Varadkar has promised more than €1,000 for average workers. How will this add up?

As the budget negotiations reach the business end, Taoiseach Leo Varadkar has said that the benefit to a middle-earning worker will come to more than €1,000 but how might this work?

A grand in the pocket

Just how does the €1,000 add up and how will the gains be spread? The Taoiseach made clear that the figure includes the benefit from both tax reductions and once-off spending supports to households. So some of the gains will be permanent and some will not be. Also, as it appears that some of the once-off spending supports will happen this year, households will get some of the additional cash this year and some in 2024.

Tax

What about tax? Final decisions are being hammered out over the weekend. But we know that three things are going to happen: the income level at which people enter the higher 40 per cent income tax rate will be increased, there will be some cuts in the universal social charge (USC) and an increase in tax credits.

Last year the income level at which people entered the higher rate was raised by €3,200 to €40,000. This delivered an additional €640 to anyone earning enough to benefit fully from the change. This year the indications are that the increase will be a bit less to allow for some cash to be spent on reducing the USC. For every €1,000 increase in the standard rate band, which sets the income level at which the 40 per cent rate kicks in, middle earners gain €200.

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The main USC rate is 4.5 per cent, which applies on income between about €23,000 and €70,000. Cutting this rate to 4 per cent would mean a gain of about €135 a year for someone earning €50,000. Tweaks in the lower USC rates might increase this a bit.

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Tax credits – effectively cash deductions from the people’s tax bills – will also increase. This gives proportionately greater benefits to the lower paid: a €50 tax cut is worth a lot more to someone earning €25,000 than someone on €70,000. And remember: those on lower incomes do not benefit from increasing the income level at which the higher rate kicks in.

In total, the income tax package is likely to be worth €800 or more a year to a middle-income worker, earning enough to fully benefit from all the tax changes. The cash gains for lower earners are likely to be less, though presumably the Government will try to construct the package so the percentage gains in their income are similar to higher earners.

Getting more than a grand

How do we get up to more than €1,000 then? From spending measures.

The clearest signals have come in relation to energy credits. Last winter all households got three €200 reductions from their energy bill: €600 in total. It is not clear what will be paid this year, but a reasonable bet might be that it will add up to €250 to €300 between late 2023 and early 2024. If we add this to the likely gains from the tax package, this takes middle-income households over the €1,000 mark, perhaps into the €1,100 to €1,200 category.

For those on welfare, there will be close attention to whether the €12 increase in weekly payments announced in the last budget is matched. Special measures for those on fuel allowances and an increase for the qualified child payment for those on welfare are also expected.

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Extras

Anything else? Yes. The minimum wage will rise by an expected 12 per cent, which would give a minimum wage worker just under €55 a week. Of course this is paid by employers, but the tax system will also be tweaked in response. Some help for mortgage holders paying higher interest rates is now flagged through some type of mortgage relief. It is not clear if there will be a general increase in child benefit; there wasn’t last year, though there was a double payment in November of last year.

Feeling the benefit?

Will the budget leave households better off? Inflation has changed everything in the last few years, cutting the living standards of households on average over the last two years. Tánaiste Micheál Martin has said households will be better off next year through the combined impact of wage increases and the budget. This is possible, but only if inflation does continue to fall, meaning a further decline in energy prices. And remember that the bulk of the tax package and many spending increases are effectively just insulating against inflation, so real gains will be limited.