Budget 2000 delivered, as expected, the biggest set of tax cuts and welfare increases in the history of the State, but how was this budgetary largesse distributed?
Illustrative calculations of the type found in the Budget day documentation are not enough to answer this question. Real families are far more complex and diverse than the small number of household types which attract attention at budget time.
A full picture of the Budget's impact must be based on information from a large-scale, nationally representative sample of households.
The ESRI tax-benefit model uses information from such a survey, updated to reflect recent trends. For each family in the survey, the model estimates the gain or loss in disposable income brought about by changes in tax and welfare policy. This information can help to answer perennial questions about the "fairness" of Budget day changes to the tax and welfare systems.
A useful starting point is a benchmark which ensures that the percentage change in disposable income would be similar across all income groups. In practical terms, a tax and welfare policy indexed to average earnings growth would approximate this outcome.
The chart above shows the impact of Budget 2000 across the income distribution, measured against this benchmark. Families are ranked from poorest to richest, in a way which takes account of the needs of families of different sizes and compositions.
The chart then shows the average percentage gain of each of 10 equally sized income groups, from the poorest tenth of families to the richest. The relatively low gains for the poorest income groups reflect the balance that was struck between increased welfare expenditure and tax cuts. The fact that high-income earners gained more than the low-paid and middle-income earners is due to the structure of the tax cuts, with the focus on rate cuts and band-widening, rather than increasing the standardised personal allowance introduced with such a fanfare last year.
How does the distributional impact of Budget 2000 look in a longer-term context? High earners also gained most from budgetary changes in the 1987 to 1998 period.
Tax rate cuts did not compensate for the lack of indexation of personal allowances and rate bands. The 1999 budget sought to re dress the balance somewhat. Personal allowances were increased, and restructured to be allowable only at the standard rate of tax. This helped to focus gains on low and middle income earners.
Pensioners also saw special increases in their payments, but other social welfare recipients saw their payment rates lag behind general growth in incomes. Against this backdrop, Budget 2000 can be seen as reverting to the trend of earlier policy, while last year's stands out as unusual.
The major structural innovation in this year's Budget is the proposal to move towards individualisation of the standard rate tax band. This has many positive features. In terms of equity, it recognises that a one-earner couple has a greater "ability to pay" than a two-earner couple at the same level of total family income. The existing system treats the couples almost identically, as if they had the same total resources because their cash incomes are equal.
However, this ignores the fact that the one-earner couple benefits from having one partner available to manage the home and care for children. From a labour supply point of view, the package proposed aims to increase the financial reward for taking up paid employment, while protecting the income position of those who choose not to take up employment. If this innovation is achieved, it could represent one of the most significant elements of tax reform in many years.
Tim Callan is a research professor at the Economic and Social Research Institute