Distributional Impact of Tax, Welfare and Public Service Pay Policies: Budget 2016 and Budgets 2009-2016

A new paper published today (Wednesday, 15th December 2015) by the ESRI examines the “cash” or “first round” impact of Budget 2016, and the combined impact of budgets for the years 2009 to 2016 inclusive. The findings are based on SWITCH, the ESRI tax-benefit model, which uses data from the CSO’s Survey on Income and Living Conditions, a nationally representative sample of more than 4,500 households. The paper compares the impacts of the budget against a situation in which tax bands, tax credits and welfare payments increase in line with expected wage growth – 2.3 percent in 2016. Such an approach would result in give the same proportional increase in income for all income groups – a distributionally neutral outcome.

Compared with a wage-indexed benchmark, the paper finds that Budget 2016 led to a modest increase – just under 0.7 per cent - in aggregate household disposable income (i.e., incomes including welfare payments and net of income tax, USC and PRSI). For the 20 per cent of households with the lowest incomes, on average Budget 2016 will have a similar impact to a neutral, wage-indexed budget. For most other income groups, changes in Budget 2016 will lead to gains of close to 0.5 per cent up to 1 per cent, as compared with a neutral or wage-indexed budget.

By contrast, budgets over the 2009 to 2016 period have given rise to substantial income losses at all income levels, as budget deficits were reduced. These may be termed “policy induced losses” to distinguish them from falls in income arising from unemployment, lower wages or falling self-employment incomes. For most income groups, these losses were between 7½ per cent and just over 10 per cent. The greatest policy-induced losses were for the top income group, at just over 14 per cent, and the lowest income group, at 12¾ per cent.

Analysis at family unit level reveals that policy-induced losses ranged between 9 and 11 per cent for most family types from the combined effects of Budgets 2009 to 2016. The greatest proportionate losses, close to 20 per cent, were for single unemployed people without children – mainly those affected by cuts in payment rates for the young unemployed. The lowest losses (5 to 6 per cent) were for those in receipt of old age pensions, as pension payment rates were increased by Budgets 2009 and 2016, leaving them higher than in 2008, while working age welfare schemes saw net reductions between 2008 and 2016.

For further information please contact:

Tim Callan (Research Professor, ESRI), tim.callan@esri.ie