Budget 2027 tax and welfare measures keep pace with forecast inflation for 2027

New ESRI research presented at today’s (Friday, 9 October) post-Budget briefing examines both the wider economic and fiscal outlook facing Ireland and the impact of Budget 2027 on household incomes and poverty. Together, the two pieces of research assess the sustainability of current fiscal policy and the extent to which the Budget’s tax, welfare and childcare measures support living standards across the income distribution.

Distributional implications of Budget 2027

Changes to direct tax and welfare measures and childcare supports announced as part of Budget 2027 are, on average, ahead of forecast price growth of 3% and broadly in line with forecast wage growth of 4.1% for 2027, according to new research presented today at the Economic and Social Research Institute (ESRI) post-Budget briefing. This means that, at the household level, direct tax and welfare measures announced as part of Budget 2027 will result in small income gains compared to a budget pegged to price growth and almost no average change compared to a budget pegged to wage growth. There is variation in how Budget 2027 will affect households of different income levels, with the lowest-income households gaining compared to both price and wage indexed policies and higher income households experiencing smaller changes or no change in their disposable income.

Some of the protective effect of Budget 2027 for the lowest income tenth (decile) of the population is due to the new €500 per year cost-of-disability payment. This has been introduced to help households with disabled members meet their extra consumption needs, which previous ESRI research has shown can reach 50% of disposable income.

There are some budgetary measures targeted specifically at children. The increase to the Child Support Payment is above forecast price and wage growth for 2027, while the increase to the Working Family Payment is above price growth but below wage growth. The increase to universal childcare subsidies for children up to senior infants, and the extension of the income-assessed subsidy and fee cap will reduce childcare costs for families who use formal childcare. However, the overall effect of the budget package, including these measures, is to hold child poverty relatively constant, compared to a wage- or price-indexed baseline. Although the increased support for childcare costs may indirectly reduce child poverty through increased parental labour supply, this will require the supply of formal childcare to expand. Many more measures directed at children will be necessary to achieve the Government target for child consistent poverty of 3% or below.

The reduction in carbon tax on home heating oil and gas is untargeted to the extent that it benefits all households who use heating oil and gas, whether they can afford the recent price increases or not. This makes the measure expensive and reduces the incentive for households who can afford to decarbonise to do so. Targeted measures to support low-income households would maintain this incentive while protecting the most vulnerable groups.

The cumulative package of indirect tax measures for 2027, including the reduction of carbon tax on home heating oil and gas, the phased re-instatement of fuel excises and the increases to carbon tax on goods other than home heating oil and gas, will result in aggregate income losses across the income distribution, averaging 0.5% of disposable income.

Taking the last seven budgets together, we find that, compared to a scenario of wage-indexed budgets since before the pandemic, households are slightly worse off, by around 0.3% of disposable income on average, as a result of direct tax and welfare measures and childcare supports. However, those in the lowest income group have seen substantial income gains which persist up to the middle of the income distribution. As a result, policy changes have been nudging poverty rates down since 2020 for all groups. Compared to a series of wage-indexed budgets, the overall at-risk-of-poverty rate is down by around 2 percentage points since 2020.

Macroeconomic context

The macroeconomic outlook for Budget 2027 sees the Irish economy continue to grow robustly. Globally, economic activity is being pulled by two cross currents. First, headwinds are strong from energy market shocks, geopolitical developments and rising bond yields. However, the expansion of AI investment internationally has created a strong tailwind as the adoption of the new technology and its supporting infrastructure rapidly increases. These effects are being felt in Ireland as investment and exports are rising on the back of the AI expansion. However, there are notable risks for Ireland if any AI-related investment activity does not deliver a sufficient return and tech firm profitability is hit. This could have implications for taxation receipts and employment in particular.

Within this context, domestic challenges related to infrastructure bottlenecks continue and targeted investments are required to address these challenges. At present, due to the soft budget constraints from corporation tax increases, policy is attempting to jointly increase expenditure on day-to-day service provision, address bottlenecks and reduce taxation. The fiscal stance as outlined in the current, and recent, Budgets is arguably too loose and the reliance on unpredictable corporation tax receipts is a rising vulnerability. A greater share of corporation tax receipts should be saved to improve sustainability and plan for longer term challenges. This implies running a smaller underlying deficit after adjusting for these potentially transitory tax receipts.

Claire Keane – an Associate Research Professor at the ESRI – said:

“Policy changes in Budget 2027, and indeed over the last seven budgets, have compensated households on average for price and wage growth. In particular, the lowest income households have been most protected. This is positive given we know that lower income groups spend more of their income on home heating and motor fuels.

While welcome to help with the additional living costs of people with disabilities, the new cost of disability payment will only be received by a proportion of people with a disability and falls below the actual extra costs they likely incur.”

Karina Doorley – an Associate Research Professor at the ESRI – said:

“The increases in the Child Support Payment and the Working Family Payment are well targeted but, when considered alongside the nominal freeze to Child Benefit, they result in little change to child poverty rates. Reductions to childcare fees may facilitate increased parental employment, but only if the supply of formal childcare increases. A second tier of child benefit remains the most effective way of meaningfully reducing the number of children experiencing poverty and deprivation.”

Conor O’Toole – a Research Professor at the ESRI – said:

“While the Irish domestic economy is growing robustly and the government is running budget surpluses, there are underlying risks and vulnerabilities that would suggest larger surpluses are warranted. First, the reliance on potentially transitory corporation taxation is increasing. Second, net expenditure increases are faster than required by the domestic economy. Savings buffers should be built up to manage any future downturn.”