Budget 2022 to ‘maintain financial status quo for households’

Increase in welfare rates and tax bands to compensate most for rising prices, says ESRI

The majority of households in the State will not see any material change in their financial circumstances as a result of Budget 2022, the Economic and Social Research Institute (ESRI) has said.

In its annual assessment of the Government’s budgetary measures, the think tank said the increase in welfare rates and tax bands would compensate most households for rising prices.

However, it warned that below-inflation increases to the State pension and other benefits would leave certain low-income working parents and retirees worse off.

Assuming a rate of inflation of 2.2 per cent for next year, the ESRI calculated that average disposable incomes would rise by 0.2 per cent as a result of the direct taxation measures contained in the budget, which included €5 increases in weekly pension and welfare rates as well as increases in personal tax credits and bands.

However when the indirect taxation measures such as the hike in carbon tax and the increase in excise duty on cigarettes are included, the increase in disposable income is negated and disposable income for most households remains unchanged.

Nonetheless, the ESRI concluded the budgetary increases were “sufficiently large” to offset the impact of higher prices and would leave the headline poverty rate slightly lower.

“While the above inflation ‘indexation’ of income tax bands and credits will also compensate higher income households for the increases in indirect taxation, most Universal Social Charge and PRSI bands were not changed,” it said.

“The effect of this is to reduce the after-tax purchasing power of lower earners who do not earn enough to pay income tax, though some of these will gain from an increase to the minimum wage,” it said.

Below inflation increases to the Working Families Payment and State Pension meant that some low-income working parents and retired couples who do not receive the fuel allowance will see their disposable incomes eroded by rising prices, it said.

The research also found that although increases to the carbon tax and tobacco duty disproportionately affect lower income households, these also gain from above inflation increases to core social welfare payments and supplements for those living alone or with dependents.

Advancing costs

The ESRI’s assessment comes as new figures show inflation in the Irish economy rose to a 13-year high of 3.7 per cent last month on foot of soaring energy and transport costs.

The ESRI's Karina Doorley said: "The changes announced in Budget 2022 will on average compensate households for forecast price growth and leave poverty slightly lower than would an inflation-proofed budget. However, some low-income working parents and retired couples will see real cuts to their payments, as may others if price rises turn out to be larger than forecast."

Her colleague Barra Roantree said the budget included some well-targeted reforms with clear policy objectives, such as the above-inflation increases in welfare supplements for those with dependents and those living alone which will slightly reduce poverty.

“However, it’s not clear why the arguments for increasing income tax bands and credit do not apply equally to PRSI and USC bands or to core welfare payments, some of which rose above and others below the forecast rate of inflation,” he said.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times