Dr. Karina Doorley:

I thank the Chairman for the invitation to appear before the committee. Mr. Regan and I are grateful for the opportunity to provide our views on the budgetary tax package, temporary versus permanent measures and social protection income thresholds.

Budget 2023 was framed as a cost-of-living budget. Thanks to a strong economic performance, evident in the labour market and Exchequer returns, the Government was in a position to allocate significant resources, without running a budget deficit, to alleviate some of the cost-of-living pressures experienced by households and businesses. In August, year-on-year inflation in Ireland and the euro area stood at 9% and 9.1%, respectively. The ESRI has forecast an inflation rate of 6.8% in 2023. However, the effects of inflation vary by household type. In Ireland, low income, rural and elderly households have experienced higher inflation as more of their consumption relates to food and fuel. The households experiencing a higher rate of inflation are also those who are more likely to be dependent on fixed incomes such as social welfare or pensions and less likely to benefit from wage increases, forecast to be 3.5% and 4.5% this year and next year, respectively.

Budget 2023 included measures directed at maintaining household standards of living. On the taxation side, the standard rate cut-off band was increased by more than forecast inflation, while tax credits were increased by less than forecast inflation. Unlike income tax credits and bands, most of the corresponding thresholds for PRSI and USC were held fixed in nominal terms, amounting to an effective PRSI and USC increase for many taxpayers. Although most excise duties were frozen in cash terms, tobacco products tax was increased and the VAT on newspapers and miscellaneous health items was reduced to zero. There was also a well-flagged increase to the carbon tax which was offset on petrol and diesel by the elimination of the National Oil Reserves Agency, NORA, levy and the extension of temporary cuts in non-carbon motor fuel duties.

A number of taxation-related interventions in the housing market were designed to increase the affordability and availability of housing. A new €500 income tax credit for renters was announced, as well as a vacant home levy. Another extension to the help-to-buy scheme was announced, despite concerns that it is poorly targeted towards its stated aims and likely to fuel house price growth. In addition, the potential for the 10% levy - now a 5% levy - on concrete products to be passed on to future residents of newly built properties may further impact housing affordability.

On the welfare side, budget 2023 saw permanent increases to most social welfare payments. Apart from the €40 increase to the working family payment income threshold, these were all below forecast inflation and follow real cuts to these payments in budget 2022. In line with previous budgets, increases to social welfare payments were announced as a flat euro-per-week amount which, given the different base rates of social welfare payments, means a different proportionate increase for pensioners, those of working age, young jobseekers and other cohorts reliant on social welfare. We estimate that the substantial package of temporary measures announced for 2022 and 2023 will make up for the real cut to permanent social welfare rates. These temporary measures include targeted payments and universal measures.

Changes to the national childcare scheme, NCS, which subsidises registered childcare, were announced. The universal subsidy, which currently pays €0.50 per hour for children under 15, will be increased to €1.40 per hour. However, as the thresholds for the income-assessed component of the NCS have been fixed in nominal terms since budget 2019, some households will lose their entitlement to this more generous subsidy due to wage growth.

In our post-budget analysis, the ESRI compared the direct and indirect tax and welfare measures - permanent and temporary - announced in budget 2023 with a price-adjusted set of policies for 2022. The overall effect of budget 2023 compared with price-adjusted 2022 polices is that, on average, households are slightly better off. There are small average gains in all income deciles. This does not equate to an increase in real income, which will depend on how wages, employment and other factors evolve in 2023, but, rather, shows that the contribution of policy changes to real income changes is expected to be positive. These gains are driven entirely by one-off measures and, despite average gains across the income distribution, detailed analysis showed that some households who are more likely to be reliant on social welfare, such as pensioners and lone parents, are likely to experience average income losses.

Disregarding one-off measures entirely and comparing the effect of permanent 2023 policy measures to inflation-proofed policies for 2020 gives an indication of the more medium-term challenges facing households and policy-makers. Compared with indexing tax and welfare policies in line with inflation since 2020, budget 2023 leaves households worse off on average. The permanent budgetary changes benefit higher-income households most, which leads to steeper losses for lower-income households compared with higher-income households.

Budget 2023 introduced a range of permanent and one-off cost-of-living measures. While these will, on average, insulate households relative to a price-adjusted benchmark, the one-off nature of many of the measures means an erosion of the real purchasing power of structural rates of payments within the social welfare system. There may be a need for further once-off cost-of-living measures in winter 2023 if price rises, particularly energy-related ones, persist next year. Targeted measures will reduce the risk of adding additional demand-side inflationary pressures to the economy.

Through successive budgets, rates of welfare payments have been incremented by fixed amounts. This translates to ad hocproportionate increases for different cohorts in receipt of welfare. If this pattern of increase continues, it will erode the relativities implicit in the social welfare system and weaken the link between rates of payment and income adequacy.

Once the need for one-off measures to insulate households from inflationary pressures has passed, policymakers may wish to consider benchmarking social welfare payments to reinstate this link between payments and income adequacy.