The Government has a problem. And it is largely of its own making. A mix of tax reductions and “once-off” cost-of-living payments in recent budgets have helped to support incomes across the board, including for the large group of middle earners who don’t have much cash left at the end of each month. But now, we are told, the cost-of-living payments need to stop and the tax cuts may need to be ditched due to the threat from the global economic uncertainty focused on the policies of Donald Trump.
The Government created this trap for itself when it extended the cost-of-living supports – including the costly across-the-board ones such as energy credits and double child benefit weeks – in last year’s package. It was a blatantly pre-election manoeuvre dressed up as an attempt to help hard-pressed households.
The problem now is that if it does not repeat the same trick again, then households are going to feel worse off. Many will end up with lower incomes. But if the Government goes again this year, with inflation falling, then supports that were introduced as “once-offs” will become regulars. And with the exchequer finances likely to tighten over the next few years, this would store up all kinds of trouble.
In political terms, it is the large numbers in the earnings middle ground that make this really tricky – some one million taxpayers (including single people and jointly assessed couples) earn between €35,000 and €80,000 a year, about a third of all earners. Call them middle class, or the squeezed middle, or Leo Varadkar’s people who get up early, they are the bedrock of many constituencies in cities and towns across the country.
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And many do not have much – or any – money left at the end of each month. There are debates here about what spending is essential and what could be judged as “luxury”. Households typically adjust their spending on the basis of their income. At the higher end of the spectrum, many double-earning couples make more than €200,000 a year and have still expanded their lifestyles to use all their cash. Still, few would argue they need State support because of the rising price of butter.
And at the lower end of the earnings spectrum – and for those on welfare – the State can direct help through a variety of programmes at a reasonable cost to the exchequer, even if permanent supports are needed rather than the once-off payments of recent years and some key areas of disadvantage need to be targeted better.
Politically, however, those on middle- and lower-middle incomes are hard to target – they do not qualify for supports such as the working family payment, but many are still financially stretched and have suffered from the rising prices of recent years. And there are a lot of them.
Many have two big costs centres – their home and their kids. A survey by Laya Healthcare this week estimated the annual cost of a child, from “cradle to college” at more than €15,300, close to 40 per cent higher than it was a decade ago. The data, based on a survey of 1,000 families, showed the rising cost of essentials with a bit less cash left for family holidays and gifts.
We can’t read too much into one survey. And earnings have risen by almost as much over the past decade. But the key point is that even after 10 years of mainly strong economic growth, many family budgets in the middle ground do not have a lot of slack. Despite increased State supports in areas such as childcare, outgoings are still rising.
We do need some balance looking this. The Irish jobs market has performed extraordinarily strongly in recent years, allowing many to get jobs and others to move into higher earning brackets. But Ireland is a high cost country too – not only for housing and rental but also more generally – and those earning in the domestic economy are paying prices driven up by the activity of the FDI sector.
Families in Ireland have benefited from this improving jobs market, but research has generally shown that households who have improved their real incomes substantially over recent years are those where more people are at work – for example, a second partner returning to the workforce, or a child entering it.
The earnings of individuals in work have shown less improvement in real terms – and there has been a squeeze more recently from the cost-of-living crisis. Even though inflation has now eased, prices remain high. This is why things still feel so tight for many.
And here we come back to the budget. Last year’s package of tax reductions and cost-of-living supports added about 3 to 3.5 per cent to the annual earnings of someone with an income of about €50,000 – in other words, it was more than enough to notice. Ditching both tax cuts and the cost-of-living payments would thus be a political challenge.
Perhaps tax measures may be affordable – to the extent that they, in effect, adjust the system for inflation. However, the cost-of-living supports are expensive, particularly the universal ones such as the energy credits and double child benefit weeks. Since 2022, the Central Bank calculates that more than €11 billion has been spent on such supports, of which only a third were “fully targeted to those most affected by stronger price pressures”. That would have paid for a lot of houses or perhaps half a metro – if the State could actually manage to build stuff.
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We need to recognise that a proper budget strategy does not involve throwing temporary cash at people every year to help them get by. It involves building up services in areas such as childcare, health, education and so on – and investing in vital areas such as housing and infrastructure. In the long term, this is the way to improve the lot of the people who feel squeezed and society more generally and underpin growth. And so the cost-of-living packages do need to end, as we simply won’t have the money to do everything.
In the last few budgets, ministers have been able to both spend on cost-of-living measures and increase spending on investment and services. Soon enough, they will have to choose one or the other. And if corporate tax revenues take a serious hit, as they well might, even tougher decisions will quickly come into focus.
