ANALYSIS:Those set to experience the greatest losses in the coming year are those who lose their jobs, writes Tim Callan
OVER THE past decade there has been much discussion of how the gains from growth have been shared. But now, with rapid economic deterioration the issue is how the pain is to be shared.
To what extent has Budget 2009 managed to shelter those on the lowest incomes from the economic storm? How have middle-income families fared compared to those on high incomes?
To analyse these issues, we need to compare Budget 2009 with a neutral budget, which would see incomes rise by the same proportion for all income groups - technically this could be achieved by increasing social welfare payment rates and tax credits and bands in line with expected wage growth.
Analysis using the ESRI tax-benefit model (Switch) shows that, on average, tax and welfare changes in Budget 2009 will lead to disposable incomes about 1 per cent lower than under a neutral, wage indexed policy. Those on low incomes - the poorest 40 per cent of the population - fare somewhat better, with a very small income gain (less than 0.3 per cent).
The top 40 per cent of the population are likely to see income losses of close to 1.5 per cent, while the middle-income group can expect to lose about 1 per cent, relative to a neutral budget. On balance, therefore, the income tax and welfare components of the Budget can be seen as favouring low income groups, and placing a somewhat higher burden on high income groups.
There are, however, some caveats to this. The compensation to welfare recipients for the elimination of child benefit in respect of 18-year-olds is temporary, ending in January 2010. When this is taken into account, the small gain for the bottom income groups becomes a small loss. A second caveat is that the analysis does not take into account the effects - known to be regressive - of increased VAT.
Those set to experience the greatest losses in the coming year are those who lose their jobs, and have difficulty in finding new employment. The real value of payment rates for the unemployed is being maintained, but there have been substantial changes in conditions governing the payments. Reductions in the maximum duration of Jobseeker's Benefit bring Ireland more into line with international practice. The rationale for the tightening of contribution conditions is less clear, and means that fewer of those who become unemployed in the recession will be eligible for Jobseeker's Benefit.
The restriction of medical expenses to the standard rate of tax puts top-rate taxpayers on the same footing as those paying at the standard rate. The provision of relief at the marginal rate meant that a top rate taxpayer faced a post-tax price of €59 per €100 of medical services, while standard rate taxpayers faced a post-tax price of €80 per €100.
As regards even more substantial nursing home expenses, the new Fair Deal should provide a system dealing with all cases, instead of having a means-tested nursing home subvention and a separate tax-subsidised system for others, favouring top-rate taxpayers. Similar criticisms could apply to the existing system of tax relief for pensions. Some restriction of reliefs towards top incomes was announced in the Budget, but key decisions have been deferred.
On the revenue side, a very high proportion of the net increase in revenue for 2009 comes in the form of inherently temporary elements (the cash-flow gains from bringing forward payment dates for Corporation Tax and Capital Gains Tax) and a new income levy, explicitly labelled as temporary.
Given the medium-term expenditure plans stated in the Budget, a substantial further rise in stable revenue sources is needed.
An explicit recognition of this fact is needed to guide future tax policy. Without this, tax policy will drift and be overly subject to short-term influences. The role of the Commission on Taxation in providing a strategic input becomes ever more important in this context.
• Tim Callan is a research professor at the Economic and Social Research Institute