Who really took the hit in Budget 2010?

Slí Eile: Once upon a time there was a thing called ‘poverty proofing’. And there used to be Agencies (State ones) that specialised in looking at ‘poverty’ (and not just inclusion or equality or human rights although some of these things are not quite a la mode anymore). We have not heard a lot about poverty or poverty-proofing in recent times. If anyone has seen or heard about ‘poverty’ in the recent deluge of official reports and 2010 Budget official documentation they might post a link and reference.
However, the poor know all about it and so do the many organisations working to deal directly with people who are poor either by way of direction financial and human help See www.svp.ie or by way of advocacy and policy research (SVP, The Poor Can’t Pay or Social Justice Ireland and others)

One way to examine poverty is to assemble some statistics about it. There are, now, more official indicators and statistics than ever about poverty – relative, absolute, consistent etc and the information is available internationally from agencies like Eurostat, OECD, UNDP etc. One of the difficulties with statistics is that that’s all they are – things that stand. Or is that so? The Etymology is interesting. The German term is Statistik given as ‘study of political facts and figures’, or the New Latin term is statisticus which is derived from Latin status state

Now if statistics is the ‘study of political facts and figures’ there are three types of ‘facts and statistics’
* Awkward known facts and statistics (from the point of view whichever values-based or ideology-based argument one is trying to advance)
* Convenient facts and statistics (from the point of view…ditto)
* Unknown facts and statistics (which one would love to know but which by definition are unknowable either temporarily or permanently and which could be awkward or convenient depending on their place a larger narrative)

Government spin aided by some researchers who should know better is simply that:
A Prices are falling so people are no worse off in real terms; and
B Irish social welfare rates are high by comparison with other countries
C In light of A and B above, any cuts are not going to entail that much hardship.

A is misleading because, for the basket of goods bought by poorer households, prices are dropping less than for all consumer prices taken together including mortgages. B is simply not true. Take out the UK and we are average to below average among the EU15. Previous posts on this website have explored the international comparative data. See here for example.

To wrap up the spin, some are lumping together two Budgets in succession to discover that Budgets 2009 and 2010 together were in some way ‘progressive’ (Budget 2010 took back some windfall gains for SW recipients in Budget 2009 due to unanticipated price deflation).

And now I am going to explore some issues by reference to the following media headline on page 1 of the Irish Times in December:

“Higher earners hit hardest by recent budgets, claims ESRI” was the headline on 23 December. Really? It depends on the data and it depends on which rung of the ladder you are standing on as you peer downwards into the choppy waters. That ‘we should all tighten our belts’ has dramatically different implications for someone who takes a hit of X amount equal to Y percent while standing on an income of Z. That equal removal of children’s allowance for over 16s for the coming summer months can make a mighty difference to someone on half the industrial wage and someone on 5 times the average industrial wage.

The claim was put forward by the ESRI in their Winter 2009 Quarterly Economic Commentary QEC (for a summary see here). They wrote:

‘while Budget 2010 was clearly regressive, the combination of Budgets 2009 and 2010 placed most of the burden of fiscal adjustment on higher earners’

In a very short piece by Callan, Kean and Walsh (‘Distributional Impact of Tax and Welfare Policy Changes’) which is in the full QEC and is not available to non-subscribers the researchers asses the impact of Budgets 2009 and 2010 against ‘a neutral benchmark’ What is this neutral benchmark? It is crude, to say the least. The ESRI have assumed a fall of 2.5% in nominal wages in 2010 (see first summary table in Overview) and compare changes in income for different households divided into five income groups from lowest to highest. Figure A in Box 2 (Page 24) shows a fall of 4% in income for the lowest income group compared to an increase of roughly 1% for each of the other 4 groups. These estimates refer to income units in terms of family units. In other words, income is equivalised in the following way (‘Income Tax and Welfare Policies: Some current issues'):

Family units are ranked by income, adjusting for differences in family size and composition using a simple equivalence scale: 1 for the first adult in the family, 0.66 for a second adult and 0.33 for children.

