Lack of cost-of-living supports negated Budget's welfare rises for lower-income households

The Economic and Social Research Institute (ESRI) concluded that households have seen a slight reduction in disposable income policy changes since 2020 on average. File photo

Middle- and high-income households were “negatively affected” by measures taken by the Government in the Budget, while benefits to lower-income households from welfare rises were offset by a lack of cost-of-living supports, new research has found.

In a supplementary paper to its quarterly economic commentary on the impact of tax and welfare policies in Budget 2026, the Economic and Social Research Institute (ESRI) concluded that households have seen a slight reduction in disposable income policy changes since 2020 on average.

“In 2026, average household income is estimated to be 1.3% lower than it would be under a tax–welfare system indexed to price growth, and 1.9% lower than it would be under a system indexed to anticipated wage growth,” it said.

In Budget 2026, the Government made minimal changes to personal taxes meaning no change to the standard rates and bands for income tax. It marked a stark contrast to previous budgets, including the pre-election Budget that increased the standard rate cut-off point by €2,000 and increased some tax credits.

At the same time, cost-of-living supports such as the electricity credit that had featured in previous years were also removed. The Government has repeatedly defended this move amidst fierce criticism, and said it wanted to help those on lowest incomes in the Budget.

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Micheál Martin told the Dáil after the Budget: “We have now targeted cost-of-living supports at those most in need of them, supports that are sustainable, while we move to address the underlying causes, within our domestic control, that are driving up prices.” 

In the ESRI report, it said that leaving the standard rate cut-off point unchanged at €44,000 represents an “effective tax increase” in the context of increasing wages as a higher proportion of workers’ income will be subject to the higher rate.

It notes that temporary measures from previous budgets may have led some households to depend on such measures to meet cost-of-living pressures.

“The ‘permanent’ Budget 2026 measures are progressive, resulting in real increases in income for those at the lower end of the income distribution and losses for those on middle–high incomes,” it said.

“Despite the positive impact of the permanent tax and welfare system for those in lower-income families, the withdrawal of the temporary cost-of-living supports (along with small negative impacts of indirect tax reforms) results in an overall loss, right across the income distribution.

“These temporary measures were playing an important role in supporting the income levels of lower-income families; therefore, their withdrawal is more strongly felt at the lower end of the income distribution.” 

Vat rate

The paper also discusses the Vat rate cut for sections of the hospitality sector, which is costing €681 million and is equivalent to 60% of the total cost of welfare measures enacted in the Budget.

The ESRI assumed that none of the Vat cut will be passed onto the consumer given it was aimed at “securing the long-term viability” of these sectors.

“This much-debated change to Vat rates is aimed at addressing ongoing pressures faced by these industries as a result of rising operating costs,” it added. “Little evidence has been provided on the necessity or effectiveness of such a cut, however.”