Budget 2021 measures will benefit lowest-income families most

The tax and welfare measures announced in Budget 2021 will benefit the lowest-income families the most, according to new research presented today at the ESRI’s post-budget briefing. Compared to indexing the tax-benefit system in line with price growth, the new measures will lead to a small 0.2 per cent increase in households’ disposable income overall, but twice this for the lowest-income fifth of households.

While increases to the carbon tax and tobacco duty disproportionately affect lower-income households, these gain significantly from increases to social welfare payments for adults with children and those living alone. Indeed these increases are sufficiently large to reverse the regressive impact of increases to indirect taxes and result in an overall distributionally progressive budget.

The Budget 2021 measures build on changes to the tax and welfare system introduced earlier this year which did much to cushion the incomes of those affected by pandemic related job losses. Without these, disposable incomes would have fallen by 7 per cent overall. The Pandemic Unemployment Payment (PUP) and Employment Wage Subsidy Scheme (EWSS) played a major role in reducing income losses from 7 per cent to 3 per cent, on average. Budget 2021 has continued this trend with income losses expected to be cushioned by a further 0.2 per cent on average.

We estimate the monthly cost of COVID-19 related employment, in terms of welfare expenditure and income tax foregone, to be around €170 million per hundred thousand displaced workers. Automatic stabilisation by the existing tax-benefit system accounts for at least half of this cost, with the PUP and EWSS accounting for the rest.

Income inequality and poverty rates would have increased significantly in the absence of COVID-related policy supports such as the PUP and EWSS. The combined effect of these and Budget 2021 measures is to stabilise income inequality and poverty rates into 2021. The withdrawal of the PUP and EWSS in Spring 2021 may lead to increases in income inequality and poverty rates in the absence of a labour market recovery.

Speaking at the event, Karina Doorley –a Senior Research Officer at the ESRI – said:

‘Direct tax and welfare measures enacted since the onset of COVID-19 have helped to cushion approximately half of family income losses, with larger effects for young, low-income groups. Budget 2021 continues this trend’.

Claire Keane – also a Senior Research Officer at the ESRI – said:

‘Although the pre-COVID tax-benefit will continue to stabilise the incomes of many families if COVID-related supports are withdrawn, specific groups such as the young and low-income families may lose substantially and more targeted measures may be needed to support their incomes beyond Spring 2021’.