Extra 2020 spending on public services and pay funded by real tax increases

Most households will pay more in tax but gain from higher spending on public services, investment and pay, new research presented today at the Economic and Social Research Institute (ESRI) has found.

An increase in the carbon tax, higher cigarette duty and cash freezes to the main tax credits and bands – a real tax rise – are the tax measures that will most affect households in 2020. Some households will gain from the increase to the self-employed tax credit, home carer tax credit, and inheritance tax threshold.

The increase of €6 per tonne in the carbon tax is a welcome measure. Previous research published by the ESRI has shown that a carbon tax increase will reduce emissions with negligible effects on the wider economy and help meet Ireland’s climate targets. However, carbon taxation disproportionally affects lower-income groups. Although the Budget ring-fenced revenues to fund new climate action measures, less than half of those in the lowest-income tenth of households receive Fuel Allowance, which will rise by €2 per week to compensate some – mostly retired – households.

The research also highlighted the Government’s extension of the ‘Help to Buy’ scheme, costing an estimated €200m. While this was introduced in 2016 to assist first-time buyers in obtaining the 10% deposit required for such borrowers by the Central Bank, Revenue statistics show that 40% of claims to date were for mortgages with a loan-to-value of less than 85%: that is, for those who had already saved the deposit required.

Karina Doorley, Senior Research Officer and a presenter at the ESRI’s post-Budget briefing, said:

“While the overall fiscal stance of Budget 2020 is prudent, freezing most tax thresholds and benefit rates in cash terms will leave household incomes lower than under a neutral budget. However, spending on policies such as the National Childcare Scheme should partly offset this for low-income households”.

Barra Roantree, Research Officer and another presenter at the ESRI Briefing, said: 

“Extra spending in Budget 2020 was focused on public services and pay, partly funded by a real tax increase on most households. Scope was also found to extend several tax breaks, including ‘Help to Buy’, a poorly-targeted policy that could add to house price growth in the coming years.”

Presentation slides and videos from the event are available here.