Tracking the Distributive Effect of Budget Policy - 2023 Edition

Posted on Wednesday, 28 June 2023

Tracking the Distributive Effects of Budget Policy - 2023 Edition

Each year, on the day after the annual Budget is announced, Social Justice Ireland produces an analysis and critique of that Budget. Included in that document is an assessment of the direct distributive impact of the measures announced by Government. These principally capture changes to income taxes, welfare payments and other universal payments/entitlements.

Our latest edition of 'Tracking the Distributive Effects of Budget Policy' complements our most recent analysis, following Budget 2023. It also provides two further assessments of recent distributive choices:

a distributive analysis of Government’s various cost of living and energy crisis measures, those implemented and scheduled, between February 2022 and July 2023; and
a distributive analysis of the three Budget’s delivered to date by the current Government (Budget 2021 in October 2020, Budget 2022 in October 2021, and Budget 2023 in September 2022),

We also include an assessment of how the gaps between jobseekers and those on middle and very high incomes have changed over recent years including the impact of the measures in the most recent Budget and cost of living initiatives.

The final section of the document provides further details on the approach taken by Social Justice Ireland to generate these results.

The Model

Since February 2022, Government have announced a series of taxation, welfare and electricity credit measures intended to assist all households with cost-of-living pressures. Here we bring together the impact of all these changes, from February 2022 to those announced in February 2023 (including those additional welfare payments scheduled up to July 2023). These capture:

the household energy credits and lump sum increases in fuel allowances announced between February and April 2022 (2022 pre-Budget 2023 measures);
the additional welfare payments and energy credit measures announced as part of Budget 2023 but for implementation before the end 2022 (Budget 2023 for 2022);
the welfare, taxation and energy credit measures announced in Budget 2023 for implementation in 2023 (Budget 2023 for 2023); and
the lump-sum welfare payments and one-off increases in the Back-to-School Clothing and Footwear allowance announced in February 2023, with payments running to July 2023.

The households we examine are those tracked annually in our income distribution model. They are spread across all areas of society and capture those with a job, families with children, those unemployed and pensioner households. Within those households that have income from a job, we include workers on the minimum wage, on the living wage, and earners on incomes ranging from €30,000 to €200,000.

Overall, the weekly impact on the households examined is large, ranging from €67.85 to €35.29 a week for welfare dependent households and from €47.18 to €16.12 a week for households with jobs. Within welfare dependent households the largest assistance has been received by those with children. Among working households tax changes have favoured those with income subject to the higher income tax rate.

Temporary v Permanent Changes

However, there is a marked difference in the way that the cost-of-living measures have been delivered to households. They have included temporary measures, such as electricity credits and one-off additional welfare and fuel allowance payments, alongside permanent measures announced as part of Budget 2023 such as changes to the value of core welfare payments and changes to tax credits and bands. It is a concern that in time the temporary measures will disappear, but the permanent changes will remain, as these permanent measures have favoured better off households.

To illustrate this, among single people in 2023 Budget 2023’s permanent changes to taxes and welfare deliver the following average weekly gains:

An unemployed person: + €12.10
An earner on €30,000: + €3.65
An earner on €80,000: + €15.92
An earner on €100,000: + €15.92

Among couples in 2023 the Budget’s permanent changes to taxes and welfare deliver the following average weekly gains:

A pensioner couple: + €22.98
An unemployed couple: + €20.08
With 1 earner on €30,000: + €0.78
With 1 earner on €60,000: + €19.27
With 2 earners on €100,000: + €31.84.

Budget 2023’s legacy will be to widen further the gap between the better off and those on the lowest welfare and work incomes. In particular, the Budget has provided least for the large cohort of workers earning around €15 to €20 per hour. Given the challenges that so many households face in making ends meet, particularly those on the lowest incomes, much of this assistance is welcome and badly needed. Yet, in the absence of future Budgetary measures targeted at low-income households, the legacy of these cost of living measures will be to widen further the gap between the better off and those on the lowest welfare and work incomes.

Budgets 2021 to 2023

Budget 2023 marked the third Budget of the current coalition Government. The first two of these were presented in the context of the challenging Covid-19 pandemic while the third was presented during the cost-of-living crisis. Here, we track the cumulative impact of changes to income taxation and welfare over the Government’s three Budgets – we do so by comparing the disposable income of households in 2023 with their disposable income in 2020. Therefore, our analysis captures the taxation and welfare measures announced in those Budgets plus various cost-of-living crisis energy credits and welfare payments announced in 2022 and 2023 (including those additional welfare payments scheduled up to July 2023). As different policy priorities can be articulated for each Budget and policy initiative, it is useful to bring together the cumulative effect of all these policy changes on various household types.

