Budget 2015: another regressive budget
Posted on October 24, 2014
Recently the Government in the Republic of Ireland unveiled its budget for the year 2015. By European law the Budget is subject to approval by the European Commission. Unlike a number of other European Union Member States it seems highly likely that the Budget will be approved. In the normal flow of events a Finance Bill will be enacted by the parliament or Dáil in Dublin before the end of this year.
‘Budget 2015’ (the Budget announced by Government in 2014 for the year 2015) has come and gone. Yet, many of the decisions, announcements and declarations of intent remain to be implemented, further scrutinised and given legal or administrative form. Very often, decisions are made but not implemented immediately. In at a least a few cases decisions are made or initiatives announced and that is the last one hears of it (e.g. the decision in Budget 2008 to levy €200 a year on those availing of city centre car parking). In some cases great publicity surrounds an announcement such as those to address taxation of large pension pots in Budget 2013 with a lead in of 12 months to allow for legislation. Specifically the Minister for Finance stated, in December 2012:
"Changes will be put in place in 2014 to the maximum allowable pension fund at retirement for tax purposes (the Standard Fund Threshold). Other possible changes will also be made to give effect to the commitment in the Programme for Government to cap taxpayers’ subsidies for pension schemes which deliver pension income of more than €60,000. The estimated full year savings [€250 million] are provisional at this time as further detailed analysis of the necessary changes and their impact will be required."
As it turned out the announcement – worth an estimated quarter of a billion Euro – was implemented but with some significant modifications. See here. It is not known what additional yield resulted from this measure but it is likely to be significantly less than the original estimate.
Meanwhile, in the summer of 2013, a Financial Emergency Measures in the Public Interest Act (FEMPI) was enacted which provided for targeted pay cuts in the public sector (the third round in 4 years) as well as other measures to reduce the public sector pay bill. The use of the word ‘Emergency’ is not that often used in legal and policy circles and when it is used it is meant to apply to an extreme situation. Persons of a certain age will recall the widespread reference to ‘The Emergency’ in 1939-1945 as applying to what was generally referred to as World War Two in the rest of the world. Many of the measures in FEMPI were designed as temporary ones but with an application that would extend over a number of years to bring about ‘savings’ in total gross public sector pay.
The change in circumstances and the rapid emergence of new fiscal realities (or perceived fiscal realities) in the course of only 12 months is quite remarkable. While talk of income tax cuts was heard in the summer of 2013 it had become the new “Given” by 2014. The question in the public discourse was no longer ‘Should we cut income taxes’ but how, and by how much and for whom. The underlying self-evident, beyond-evidence truth was that Ireland’s tax ‘burden’ was
- too high vis-à-vis what might be considered normal or acceptable
- too high vis-à-vis other countries especially ‘at the margin’ for those paying the higher rate of income tax
- putting Ireland at risk in terms of new investment, enterprise and reward for work.
These ‘self-evident truths’ were rarely questioned in the public discourse. Rather, it became a matter of how to make tax cuts fairer or more effective. The result was a very large income tax package in Budget 2015 amounting to over €642 million in a full year. All of this sits uneasily with the use of the word ‘emergency’ 12 months ago. The recent tax measures left at least three major questions:
- What about the government deficit (it is still over 2% of GDP and is probably more than the ‘structural deficit’ however that might be measured)?
- What about the cost of providing additional teachers, nurses, Garda, special learning resources, early childhood care, community staff for the elderly for a population that continues to grow (thankfully)?
- What about the impact of these particular income tax changes on the net income of households across the State?
Taking the last of the above three questions it is possible to examine the impact of Budget 2015 on different types of households with reference to:
- The impact of income tax changes only (including USC)
- The combined impact of income tax changes, water charges and certain other social welfare changes.
