Budget 2022 measures compensate most households for rising prices

Increases to welfare payments and tax bands announced in Budget 2022 will on average compensate households for forecast price growth, according to new research presented today at the Economic and Social Research Institute’s post-budget briefing. However, below inflation increases to the Working Families Payment and State Pension mean that some low-income working parents and retired couples who do not receive the Fuel Allowance will see their disposable incomes eroded by rising prices.

The research also finds that although increases to the carbon tax and tobacco duty disproportionately affect lower income households, these also gain from above inflation increases to core social welfare payments and supplements for those living alone or with dependents. These increases are sufficiently large to offset the impact of increases to indirect taxes for the lowest-income fifth of households and will leave poverty slightly lower than had all welfare payments and tax bands kept pace with inflation.

While the above inflation ‘indexation’ of income tax bands and credits will also compensate higher income households for the increases in indirect taxation, most Universal Social Charge and PRSI bands were not changed. The effect of this is to reduce the after-tax purchasing power of lower earners who do not earn enough to pay income tax, though some of these will gain from an increase to the minimum wage.

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

“The changes announced in Budget 2022 will on average compensate households for forecast price growth and leave poverty slightly lower than would an inflation-proofed budget. However, some low-income working parents and retired couples will see real cuts to their payments, as may others if price rises turn out to be larger than forecast.”

Barra Roantree, a Research Officer at the ESRI, said:

“Budget 2022 announced some well-targeted reforms with clear policy objectives, such as the above inflation increases in welfare supplements for those with dependents and those living alone which will slightly reduce poverty. However, it’s not clear why the arguments for increasing income tax bands and credit do not apply equally to PRSI and USC bands or to core welfare payments, some of which rose above and others below the forecast rate of inflation.”

Kieran McQuinn, a Research Professor at the ESRI, said:

“From a macroeconomic perspective, Budget 2022 sees further increases in both current and capital expenditure. The expected increase in capital investment is particularly welcome and reflects a period of dis-investment after the economy recovered from the great financial crisis. Over the coming years, fiscal policy will have to be restrained in terms of current expenditure to ensure that the increase in capital investment does not cause the economy to overheat particularly as the economy is expected to grow robustly.”