Failure to fully index the tax and welfare system in recent budgets has made Irish households poorer once temporary and one-off measures are excluded, according to an analysis by the Economic and Social Research Institute (ESRI).
In a special article to be published with its latest economic quarterly commentary on Thursday, the think tank assesses the distributional impact of Budget 2025.
It showed that permanent changes to the tax and welfare system, such as increases in the tax band, tax credits and social welfare rates, made between 2020 and 2025, have resulted in small income losses for the average household (-0.3 per cent of disposable income) compared to what would have been the case if policy changes had been pegged to wage growth.
If tax credits and bands fail to keep pace with inflation, workers in theory face higher tax bills as their earnings rise in a kind of inflationary stealth tax.
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The last two budgets were framed around temporary one-off measures aimed at insulating households from cost-of-living hikes.
[ ESRI disagrees with peers over Budget 2025Opens in new window ]
In its report, the ESRI noted that while temporary measures have been successful in helping households deal with rising prices, “their inevitable phasing out will cause issues if headline welfare payments fail to keep pace with income growth”.
The institute concluded that the measures announced as part of Budget 2025 would result in small income gains on average next year, compared to a budget indexed to forecast income growth. The package of tax cuts, welfare increases and cost-of-living measures has grown broadly in line with forecast wage growth of 4.2 per cent for 2025, compared to the 2024 package, it said.
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However, there was variation in how it will affect households of different income levels, it said.
Compared to a baseline pegged to wage growth, the permanent measures in Budget 2025 were seen as “broadly progressive”, with lower-income households benefiting more – relatively – than higher-income ones.
When accounting for temporary measures, the average household is estimated to see an increase of just 0.2 per cent in their equivalised disposable income, it said.
On the specific measures targeting housing, the ESRI noted that the income tax credit for private renters, introduced in Budget 2023, was increased from a maximum of €750 to a maximum of €1,000 per person per year for those eligible and living in unsupported private rental accommodation.
“The credit will benefit middle-income households most as households need to earn enough to incur a tax liability to benefit from the credit,” it said.
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