Budget 2025 tax and welfare measures will result in small real income gains for households in 2025

Measures announced as part of Budget 2025 will result in small income gains on average next year, compared to a budget indexed to forecast income growth, according to new research presented today at the Economic and Social Research Institute (ESRI) post-budget briefing. The package of tax cuts, welfare increases, cost-of-living measures and indirect tax cuts has grown broadly in line with forecast wage growth of 4.2% for 2025, compared to the 2024 package. However, there is variation in how it will affect households of different income levels, with smaller gains for middle income households.

Figure 1: The effect of Budget 2025 on the Distribution of income compared to an income-indexed 2024 policy

Source: Authors’ calculations using ITSim linked to the 2015-2016 Household Budget Survey uprated to 2025 prices, and SWITCH run on 2022 Survey of Income and Living Conditions data, uprated to 2025 income levels. 

Notes: Deciles are based on equivalised household income, using CSO national equivalence scales. Temporary measures announced in Budget 2024 (enacted in 2023 and 2024) are included in the baseline while temporary measures announced as part of Budget 2025 (enacted in 2024 and 2025) are in the reform.

Most elements of the tax-benefit system will be increased broadly in line with forecast income growth in 2025. However, some elements of the system, such as child benefit, the living alone allowance and fuel allowance have been frozen in nominal terms. These, together with the PRSI increase planned for 2025, will lead to small income losses for some households, compared to a budget indexed to forecast income growth. Additionally, the reduction in the energy credit from €450 in Budget 2024 to €250 in Budget 2025 will disproportionately affect households on fixed incomes, such as pensions, for whom this credit represents a large proportion of income.

Temporary cost-of-living measures, which have been a feature of this and the last number of budgets, are providing considerable assistance to many households. Without these measures, the at-risk-of-poverty (AROP) rate of retired households would be 5 percentage points higher than we estimate it to be for 2025. Similarly, without temporary cost-of-living measures, the AROP rate of disabled households would be 3 percentage points higher.

Taking the last five budgets together, we find that, compared to a scenario of income-indexed budgets since 2020, households are slightly worse off, by around 0.7% of disposable income. However, accounting for the value of initiatives such as free schoolbooks and meals, rolled-out over that period, average losses are lower, at 0.3% of disposable income. This illustrates that, although they do not form part of the traditional tax-benefit system, non-cash benefits such as schoolbooks and meals can have a measurable impact on household incomes.

Dr Claire Keane – an Associate Research Professor at the ESRI – said: "While inflation has slowed, price levels remain elevated. The withdrawal of cost-of-living policies, which has begun in Budget 2025 with the reduction in energy credits, may increase the number of pensioner and disabled households at-risk-of-poverty in the future, unless there is an accompanying increase in core welfare rates.”

Dr Karina Doorley – an Associate Research Professor at the ESRI – said: “Budget 2025 will result in small average household income gains, compared to a budget indexed to forecast income growth. However, it will have little effect on reducing overall poverty or child poverty. The exchequer cost of the untargeted cost-of-living measures, such as energy credits and the double child benefit payment, would have been enough to finance a second tier of child benefit which could lift 40,000 children out of poverty”

Prof Kieran McQuinn – a Research Professor at the ESRI – said: “From a macroeconomic perspective, the increased levels of capital spending, coupled with the enhanced commitment to the investment funds established, does offer the potential to put investment on a more sustainable footing in the Irish economy”.