Budget 2024 tax and welfare measures likely to increase real income next year
Measures announced as part of Budget 2024 will insulate most households from rising prices next year, according to new research presented today at the Economic and Social Research Institute (ESRI) post-budget briefing. The package of tax cuts, welfare increases, one-off payments and indirect tax cuts is worth around 2% of household disposable income on average, with higher gains for low-income compared to high-income households.
The effect of Budget 2024 on the distribution of income compared to an income-indexed 2023 policy
Source: Authors’ calculations using ITSim linked to the 2015-2016 Household Budget Survey uprated to 2024 prices, and SWITCH run on 2019 Survey of Income and Living Conditions data, uprated to 2024 income levels.
Notes: Deciles are based on equivalised household income, using CSO national equivalence scales. Temporary measures announced as part of Budget 2024 are split into those occurring in 2023 (2023 temp. direct tax and welfare) and those occurring in 2024 (2024 temp. direct tax and welfare).
The total budgetary package is progressive and this research estimates that it will result in reductions in the at-risk-of-poverty (AROP) rate of most groups, compared to a budget pegged to income growth. However, this reduction is accomplished mainly through the temporary measures in the budgetary package. For example, without the one-off measures, the AROP rate for elderly households would actually increase by close to 1 percentage point.
Taking the last four budgets together, many tax and welfare changes since 2020 have been below wage and price inflation over the same period. This trend is somewhat reversed by Budget 2024. However, compared to a scenario of income-indexed budgets since 2020, households will have lower purchasing power in 2024. This amounts to 0.5% of disposable income on average, with larger losses for middle-income households.
The increase in the universal component of the National Childcare Scheme of €0.74c per hour – which takes effect next September - will reduce the out-of-pocket childcare costs of those using formal childcare. However, the effective freeze to the thresholds for more generous means-tested supports through the NCS may result in lower-income households who experience wage inflation receiving less support with their childcare costs.
The government announced a range of interventions in the housing market. On the supply-side, an increase in the rate of Local Property Tax on certain vacant residential dwellings is expected to increase housing supply. On the demand side, it also announced the extension of the Help to Buy scheme for another two years as well as a new tax credit for landlords, an extension to the rental tax credit and a temporary mortgage interest relief policy. Given the robust demand for housing combined with long-standing supply constraints, it is likely that these demand-side policies will increase demand for housing, putting pressure on house prices.
From a macroeconomic perspective, the total budgetary package is substantial and with the Consumer Price Index (CPI) likely to increase by 6% this year and unemployment at 4%, it does risk adding to the inflationary pressures. The adoption of the Future Ireland Fund is a welcome addition and should help to make capital expenditure less dependent on the economic cycle going forward.
Karina Doorley – a Senior Research Officer at the ESRI – said:
“For the second year in a row, temporary welfare measures are playing an important role in insulating households from the effects of inflation. With inflation moderating and wages growing strongly, policymakers should now consider benchmarking social welfare payments to provide more certainty to those dependent on them.”
Dora Tuda – a Research Officer at the ESRI – said:
“Our analysis shows that the temporary measures announced in Budget 2024 may decrease the number of people living at-risk-of-poverty next year. However, to accomplish long-lasting, significant improvements to the living standards of lower-income households, a more permanent solution will be needed.”
Kieran McQuinn – a Research Professor at the ESRI – said:
“Budget 2024 is substantial in scale and does incur the risk of further stimulating inflationary pressures already in the economy. The commitment to a long-term investment fund is welcome, particularly one with a counter-cyclical element”.