At the outset it is important to stress two points:

that our analysis does not take account of other budgetary changes, most particularly to indirect taxes (VAT and excise), other charges (such as prescription charges and state exam fees) and property taxes. Similarly, it does not capture the impact of changes to the provision of public services or the many emergency measures that were introduced to respond to the Covid-19 emergency. As the impact of these measures differs between households it is impossible to quantify precise household impacts and include them here.
that our analysis does not take account of one-off cost of living income support measures that represented temporary increases to income in 2022 only, for example the additional one month child benefit payment. While this features in households 2022 income (see Table 1) it does not feature in households’ income for 2023.

As there were limited changes in income after Budget 2021, most changes reflect measures from Budget 2022, measures in Budget 2023 which impacted on income in 2023, and the cost of living measures announced in February 2023.

Comparing 2020 to 2023 for households with jobs, the weekly income gains experienced range from a €8.84 cent per week (for low-income couples on €30,000) to €55.61 per week for couples with incomes over €80,000. Earners on both the living wage and the minimum wage gain more that the value of taxation, welfare, and one-off cost of living changes on account of the increase in the level of those hourly rates. The analysis highlights how low-income working families, those with incomes below the standard rate income tax threshold, gain least from the Government’s measures over the past three years.

Among households dependent on welfare, the gains have ranged from €28.61 per week for single unemployed individuals to €72.28 per week for unemployed couples with 2 children over 12 years of age. The gains are largest for welfare dependent household with children who benefit from a one-off child benefit top-up and a one off back to school allowance increase in 2023. However, these payments will not carry over to 2024 income and the relative standing of these households is likely to deteriorate in future years.

Social Justice Ireland has consistently argued for the prioritisation of low-income welfare dependent families in Budgetary policy and welcome how recent cost of living supports have particularly assisted this group. However, we are concerned that the permanent changes to income taxation levels in recent Budgets have shifted away from this approach and regrettably expect that much recent progress will be reversed.

Rich-Poor Gap

how uncommon this income level is in Irish society (the top 180,000 earners representing 6.5 per cent of all earners in 2021 according to the Revenue Commissioners); and
how it represents approximately two-and-a-half times average earnings (€40,283 in 2019 according to the CSO).

The analysis tracks both the change to this gap each year and the overall size of this gap following the most recent Budget and February 2023’s cost of living measures. The analysis covers the period from Budget 2014 to the most recent measures.

As a result of the taxation and welfare measures adopted in Budget 2023, the rich-poor gap increased by €3.82 per week (€199 per annum). After than Budget the cumulative rich-poor gap stood at €979 per week (€51,000 per annum). The cost-of-living measures announced in February 2023 reversed much of this increase by providing a €200 lump-sum payment to long-term social welfare recipients in April 2023.

The gap has grown by €3 per week following the Budgetary policies of the current Government (Budgets 2021, 2022, 2023 and announcements in February 2023) and it has grown by a total of €34 per week (€1,775 per annum) over the period 2014-2023.

Middle-Poor Gap

This gap monitors the income of single individuals on jobseekers’ benefit (‘poor’) and the disposable income (after income taxation and employee social insurance) of a single PAYE worker earning €40,000 (‘middle’). This middle-income figure approximates average earnings which stood at €40,283 in 2019 according to the CSO. The analysis tracks both the change to this gap each year and the overall size of this gap following the most recent budget (see chart 6). The analysis covers the period from Budget 2014 to the most recent Budget and February 2023’s cost of living measures.

As a result of the taxation and welfare measures adopted in Budget 2023, the middle-poor gap remained unchanged. The cumulative middle-poor gap stood at €572 per week (€29,800 per annum) in 2023. The gap also remained unchanged following the February 2023 cost of living measures. The gap has marginally decreased by 16 cent per week following the Budgetary policies of the current Government (Budgets 2021, 2022 and 2023), this can be explained by the full payment of the Christmas Bonus to jobseekers in 2020/21 and no other changes to income taxation or welfare payments for these individuals. Overall, the middle-poor gap has grown by almost €20 per week (€1,031 per annum) over the period 2014-2023.

What this means for Budget 2024

Budget 2024 is being set in the context of full employment, "windfall" surpluses and persistent inflation. The latest data shows that inequality increased in 2022 and some 671,000 people are living on incomes below the poverty line. This Budget must address the Rich- and Middle-Poor gaps identified in Social Justice Ireland's analysis and avoid reversing the gains achieved for welfare-dependent households prior to Budget 2023 by increasing the rate of core social welfare by €25 per week and benchmarking welfare payments to average earnings.