Budget 2019 will hit lower-income households harder than those with higher earnings, according to the latest report from the Economic and Social Research Institute.
The ESRI has found that the tax and benefit changes announced in October’s budget will, on average, reduce households’ disposable income by 0.7%.
In Budget 2019: Tax and Welfare Changes, it said lower-income households will on average see slightly larger proportional losses (0.8%) because of the decision to freeze personal and employee income tax credits in cash terms (which it said is a real tax rise) as well as to increase maximum benefit payments by less than wage growth.
On the other hand, it said higher income households will, on average, see smaller proportional losses (0.5%) because of cuts to Universal Social Charge and a rise in the income tax higher-rate threshold, which partially offset overall tax increases.
“The measures in Budget 2019 result in an average loss equal to 0.66% of household disposable income,” said the authors. “This is primarily a result of changes to direct taxes and benefits, which account for more than three-quarters of the overall average loss.”
It broke down the measures across the distribution of household income, adjusted for family size, with the population divided into 10 sectors (deciles). This showed that losses as a share of household disposable income were, on average, largest for the third lowest income group (0.94%) and smallest for the highest income group (0.37%).
The ESRI said that, with the exception of the very lowest income group, households in the bottom half of the income distribution (deciles 2-5) lose by more than those in the upper half.
“This pattern is driven by the nominal freeze (real cut) to personal and employee tax credits and to PRSI thresholds, which increase the taxes paid on earnings by households in the bottom half of the distribution,” said the ESRI researchers.
“Households in the lowest income decile tend not to have sufficiently high incomes to pay tax, so are less affected by these changes, but do lose from the below wage indexation of benefit payments which make up a substantial share of their disposable incomes. The upper half of the income distribution see smaller losses because of USC reductions and the increases to the standard rate cut-off, but still lose on average because of the real cuts to personal and PAYE tax credits and the rise in indirect taxes.”
The ESRI said retired couples and lone parents saw larger than average losses as a percentage of disposable income because transfers from the State make up a large proportion of income for most of those households. “Couples without children — who saw the smallest overall losses — are, on average, less reliant on State transfers, and include many higher-earning couples who benefit twice over from USC reductions and the increase to the standard rate threshold.”
It also found that women lost out most — 0.73% as a share of disposable income compared to 0.41% for men. It blamed the differential impact of the measures on men and women with children who are in one-earner or no-earner couples.