The NERI Post Budget Analysis Seminar takes place today at 15:30 in SIPTU, Liberty Hall, details here if you wish to attend. In the blog below, NERI Co-director, Dr. Tom McDonnell offers some thoughts about what was a highly consequential but ultimately flawed budget.
Despite its evident flaws budget 2024 will end up going down as one of the most consequential budgets of recent years. I’ll start with some criticisms before moving on to the positives.
Criticisms
The Budget itself was modestly stimulatory and pro-cyclical. This was hardly ideal or appropriate given that the economy is already running close to or at full employment and has clear capacity constraints in terms of both infrastructure and labour supply. Overall, the budget will modestly add to inflation over the next year. The NERI, ESRI, IFAC and the Central Bank all criticised this approach in advance of the budget.
There are other criticisms. The government basically ignored recommendation 14.7 of the Commission on Taxation and Welfare (COTW) report that ‘tax incentives should not be used to stimulate the supply of housing’. Instead, the ineffective and regressive Help to Buy Scheme was renewed and we now have a new tax break for landlords that seems likely to bear a deadweight cost of somewhere between 90% and 100%. It’s hard to imagine a more ineffective and regressive measure. Landlords will now have a lower effective tax rate on their passive income than nurses will have on their own equivalent earned income. The new mortgage interest relief scheme is also unwelcome and will hopefully prove to be just a one year tax break. However, such measures have a very nasty habit of becoming permanent and I suspect this one will be with us for years to come. Genuine hardship cases are better dealt with through the social welfare system.
The tax cuts and indeed the regressive nature of the tax cuts were expected but still unwelcome. The COTW’s main recommendation was that government revenues will have to meaningfully rise as a share of national output in the years to come and current policy seems to run against this advice. There are immense pressures on spending coming down the tracks from ageing demographics, from climate action and the loss of green taxes, and from numerous other sources. Cutting taxes now means larger tax increases in the future. The eventual burden of taxes is therefore being pushed on to younger workers. It’s notable that the main beneficiaries of the tax cuts will be those earning over €71,000 or so (single persons) and usually older, whereas the big losers are those earning in the range between €20,000 and €40,000. It is not clear what public policy goal this serves – particularly when the context is a cost of living crisis for lower income households.
Finally, the excise tax and VAT cuts run counter to our climate targets and are poorly targeted from a cost of living perspective. Similarly, the electricity bill support is a universal payment to all households regardless of need. Such a measure makes no economic or distributional sense and should be seen as a waste of resources.
Positives
The increase in the minimum-wage should be seen as a welcome, albeit partial, move towards a living wage. It’s a significant year-on-year increase and well above inflation. The new measures to cut the cost of education (e.g. free school books and reduced third level fees) are welcome as are the cuts to public transport and childcare fees.
The most consequential announcements were in relation to the two new investment funds – the Future Ireland Fund (FIF) and the Infrastructure, Climate and Nature Fund (ICNF). In particular, the FIF will eventually create a new revenue source from the middle of the next decade and will help reduce fiscal pressures arising from ageing demographics and other reasons. Its inception is a very prudent and important measure. The operation of the ICNF is less clear but it could prevent cuts to the capital budget in future years. Its creation is another prudent measure.
The increase in the PRSI rates may not appear that important. But it is a potentially very significant move to the extent it represents the first step in a medium-to-long term process of bringing social contributions into line with other Western European countries. This would help stabilise the public finances in the decades to come. The related decision to move towards income related unemployment benefits is also welcome.
Other
The €12 increase in welfare payments will be sufficient to exceed inflation in 2024 and therefore boost real incomes, but may not compensate for the losses experienced in 2022 and 2023. We saw the deprivation rate increase from 13.8% to 17.7% in 2022 (over 40% for some groups) and the concern is it will have crept higher in 2023. The focus on one-off measures is inherently problematic. The higher prices year-on-year will be recurrent going forward. If the once-off welfare measures were necessary to ensure income adequacy then they should logically be made permanent. The tax cuts are permanent so why not the once-off welfare payments.
The decision not to introduce a 2nd tier child benefit payment to take a quarter of affected children out of poverty was very disappointing and puts the decision to award tax breaks to landlords and tax cuts for higher earners into perspective. Ultimately, we need to move to a system of evidence based benchmarking for all welfare payments (child, working age and old age). The current system of last minute haggling over rates is a shocking way to make policy.
A further regret is that no meaningful decisions were made to signal a future increase in taxes on capital (e.g. LPT increase, reduced CAT threshold, elimination of capital tax breaks, introduction of a land tax). The COTW highlighted the need for greater taxation of capital as one of its main recommendations, but it seems the issue won’t be addressed this side of an election. The failure to respond to the COTW report is glaring
An important but flawed budget.