In this blog by NERI Co-director, Dr. Tom McDonnell he asks 'What should the government do in Budget 2023?'
Budget 2023 will take place next week in the context of declining real incomes and living standards for households and spiralling costs for business. Inflation this year will average close to 9%. Consumer prices will likely increase by a further 4% or 5% next year. Once-off measures for households make no sense in this context. Once-off measures would only make sense if policymakers believed that consumer prices were likely to fall in 2023.
The ongoing energy crisis is placing considerable pressure on household budgets. The appropriate response to this crisis will support households in need, while remaining consistent with longer-term objectives of reduced energy use and decarbonisation of supply.
Our view is that the Budget should concentrate its firepower on those households likely to experience a qualitative decline in their standard of living due to the cost of living crisis. As such, all social protection payments, income thresholds and disregards should be indexed to average inflation in 2022. For lower income households this will be close to 10%. Within this I include supports and protections like the working family payment and the national minimum wage. Pursuing this strategy will protect vulnerable households in a much more efficient and targeted fashion than populist measures like universal energy credits. It also maintains the incentive to reduce energy use where viable.
In addition, the government should concentrate fiscal resources on directly reducing the cost of using public services (education, healthcare, childcare, public transport). There are many potential interventions that the government could make (free GP visits, greater subsidies for public transport and/or childcare, reduced college fees etc etc). This is one of the few meaningful ways in which the government can directly intervene in Budget 2023 to immediately reduce inflation and also ameliorate long-term cost of living pressures. The particular focus and theme of this strategy should be on reducing the direct costs to households of using public services.
Partial indexation of the income tax system will help middle income households and should be considered given the sheer scale of inflationary pressures. However, it is crucial that fiscal policy not run against the long-term need to materially increase taxes. It is worth recalling that the Commission on Tax and Welfare’s main recommendation was that the overall level of revenues raised from tax and PRSI must increase materially as a share of national income in order to meet medium-to-long term fiscal challenges. As such, any tax cuts for middle income households should be fully offset by eliminating certain tax expenditures and/or by increasing taxes on capital. The Help to Buy scheme and the 9% VAT rate for tourism and hospitality are poor policies and two obvious targets for abolition in this budget. It is also worth noting that income tax cuts will not only be inflationary but also a poor response to a cost of living crisis. This is because the benefits will disproportionately flow to middle and higher earners.
Finally, temporary measures to support business over the Winter may be necessary in order to protect employment levels but such supports will ideally be time limited and grants should be restricted to businesses that can show A) they would be viable in the absence of the surge in energy prices and B) that the increase in prices is threatening their viability.
Overall, the financial position of the State is reasonably healthy in the short-run, notwithstanding uncertainty about the sustainability of corporation tax receipts. We have the resources to fully shield the most vulnerable households from current inflationary pressures. On the other hand, we should be careful not to further undermine the tax base in the context of medium-term fiscal pressures and we should be careful not to reduce incentives to reduce GHG emissions.