While high-income groups have seen greater absolute rises, the incomes of workers in lower brackets are growing faster, writes Tim Callan.

Commentary on who gains and who loses at budget time is often based on calculations for a small number of families thought to be "typical". But a true picture of the overall pattern of gains and losses can only be obtained from analysis of a large-scale survey of families.

Here we make use of the ESRI's tax benefit model, based on a nationally representative survey, to assess the overall extent and pattern of gains from this year's Budget.

Most calculations, including those in the Budget day documentation, focus on how policy changes announced on Budget day compare with a scenario in which all tax and welfare policies are "frozen" in nominal terms.

A major difficulty with this approach is that if such a "frozen" budget were actually implemented, welfare recipients would see their incomes fall in real terms, while others would see income gains.

A better baseline is provided by a budget which indexes tax and welfare parameters in line with expected nominal wage growth. This provides a neutral benchmark in distributional terms - all income groups would be expected to experience similar real income gains - and is also neutral in macroeconomic terms (the average tax rate does not rise through "fiscal drag").

The income tax and welfare policies announced in Budget 2007 boosted overall household income by about €2.6 billion per year. More than half of this was required simply to index the tax and welfare systems in line with expected wage growth (of about 5.5 per cent).

The boost to incomes, over and above the neutral benchmark provided by wage indexation, is of the order of 1.5 per cent. This is somewhat less than the 1.8 per cent boost provided by budget 2006.

Of course, the overall impact of the Budget depends also on Government expenditures in other areas and on other taxes.

Analysis using the ESRI tax benefit model indicates that this was one of the most progressive budget packages over the past decade and a half. The chart shows the average percentage gain of each of five equally-sized income groups, from the poorest one-fifth of families (quintile) to the richest. Poorer families gained substantially more in percentage terms than those at the middle and top of the income distribution.

On average, the poorest one-fifth of families gained close to 5 per cent from Budget 2007 (over and above what a neutral budget would have brought). By contrast, the gain for the top one-fifth of families was 1 per cent.

The cut in the top rate of tax has attracted particular attention. But the sharp increases in welfare payment rates - for all types of welfare clients, not just pensioners - have given a greater proportionate boost to the incomes of poorer households. The outcome is a progressive pattern of greater gains towards the bottom of the distribution.

Over the past decade and a half, only the 2006 budget appears more progressive in its impact. For most of the 1990s, budgets gave rise to greater increases in income for higher rather than lower earners. In more recent years, this pattern has been reversed, with gains of 3 to 4 per cent for the poorest one-fifth of families.

This year's Budget sees a rise of almost 5 per cent in the incomes of the poorest one-fifth of families - a rise only exceeded by budget 2006, where the large early childcare subsidy gave rise to a particularly strong percentage increase in the incomes of low earners.

Some debate about the distributional impact of this year's Budget has focused on the fact that high-income earners have seen greater absolute rises in income due to tax cuts, while welfare recipients received greater proportionate gains in income. A progressive budget is one which sees greater proportionate rises in income for lower income groups.

When the incomes of low-income earners are growing faster than their high-income counterparts, the share of income going to low-income groups is rising - and their incomes are rising in relation to average income.

Tim Callan is a research professor at the ESRI