Average household incomes will fall 2% after Budget 2026

'Low-income households will significantly more as a proportion of their disposable income'

For higher income households, it said the freeze on tax bands and credits will amount to an effective tax rise if wages grow at their forecasted rate of 3.7% in 2026. Picture: Sasko Lazarov/RollingNews.ie

A lack of cost of living measures in the budget will see an average loss of household income of around 2% next year with “low-income households losing significantly more as a proportion of their disposable income”, research from the ESRI has found.

In its budget assessment, the ESRI said at a household level, measures announced in the budget will result in small income losses next year compared to a budget indexed to forecast income growth. “The withdrawal of temporary cost-of-living measures is responsible for much of this effect,” the ESRI said.

“There is variation in how the budget will affect households of different income levels, with slightly higher losses, of 2.5% of household disposable income, expected for low-income households.”

It said the loss of temporary cost-of-living measures, while inevitable, will result in a reduction in households’ standard of living in 2026.

"This loss will be felt across the income distribution, with low-income households losing significantly more as a proportion of their disposable income compared to high income households.

“The withdrawal of temporary measures results in losses of 4.1% of disposable income for the lowest income households compared to losses of 0.3% for higher income households.”

For higher income households, it said the freeze on tax bands and credits will amount to an effective tax rise if wages grow at their forecasted rate of 3.7% in 2026.

On a macroeconomic level, the ESRI said the economy does not need strong government support, “but rather focused and targeted investment, particularly at infrastructure bottlenecks”.

“At present, the fiscal stance as outlined in the current and recent budgets is arguably too loose, and the reliance on unpredictable corporation tax receipts is a vulnerability.

"This means hard choices must be made between measures in order to have sufficient scope to support the economy in a downturn."

ESRI associate research professor Conor O’Toole said the budget “proposes strong net spending growth in a time of economic buoyancy.

“This risks overheating the domestic economy and leaves less space to act if a downturn occurs.” He said the share of total tax coming from windfall corporation tax receipts is “both substantial and increasing, while the underlying deficit, excluding these taxes, is widening”.

“A pathway to close this underlying deficit, by making difficult choices and trade-offs, should be developed,” he said.