Report Explores Tax and Welfare Options Available for Budget ’16

Background Information

The changing economic background is important, with a return to modest wage growth expected in 2016 after several years of stagnation. If Budget 2016 took no action, average tax rates would rise. This is because with an unchanged tax policy, more income would be taxed at a higher rate because of income growth. Some of the "fiscal space" identified in the Spring Economic Statement will be needed simply to prevent average income tax rates from rising.

How might the remaining "space" identified by the government for cuts in taxes be used?
Recent policy statements have indicated that reduction of the 7% rate of USC will be a priority in Budget 2016. ESRI researchers have analysed some tax and welfare packages which are consistent with this approach, and with the €1.5 billion split 50-50 between tax cuts and expenditure increases, as indicated by the Spring Economic Statement and the accompanying speech of the Minister for Finance. These packages are provided as illustrations only of what might be possible and do not represent either the authors’ predictions of, or recommendations for, Budget 2016.

Based on these illustrative packages, the research suggests that:

• ·With a 50-50 division of the "fiscal space" between tax cuts and expenditure increases, the average income tax (including USC) rate could fall, and welfare payments could rise slightly ahead of expected inflation.
• Reductions in the 7 per cent rate of USC would see the greatest percentage gains go to the upper middle reaches of the income distribution, but with some benefits for the middle.
• Cuts in the top rates of tax or USC would have a strong impact on households with incomes in the top 10 per cent, but little effect on households at low and middle income levels.
• CSO data show that rates of consistent poverty and “at risk of poverty” are lower for the elderly than for those of working age. The analysis by ESRI researchers in this paper finds that about 45 per cent of persons aged 65 and over are found in the top half of the household income distribution.
• Increases in welfare payments would lead to gains which were greatest in percentage terms for households in the bottom half, and especially the poorest 30 per cent, of households.

Speaking at the conference, Professor Tim Callan said that “If government wishes to prevent average income tax rates from rising and to ensure that welfare payments keep pace with general growth in incomes, this could absorb between 25 and 50 per cent of the €1.5 billion "fiscal space" identified in the Spring Economic Statement. The exact amount depends on what happens to income growth”.

For further Information please contact:

Tim Callan, Research Professor, The Economic and Social Research Institute

Email: tim.callan@esri.ie,

or the ESRI Press Office - Email: press@esri.ie, Phone: +353 1 863 2000

Notes for Editors

1. Budgetary policies on income-related taxes and welfare must find a balance between providing income support to those in need and maintaining a financial incentive to work which supports high employment. This paper focuses principally on the “cash” or “first round” impact of tax and welfare policy changes across the income distribution.

2. Government statements on policy for Budget 2016 include the Spring Economic Statement, an accompanying speech by the Minister for Finance, and a speech by the Taoiseach to the Grant Thornton Worldwide Tax Conference, 4 June 2015.

3. “Fiscal drag” is the term used to describe rising average tax rates when tax bands and credits are held constant in the face of growing incomes.