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TRADE UNION DESK Priorities for Budget 2023

Real incomes and living standards will fall for most households in 2022, writes Tom McDonnell, Co-Director of the Nevin Economic Research Institute (NERI), as he considers the priorities for Budget 2023.

Cost of living pressures are creating almost daily demands for wage increases and for fiscal and regulatory measures to relieve the burden on households. Economy-wide price inflation is likely to average over 8 per cent but reach 10 per cent for lower income households (which spend a higher portion of their incomes on the type of necessities such as energy, food, and rent).

We will see a significant rise in poverty and deprivation rates for those on fixed incomes without meaningful policy interventions from government. Therefore, all social protection payments in Budget 2023 should at least match inflation to protect or increase real incomes and to ensure that no one is left behind by the cost-of-living crisis. Budgetary supports should be targeted on those households likely to experience distress and government should not attempt to chase inflation for all households.

Fortunately, the public finances are in a reasonably strong position. Tax receipts have been buoyant this year with a modest projected surplus in both 2022 and 2023. The expected €6.7 billion budgetary package is broadly appropriate in terms of the fiscal stance, albeit plans to cut taxes are short-sighted. The Government should remain conscious of the medium-to-long-run fiscal pressures including demographic change, international changes to the treatment of corporation tax, and the gradual loss of receipts from fuel excises as Ireland achieves its climate targets. The reliance on corporation tax receipts is a further worry as it means the health of the public finances depends on the performance of a small subset of firms.

Higher income households have generally built-up significant savings during the pandemic with aggregate household deposits rising sharply and accumulated net savings exceeding €20 billion according to the Central Bank. Many of these households can absorb the hit to their real incomes by reducing their rate of savings. Such households do not need fiscal support from government and are unlikely to experience deprivation or a meaningful qualitative decline in their living standards. As such, the Government should only directly help low-income households with targeted income supports, while higher income households should look more towards wage increases.

Pro-cyclical tax cuts would be a mistake. Cutting taxes for middle and high earners via the introduction of a third income tax band or through a significant increase in the standard rate cut off point will be regressive and will add to inflationary pressures. It will also do nothing for most of the households experiencing income adequacy issues due to the cost-of-living crisis. Instead, the Government should seek to consolidate its revenue base by eliminating tax breaks such as the help to buy scheme.

On the other hand, Ireland’s per capita level of public spending is well below that of other high-income EU countries. This has consequences in terms of our ability to address the ongoing crises in housing, in healthcare, in early childhood care, and education, alongside a range of other areas.

Budget 2023 should build on our collective economic and social infrastructure through greater funding of the ‘social wage’ provided through subsidised universal public services. This should form part one of a multiannual process of increasing government spending on collective early year services, on education and public R&D, on healthcare, on public transport, and on public housing services. Universalist measures such as free or more heavily subsidised public transport would simultaneously support carbon reduction targets.

A key focus and theme of this strategy for Budget 2023 should be on reducing the user costs to households, for example in areas like health and education. Unlike cuts to income tax, such an approach will help dampen inflationary pressures. Medium-term cost of living measures ought to focus on areas where Ireland is particularly out of line with other countries. Good examples include direct government funding for the labour component of childcare services in conjunction with regulated caps on non-labour costs, alongside measures to directly increase the supply of affordable and cost rental housing. The cost of inaction in these two areas will be a weaker labour force and a poorer and less competitive economy.

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