Scale of inequality now a drag on our economy and well-being

Colm O'Doherty: The results from the Central Statistics Office Survey of Income and living Conditions 2010, released earlier this year, confirmed what most Irish people are acutely aware of – the gap between the top and bottom 20% of income earners is increasing. The well-off are getting richer compared to the rest of the population and are suffering little or no repercussions from the economic crash. Average income of the top 20% of earners was 5.5 greater than those in the lowest 20 per cent. This inequality ratio is up from 4.3 a year earlier.

Persistent and increasing inequality is a serious threat to both our economic prospects and our well-being. A new wave of research on the effects of inequality, growth and financial crisis all see inequality as a driver behind the unsustainable surge in household indebtedness which triggered the crash.

On the level of individuals, Joseph Stiglitz suggests that in the US people on lower incomes over-borrowed in order to maintain a rising standard of living in the face of stagnating real incomes. This borrowing, over time, became unsustainable and led to default and pressure on over-extended financial institutions such as Fanny Mae, precipitating the wider financial crash. A second set of theorists (Rajan, Fitoussi and Saraceno) argue that on the societal-level inequality is the driving force for policy choices which, in turn, lead to unsustainable household and governmental debt levels. In this scenario, neo-liberal economic policies use regulatory tools to facilitate low income households’ access to credit , particularly mortgages.

These policies encouraged low interest rates and financial deregulation to compensate for inadequate incomes. They also aided and abetted financial liberalisation and raising top incomes, seen as progressive policies by neo-liberals, through regressive taxation strategies. Policies such as these permeated the thinking of successive Fianna Fail coalition governments and, many people were convinced that that they represented a natural economic order. It appears that the current Government is also in thrall to these doctrines. While there is some overlap between these theoretical standpoints, they all clearly make valid links between inequality and the financial crash.

The consequences of inequality are also becoming clearer. Economic hardship, manifested as unemployment, wage reductions and income support cuts, is affecting all tiers of Irish society except those at the top who are becoming more and more adept at looking after themselves and their own. A recent report from the Irish League of Credit Unions found that 1.82 million adults, say they have less than 100 Euro a month spend after bills are paid. Poverty rates are on the rise with yearly increases in consistent poverty and at-risk–of-poverty rates being recorded by the CSO. Reductions in essential public services such as health and education, are weakening the social contract between citizens and the State.

The State is pursuing policies which openly discriminate in favour of the wealthy and against all other citizens. This policy direction is the road to economic and social ruin. While the left here appear not to have woken up to this reality – blaming the EU, the IMF and global capitalism for everything - world leaders in the US and France accept that government policy needs to be framed around re-distribution of wealth in order to balance the fiscal books and fulfil the social contract obligations of the State.

On the academic front, Robert Putnam, the author of Bowling Alone, who is recognised as an authoritative academic but not a firebrand, has pinpointed inequality, the closure of social mobility and diminishing social trust as threatening America’s economic future. The tax burden in Ireland, at 28% of GDP, is one of the lowest and most regressive in the EU. Sweden and Denmark and other Scandanavian countries have tax burdens of the order of 45.8 % and 48.2% respectively, and are not in the same economic disaster zone as us. Despite going against the economic orthodoxy we have been in thrall to for the past twenty years the Nordic region's tax policies have protected their social models, encouraging and realising more equal societies and avoiding the financial crash which is now inflicting terrible damage on the most vulnerable and weakest sections of our society.

The big question facing our Government now as it begins to frame its second budget is: will it continue to progress inequality and ramp up social and economic decline in the pursuit of measures which are widely discredited or will it put in place fair and equitable taxation measures which share the burden of economic and social renewal?