As the ESRI authors point out, ‘Much of this effect is driven by the very sharp reductions in Job Seeker’s Allowance for those aged under 25.’ Alternatively, the ESRI present the data according to household units. Here, the comparison by income group shows a much smaller drop for the lowest income group (1.5%) and modest gains for all other groups. In comparing on the basis of a households, a household consisting of one member – say a pensioner is treated the same as a household with 2 adults and 3 children.
The ESRI authors also concede (in a separate place here) that:

It is difficult to assess the scale of impact of Budget 2010 on specific groups since many of the policy changes entail shifts within particular groups. Hence, for example, cuts in job seekers allowances impact more on new applicants and the withdrawal of early childcare supplement for all children under 5 with its replacement by a new scheme for young children in the 3-4 age-group.

No allowance was made for the impact of public sector pay cuts (per QEC document)
This latter point is significant because a low-paid worker in the public sector (yes, they are many) had taken an additional hit over and above the other adjustments used in the ESRI calculations. This effects particular groups of public sector workers more than others and needs to be taken into consideration.

So much for Budget 2010.
The ESRI then show a graph for the impacts of Budget 2009 (Figure B on page 25) benchmarking on a 3.5% fall in nominal wages in 2009. Here the pattern is reversed somewhat compared to Budget 2010 – high income earners take the biggest hit at 6% (reflecting among other things income and levies) while the low income households take a lower reduction (or an increase if household composition is taken into account). The income group second from the bottom see an increase in income against the benchmark. Recall that most basic social welfare rates were increased by 3% in Budget 2009 (although other payments were reduced including the Christmas bonus and various discretionary payments and allowances were curtailed in the 2009 Budget).
Having found –according to these estimates and this modelling – that Budget 2010 was ‘regressive’ and Budget 2009 was ‘progressive’ what did the ESRI do? You have guessed. They lumped the impacts together to estimate a ‘Combined Distributional Impact of Budgets 2009 and Budget 2010 versus Wage Indexation (-3.5%)’ and hey presto: the rich were soaked and the poor were less soaked when both budgets are brought into play. Alas, I am a dreadful sceptic refusing to believe the ‘facts’ and sniffing spin somewhere. What about the following:

Supposing the rich took a 10% cut – on average – in 2009 (quite possibly as various types of incomes on assets and employment took a dramatic hammering in the downturn) and the poor took a 5% cut – are we comparing like with like in terms of hardship, health and psychological trauma? Is the tipping point different for someone who is already insecure, anxious and worried that a breakdown in some appliance simply cannot lead to replacement anymore?

Exactly which types of income are taken into account in this model? Do we know anything about those parts of income that are completely or partially outside the tax net? (undeclared income, tax-free income, profits accruing to those companies least hit by the recession?

As the old saying goes
‘First get your facts, then you can distort them at your leisure’! I am not suggesting that the ESRI or other economic commentators have been doing this. However, some folks in the media and the political world are – for their own purposes and researchers and other independent commentators should be careful about how their findings and facts are picked up somewhere else

The Poor Can’t Pay document states:
Government said it had to make difficult decisions. But the decisions now facing many of Ireland’s poorest households will be much more difficult. How can I feed my family tonight? Can we afford to heat the house? Which bill can I pay this week, and which must I hope can be postponed? How will we manage when the bills cannot be postponed any longer?

Based on CSO EU SILC data, the three groups in relative poverty are, in descending order:

Lone parents (36%)
Couples with 3 children (25%)
Others with children (16%)

In other words, working age households with children. These are the groups most heavily targetted in Budget 2010. This is also confirmed in the early post-budget analysis by Social Justice Ireland (refer to Chart 6.1 in the analysis here).

Following an examinations of the Budget 2010, the ‘Poor can’t pay’ research document gives details of how various individuals and family types are affected with reference to concrete examples:
Case Study 1: Unemployed lone parent
Case Study 2: Student about to graduate
Case Study 3: A person claiming the Blind Pension
Case Study 4: A carer for a person with a disability, with an unemployed son
Case Study 5: An unemployed couple with children
Case Study 6: A working lone parent
Case Study 7: A family managing on unemployment and part-time work

How many bankers, senior civil servants, academic and stockbroker economists have a clue what it is really like to live in any of the above real situations? Lets get real.