Tax will take more of gains than budget allowed for - ESRI

The budget did not do enough to adjust the tax and welfare systems for the expected rise in wages next year, an analysis from the Economic and Social Research Institute states.

Its analysis of the impact of the budget on different income groups, published on Thursday in The Irish Times, shows that the tax system was not adjusted enough to account for expected wage growth of 3 per cent. Despite the adjustments to the standard rate band and USC, tax will take a bit more of expected wage gains, limiting the net rise in incomes for employees.

Looking at the increases in welfare rates, the analysis finds that the average €5 rises granted in the budget will mean welfare recipients fall short of the 3 per cent benchmark, doing slightly worse than higher income sections of the population in a budget where the net changes for all groups were small.

The budget offered cash gains to taxpayers and welfare recipients via a series of measures. The ESRI’s analysis takes these changes into account and then factors in the impact of expected wage inflation.

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Impact on households

It thus tries to measure the impact on households of budget policy, assuming that employees on average get the 3 per cent rise in 2018. This 3 per cent figure is taken as the benchmark from which gains and losses are calculated for all income groups, using an ESRI model based on CSO data for 8,000 households.

Taxpayers will gain from the cuts in USC and the extension of the standard rate tax band. However, a bigger adjustments to the tax system would have been needed to ensure that expected wage inflation did not eat into the value of wage increases, according to the ESRI research, undertaken by Prof Tim Callan. For this reason the gains for employees in all income groups fall slightly short of the 3 per cent benchmark.

In the area of welfare, the €5 per week increases will also leave most recipients short of the 3 per cent gain, according to the data, which suggests that a rise of about €6 a week for most welfare recipients – and €7 for pensioners – would have been needed to achieve this goal.

Prof Callan estimates that it would have cost about €1.1 billion to fully index the income tax and welfare systems in a way which would have left most people gaining around the 3 per cent benchmark. However, the amount allocated in the budget was about €400 million short of this.

According to Prof Callan, writing in today’s Irish Times: “We do not argue that indexation is necessarily the best policy. It does, however, provide a more informative benchmark against which to measure the distributional impact of actual policy than the unindexed policy.”