ANALYSIS: What is the impact of the latest budget on the various broad social groupings?
Concern about how the overall burden of adjustment has been distributed by tax and welfare policies has intensified in the era of austerity. Identifying the impact on different groups is not a simple task.
The Economic and Social Research Institute tax-benefit model represents the best tool for identifying the impact of a wide range of direct tax and welfare measures – as recognised by the use of model results in budgetary documentation. While some policies introduced in Budget 2013 are outside its scope, many useful insights into budgetary impact can be gained from model-based analyses – and a consideration of the likely implications of what is excluded can provide guidance as to a fuller picture.
Here we present initial results on the distributional impact of Budget 2013, based on data from the Survey on Income and Living Conditions from 2010. On the welfare side, our analysis includes cuts to child benefit and the back-to-school allowance, as well as the reduced earnings disregard for one-parent families. It does not include the restriction of jobseeker’s benefit to nine months, reductions in the household benefits package and the respite grant for carers. Taken together, the included items cover a little under half of the savings and do not cover about €200 million worth of full-year savings.
On the tax side, our analysis includes the implementation of the new property tax for six months of 2013, the abolition of the PRSI allowance, and the inclusion of maternity benefit in taxable income. The impact of indirect tax changes is not taken into account, nor the rise in capital taxes, Dirt and the rise in universal social charge for high-income pensioners. We estimate the model includes close to €600 million of the tax measures for 2013, while indirect and capital taxes raising a similar sum are not included. Internationally most tax-benefit models cover a similar range to the ESRI model, a few also cover indirect taxes. None, to our knowledge, covers capital taxes.
Income groups
For 2013, the impact of the measures included in the analysis is similar for the middle three income groups – leading to a reduction in income of just under 1 per cent. For the lowest-income group, the income reduction is just over 1 per cent, while for the top income group it is lower, at a little over half of 1 per cent. But how might the pattern be affected by the inclusion of other elements of the tax and welfare policy changes?
We expect inclusion of capital gains taxes, Dirt and the USC for the elderly would tend to make the impact more progressive. The inclusion of indirect taxes, and of household benefit package changes, would make for a more regressive impact. The net balance between these factors is a matter for further investigation – in the case of capital taxes, this would have to use data from Revenue records.
Rich/poor multiple
One feature that should be borne in mind is that average income for the top 20 per cent of households is more than five times the average income of the poorest 20 per cent.
This means that for a budgetary package to impose an equal percentage burden on each group, then for every €50 million taken from the lowest income group, a further €250 million would need to be raised from the top income group.
Property tax is a key driving factor. For those with low incomes the emphasis is strongly on deferrals of property tax liability rather than income-related exemptions or relief. This means that the burden of the tax – deferred or otherwise – tends to be greatest for those on low incomes.
There is an argument that deferral makes most sense for the elderly, when the tax bill can be paid on the sale of the property. In such cases, the burden might be regarded as falling on the inheritors. On the other hand, a deferral option for the elderly in Northern Ireland resulted in a very low take-up, despite a low interest rate – suggesting that the burden of the tax did fall on the elderly person. The balance between deferrals and income-related reliefs varies across countries. The UK and Northern Ireland have much more developed schemes of income-related relief, while the US has more deferrals and fewer income-related reliefs. Choices in this area have a major bearing on the impact of a property tax on those with low incomes – but low-income concessions also affect the rate for those paying property tax.
Austerity comparison
How does Budget 2013 compare with other austerity budgets? The big distinction here is between the budgets for 2009 (October 2008 and April 2009) and those for later years.
The October 2008 budget imposed high and progressive levies on income (later replaced by USC), imposed a progressively structured public service pension levy, and raised welfare rates by 3 per cent. Since then, budgets have been either regressive or broadly proportional. For example, Budget 2010 was clearly regressive, as we indicated at that time.
Much of the overall progressive impact of the six austerity budgets is due to the front-loading of tax increases and effective public sector pay cuts between October 2008 and April 2009.
Budget 2013 contained a number of elements which will be implemented in 2014. The announced restriction on tax relief on pension contributions will be a progressive element. On the other hand, the move from a half-year to a full-year payment of property tax will tend to bear more heavily on low-income groups.
* Tim Callan, Claire Keane, Michael Savage and John Walsh are researchers at the Economic and Social Research Institute