worse off than they were before the energy crisis started because inflation has taken such a heavy toll on their spending power. Earnings have gone up by less than 2.5 per cent on average over the past year, while inflation is running at 9 per cent. The budget can only hope to close a bit of this gap.

Politically, there is a touch of the Mission: Impossible about this for the Government. They cannot undo all the damage. With uncertainty about what is going to happen over the next few months, never mind the next year, budget ministers Paschal Donohoe and Michael McGrath will have to leave room to respond to events. It will be like trying to walk a tightrope with a blindfold on.

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The budget will do two separate things for households – and it is important to understand the difference. First, there will be a host of once-off measures to try to help people get through this winter. The detail is still to be fought out, but there is speculation of another once-off boost to those who qualify for fuel allowance, special additional benefit payments – and perhaps a repeat to the energy credit paid to all households.

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Second, there will be the normal budget measures – the permanent tax and welfare changes and the allocation of spending to provide services in areas such as health and education, which are the normal fare of budget day. Expect, because of inflation, the amounts of cash involved will be way higher than normal.

The normal budget-day illustrations beloved of the Department of Finance and the media – Mary, the 30-year-old civil servant renting a house; Louise and Danny, the nurse and the garda struggling to make ends meet – will be a lot more complex this year

The Government has indicated that some of the permanent measures may come in earlier than usual, given the pressure on household budgets. For example, rather than coming into force next January as they would normally, some of the permanent welfare changes are likely to take effect sooner.

This will be a complicated budget to understand – and one which will affect different households in different ways. The normal budget-day illustrations beloved of the Department of Finance and the media – Mary, the 30-year-old civil servant renting a house; Louise and Danny, the nurse and the garda struggling to make ends meet; and Cynthia and Rodney, the comfortable retired couple – will be a lot more complex this year.

What are the main ways household budgets are likely to be affected and how far will this go to compensate for the soaring cost of living?

The once-off measure: Because taxes are way ahead of target and the Government has money put aside for contingencies this year, there is a lot of leeway for once-off measures. The advantage of these from a budget point of view is that the cost is one-off, too. The risk is that energy prices keep rising through the winter, inflation remains high and the pressure comes on to repeat the “once-offs” again next year. Otherwise, people might find it even harder to make ends meet in 2023.

For 2022, these will aim to put cash straight into people’s pockets, even if the precise way to do this remains to be decided. There is speculation of another energy credit, payable to all households – similar to the €200 credit that some two million households received between April and June this year.

Additional once-off benefit measures are also expected. A special “double month” for child benefit – meaning parents would receive €280 per child rather than the normal €140 – is one option on the table. A wider Christmas bonus-style double payment week for general welfare recipients had also been speculated about – in addition to the normal end of year one – but the Government could not afford this and the child benefit measure. More targeted measures are also expected – there have already been two extra fuel allowance payments this year, €125 in March and €100 in May, and another one is expected, together with other possible tweaks to this scheme and other ones that target “fuel poor” households.

A big decision for the Government is how much of this once-off help to allocate to specific measures such as the fuel allowance scheme, which benefits 390,000 households, and how much more to give to general measures, such as another electricity credit, which benefits two million households, in other words, anyone with an electricity connection. The more targeted measures deliver for those on the lowest income, but reaching the “squeezed middle” is more difficult – unless there are universal measures which benefit everyone, including the highest earners who do not really need it.

The Government is also likely to extend excise cuts announced in March on petrol and diesel – due to run out in mid-October – and extend the reduction in the VAT rate on electricity, due to run out at the end of October.

The tax package: Households will get some relief on taxes – but here, too, inflation has changed the game. In times of inflation, wages go up and the income tax system has to be adjusted if people are not to end up paying proportionately a bit more tax. While there was talk of a new 30 per cent income tax rate – as proposed by Tánaiste Leo Varadkar – the likelihood is that the budget will extend the rate at which people start paying the higher income tax rate – €36,800 for a single person or €45,800 for a one-income couple. These measures are aimed at middle to higher earners – there will probably also be increases in tax credits and some other specific measures aimed at lower earners.

The political risk for the Government is that most families will see their spending power fall, even if budget measures cushion the blow a bit

The choice comes down to what households to help and how to spread the relief that is available. A new 30 per cent income tax rate would – on one calculation done by the Tax Strategy Group of public servants who advise the Government on options – deliver €19 per week to around one million taxpayers. Increasing the tax credits and the standard rate band to use roughly the same amount of budget cash would give €10-€11 a week to 1.9 million taxpayers, pretty much all those who earn enough to pay income tax. The additional numbers gaining via the second route are lower earners. In terms of politics – and fairness – it seems like a no-brainer. However, it is important to note that these are adjustments in the tax system to respond to inflation, rather than cuts in the tax burden.

Welfare measures: As well as the once-off welfare measures, there will be permanent increases in rates. Here the choice is simple – will all rates go up and by how much? The Tax Strategy Group papers focused on increases of between €10 and €15 in weekly rates but pointed out that there was a trade-off here. Giving slightly lower general increases to welfare recipients and pensioners would, the Tax Strategy Group pointed out, leave more cash for focused measures such as increases in the Living Alone Allowance, the Fuel Allowance and the allowance paid to welfare recipients with children – the Qualified Children Allowance.

Around 1.8 million people are in receipt of welfare payments. In terms of protecting living standards, there are really big decisions to be made here.

Cutting prices: The budget will also aim to support households by cutting the price of services – either provided by the State or by subsidising private provision. A key area is likely to be childcare, with Minister Roderic O’Gorman saying that the Government wants to cut fees for parents by 50 per cent over the next two budgets. This would involve increased cash being directed via the National Childcare Scheme, which involves a universal subsidy for all parents and also additional help for lower-income households. Other supports, such as lower public transport fares, introduced in May until the end of this year, may well be extended.

Trade unions have pushed the concept of the “social wage” – the cheaper provision of services to the public – and it is no coincidence that the vote on the proposed new public sector wage deal will not take place until after the budget. The unions will wait and see what is delivered in terms of direct cash support, tax and also public services.

Impossible to compensate

It is impossible, whatever the Government does, to compensate households for the higher prices they are facing, particularly for energy.

The number of measures likely to be involved in the budget make it difficult to generalise what the cash benefit for an “average” household will be. But as a baseline, the basic welfare measures delivered €5 a week extra in the 2022 budget and this could rise to €12 to €15 this year – with more for many households through specific measures such as the fuel allowance.

Income tax changes delivered €7 to €9 a week last year to many single-income households and this could rise to around €15 in the forthcoming budget. Special measures, such as new tax reliefs for renters, will increase the benefits for some.

If we think about a family with two children and two parents in employment, the tax package might deliver an income gain of €1,250 to €1,400 a year – assuming the two parents are middle earners. If the once-off child benefit payment is part of the budget, then this could add another €280 this year. Lower childcare costs could also chip in if subsidies increase here. This is a significant cash boost, but with higher prices, particularly for energy, costing several thousand extra each year, it closes only some of the gap.

The political risk for the Government is that most families will see their spending power fall, even if budget measures cushion the blow a bit. The budget could involve spending of €6.7 billion next year – and a couple of billion this year in additional once-off measures – and still be greeted with a bit of a shrug. A lot then depends on what happens moving into 2023 and whether the great energy squeeze starts to ease off. The Government will have been pleased with the extraordinary bounce back of the economy from the Covid crisis. But the energy crisis and the surge in inflation are shaping up to be a much trickier challenge.