The Government was careful not to oversell Budget 2018 as a giveaway and with good reason. A study by the Economic and Social Research Institute (ESRI) reveals most families will see their incomes squeezed when the impact of wage inflation, and the additional tax that implies, is taken into account.
This is because tax and welfare are not indexed to wage growth therefore the Government’s tax take automatically increases when wages increase, in a kind of inflationary stealth tax.
The ESRI’s analysis finds the average income loss across all households will be in the region of 0.4 per cent.
At low income levels, the slide, relative to a wage-indexed policy, was in the region of 0.6 per cent, while at high income levels, it was roughly 0.2 per cent.
Minister for Finance Paschal Donohoe framed his budget around cuts in the Universal Social Charge and an increase in the standard rate income tax band, which ostensibly delivered between €5 and €10 a week to most single- and dual-income households.
The ESRI noted that while the standard income tax rate band was widened by €750, indexation would have required an increase of €1,050.
Similarly, while welfare payments were increased by €5 per week, indexation would have required an increase of €6, and €7 for pensioners.
It is these gaps between the changes required by indexation and the actual budget changes which generate the losses observed in most households, the think tank said.
The ESRI concludes by highlighting that the indexation of tax bands, credits and welfare payments would have cost the Government €1.1 billion instead of the actual €700 million spent on the changes.
While the losses to household income are small compared to the losses imposed by the sequence of austerity budgets imposed after the crash, they go some way to explaining why so many people still are not feeling the recovery.
