Joan Burton (Dublin West, Labour)
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84. To ask the Minister for Finance his views on the ESRI analysis of budget 2018 by a person (details supplied) that all households have lost income due to the lack of indexation of budget changes in both tax and welfare; and if he will make a statement on the matter. [44787/17]

Joan Burton (Dublin West, Labour)
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85. To ask the Minister for Finance his plans for reforms to improve household incomes to ensure indexation of budget changes in taxation changes in future budgets; and if he will make a statement on the matter. [44788/17]

Paschal Donohoe (Dublin Central, Fine Gael)
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I propose to take Questions Nos. 84 and 85 together.

I take it that the Deputy is referring to an article by the Economic and Social Research Institute (ESRI) assessing the distributional impact of Budget 2018 which was published in the Irish Times on Thursday, 12th October 2017. This analysis of the Budget is undertaken and published every year by the ESRI. The article this year was headlined “Budget 2018 leads to small losses in income at all levels”. I believe that this headline – which I assume the Deputy is referring to in her question - is both incorrect in its own right and is unreflective of the full article written by the ESRI.

It is important to clarify that the ESRI analysis reflects a specific modelling approach rather than the direct impact of tax and welfare measures on people’s incomes, which is the basis on which Budgets are set. Their analysis relies on the SWITCH (Simulating Welfare and Income Tax Changes) model, a model also used by Government departments, to assess the distributional impact of the Budget. The SWITCH model is a tax-benefit micro-simulation model which allows users to analyse the impact of discretionary tax and social welfare policy in a way that is representative of the full population of households in Ireland. However, the methodology applied to the SWITCH model by the ESRI differs from the methodology used by Government departments.

The ESRI analysis compares Budget 2018 to a hypothetical scenario where all tax bands, tax credits and welfare payments are increased by 3.1 percent, which is the ESRI’s forecast of wage growth for 2018. They refer to this hypothetical scenario in the article as a “neutral benchmark”. By comparing Budget 2018 to this hypothetical scenario, they estimate that the Budget results in relative income losses. In other words, the ESRI did not say in their article that Budget 2018 directly imposes income losses on households, but rather that the Budget imposes losses relative to the ESRI’s choice of benchmark.

I would like to emphasise that their method does not result in a measure of the actual change in people’s incomes by income group due to the budget. In contrast, my Department’s methodology compares a situation where the existing 2017 tax and welfare parameters remain in place in 2018, to an alternative situation where the Budget 2018 tax and welfare parameters are applied. This method reflects the actual change in people’s incomes resulting from the tax and welfare measures in Budget 2018, and I believe it is more informative than the ESRI approach when assessing the direct impact of the Budget on household incomes in 2018.

I further note that in the main text of the article the ESRI acknowledge that the assumption of indexing tax and social welfare parameters to wage growth is costly; they estimate it would cost in the region of €1.1 billion. The Budget Day Package, net of the €180 million allocated to the Public Service Stability Agreement, is approximately €1.2 billion. In line with the Programme for a Partnership Government and the Confidence and Supply arrangement, this is distributed on a 70:30 basis between expenditure and taxation measures, which exceeds the split outlined in the Programme for a Partnership Government. With this fiscal context in mind, the ESRI’s hypothetical scenario of wage indexation is not affordable in 2018 given the other key priorities for Government expenditure such as housing and education.

The elements of the Budget 2018 tax package relating to reductions to USC, increases to the income tax standard rate bands and increases to the Home Carer Tax Credit and the Earned Income Credit amount to a cost of €333 million on a first year and €397 million on a full-year basis.

No Government has followed a policy of strict indexation of tax bands and/or tax credits, as this does not allow flexibility to adapt spending as necessary to the level of resources available to the Government in any given Budget. It would also restrict the ability of the Government to target resources where the need is greatest.

The Department of Employment Affairs and Social Protection (DEASP) will produce and publish a Social Impact Assessment of Budget 2018 in the coming weeks. This will use the SWITCH model to consider the impact of the Budget on households across the income distribution. My Department provides inputs to DEASP when they are preparing the Social Impact Assessment. However, preliminary analysis carried out in advance of the Budget by my Department using the SWITCH model indicated that, in overall terms, households experience an average increase in the order of 1% in weekly disposable income as a result of Budget 2018. Gains are highest for the first (lowest income) quintile at over 2 per cent and lowest for the fifth (highest income) quintile at below 1 per cent, pointing to a progressive Budget package. These gains represent the actual change in people’s incomes resulting from the tax and welfare measures in Budget 2018, and I would point out that the percentage gains are greatest for the least well-off.