First, the impact of income tax changes. It would appear that these changes, which have been spread over a large number of income tax payers, are mildly regressive. In other words, most people above a certain income threshold (roughly €10,000 a year) benefited as a result of either paying less USC or paying less income tax. However, the benefit in percentage terms was more for some groups than others. Generally, those earning between €32,000 and €70,000 gained the most (in % terms) while those below or above this income band gained less. The details vary for type of household (single, couple, with children, without children etc) but the overall picture holds up. It should be pointed out that in terms of income tax/USC, earners in the €10,000-€12,000 range did benefit most in percentage terms (not counting water charges – see below). However, when all measurable changes are factored in: income tax, welfare rates and water charges a clear picture begins to emerge. In a newspaper article published two days after the Budget by the Irish Times on 16th October (‘Richest will not have to pay more for austerity’- Tim Callan, Claire Keane, Michael Savage and John Walsh) it is estimated that Budget 2015 was regressive. The initial work signals a more comprehensive analysis to be published this December in the ESRI Quarterly Economic Commentary. A number of substantive issues arise:
- The cumulative impact of all budgets from 2009 to 2015 was large – households suffered a hit of between 10 and 14% of average income when taxes, welfare (and water charges) are included in the analysis.
- The cumulative impact was greatest for the highest and the lowest 20% of households (by income) – in other words the cumulative impact over 6 years was neither clearly progressive or regressive.
- The impact of Budget 2015 was much less than previous budgets (within 1.1% of income in the case of Budget 2015) – in other words the ‘heavy lifting’ and negative impact was much greater earlier on.
- The impact of Budget 2015 was regressive – albeit mildly so – the bottom 20% of households took a hit of 1.1% while the top 20% actually saw an increase of 0.5% thanks to tax cuts.
- The impact of earlier Budgets (2009-2010) appears to have been progressive as measured in the ESRI analysis whereas Budgets 2012-2015 have been regressive) – these results are shown in previous ESRI analysis.
Four major caveats apply to all of the above:
- The analysis does not cover all types of cash payments and tax adjustments (e.g. relief on capital gains in Budget 2015 or the gradual raising of third level charges for undergraduate students)
- Analysis by the ESRI is constrained, inevitably, by the omission of budgetary changes that are not in the form of cash payments or tax adjustments – for example the indirect knock-on effect of cutting central government subsidies to public transport or the withdrawal of various community services which are used by poorer people. Also, the impact of the removal of the private pension levy was not measured.
- Timing factors apply so that new measures in one budget
- The measure of ‘regressivity’ or ‘progressivity’ is questionable.
In regards to 4 above, it must be pointed out that a given percentage change affects households in different ways. Compare a household with a combined income of €60,000 a year which suffers a 10% decline in disposable income as a result of budgetary changes (=€6,000) and a household with an income of €10,000 a year which suffers a decline of say only 5% (=€500). On a simple measure of percentage change in disposable income, the poorer household would have taken a smaller hit than the more affluent household. However, a cut of €500 for the poorer household might imply forgoing a new pair of shoes this winter or a hot meal on some days of the week while a cut for the relatively better off household might mean the cancellation of private health insurance etc. Everyone suffers but some suffer more in terms of what might be considered basic necessities (these numerical examples are given to illustrate a point). In practice poorer households actually took a bigger hit in percentage terms than those in the middle of the income distribution going by the ESRI analysis referred to above).
While Budget 2015 did not contain measures to make further new cuts in nominal public spending (apart, that its, from the carry-over of measures already implemented or signalled in previous budgets) it did show that the direction of public policy in the immediate years ahead is likely to be characterised by:
- further cuts to income taxes that benefit, disproportionately those at the top of the income of distribution
- continuing reductions in the volume (after adjustment for inflation) of public service spending per head of population
- a continuing very low level of public spending on capital infrastructure including houses.
Commitments and promises in relation to 'off-the-books' investment whether in the areas of water and housing are welcome in themselves but will not be adequate in scale or timing to meet pressing social needs in these areas.