Budget priority should be welfare not tax - ESRI

The budget should devote more funds to increasing social welfare payments and less to cutting taxes, according to a new study from the Economic and Social Research Institute.

The last four Budgets have provided much greater gains to the better off, and to reverse this trend social welfare payments must be increased much more rapidly in future, the ESRI says.

Its research results, to be presented to a pre-Budget conference in Dublin this morning, show that the Government commitment to cutting taxes for the lower paid is not in itself enough to help the less well-off.

Many of the poorest in society gain nothing from tax reductions, the ESRI points out, and have been progressively left behind as welfare increases in recent Budgets failed to keep pace with the growth in average pay rates.

Social welfare rates have risen by around 16 per cent over the past four years, while average income for all households has increased by 22 per cent, according to the ESRI economists, Prof Tim Callan and Prof Brian Nolan. This means that the poorest 30 per cent of the population gained 2 per cent less from the last four Budgets than they would have if welfare increases had kept pace with average earnings.

In contrast, the richest members of society have benefited substantially from tax reductions. The richest 10 per cent have gained 4 per cent in annual income from the past four Budgets, over and above changes to take account of wage inflation.

Other high earners have also gained substantially. But middle-income earners have gained less, while the poorest have lost out relative to the rest, due to the rate at which social welfare is increasing.

The Government is already facing strong demands from the trade union movement for substantial further tax relief in the December Budget, aimed primarily at low to middle income earners.

This latest ESRI research, the first comprehensive analysis based on its model of the population, will increase pressure on the Government to forgo further reductions in income tax rates in favour of increasing personal tax allowances to benefit lower earners. It will also reinforce the case of those lobbying for higher welfare payments.

If future Budgets continue the policy of including a mixture of income tax rate reductions, increases in personal tax allowances and widening of the standard-rate band, much of the gains will remain concentrated on higher earners, the paper argues.

Instead, leaving income tax rates unchanged and devoting all the tax-cutting funds to increasing personal income tax allowances would give a greater benefit to people on middle and low incomes, while cutting the gains for the better off.

But the researchers claim that such tax cuts must be combined with a much more rapid increase in social welfare payments. They warn: "A continuation of past policy trends - with social welfare rates increasing more slowly than average incomes - will see a rise in poverty in coming years."

They argue that the Government should thus devote more budgetary resources to increasing social welfare payments than it might otherwise do, and fewer to reducing taxes. Calculating that, on current policies, the Government could spend £750 million on tax reductions over the next three years and £250 million on welfare increases ahead of inflation, they suggest that instead £500 million should be devoted to each area, offering the opportunity to direct more help at the least well-off.