Tax cuts in the budget would add fuel to an over-stimulated economy and could contribute to persistent inflation, a new report warns.
The study from the economic and social think-tank, TASC, argues that tax levels should remain broadly the same as prior to the budget to prevent a resurgence of inflation, which has recently shown signs of moderating.
The report’s publication follows a recent opinion piece in the Irish Independent by three Fine Gael TDs calling for tax cuts to be introduced in the budget worth €1,000 for the average family.
The TASC report argues that investment should instead be directed towards maintaining social services as well as investing in pensions, the health services and the challenges presented by climate change.
The report ‘The State we are in: Inequality in Ireland 2023’ argues that tax cuts “would run counter to recommendations from both the Commission on Taxation & Welfare and Commission on Pensions, both of which highlighted the need for additional revenue to meet future challenges.”
“Reducing income tax might seem initially attractive, but would be a quite unwise economic strategy as inflation is still predicted to be 4.9% this year and 2.5% in 2024,” report author Dr Robert Sweeney, Head of Policy at TASC pointed out.
“Tax cuts also drive general and house prices, and makes inflation longer lasting. That would be wholly counterproductive and should be resisted in Budgetary planning,” he said.
The report points to data showing inflation having the greatest impact on poorer households.
“Poorer families spend disproportionate amounts of income on food and energy bills. These areas of the economy were most impacted by inflation, leading to a largely unacknowledged increase in deprivation,” Robert Sweeney claimed.
The report proposes directing some tax receipts towards expanding targeted supports for the less well-off as previous cost of living measures were mostly non-targeted subsidies, it claims.
The report also calls for social welfare increases to be based in future on indexation according to wages rather than it being linked to inflation.
“When inflation is low, low-income groups receive little or no increases as they may be out of paid work and prices have not risen, whereas middle and higher-income groups experience income growth in line with wage increases,” Dr Sweeney points out.
“Additionally, given inflationary pressures that still exist, income inequality would be best addressed through increases in the social wage, rather than money wages,” he adds.
The report also calls for an increase in public investment in childcare, which it says remains very expensive in Ireland, acting as a barrier to employment for women in particular.