The NERI has published, today, its fourth Quarterly Economic Observer (QEO) along with the latest Quarterly Economic Facts (QEF). A link to the full QEO together with a short summary of key points is contained here.
The QEF may be accessed here.
Later today staff of the NERI will present these publications at a special seminar at 3pm (earlier time than normal NERI seminars) in Dublin. All are very welcome to attend. Details are here.
The next (Spring 2013) QEO will be focussed primarily on the Northern Ireland economy while retaining the NERI's all-island mandate in the publication itself.
Showing posts with label Budget 2013. Show all posts
Showing posts with label Budget 2013. Show all posts
Wednesday, 9 January 2013
Monday, 3 December 2012
Clamping Down on Tax Injustice—Sharing the Price of Austerity
Daragh McCarthy: On Wednesday, the EU’s tax commissioner will outline a set of proposals aimed at reducing the level of tax evasion and aggressive tax planning in the EU. The Commission estimates that tax dodging, in all it's various guises, deprives Member States of almost €1 trillion every year.
Reports suggest that the plan will detail the need to agree a concrete, shared definition of a "tax haven", and to create a blacklist of jurisdictions that match the definition. It is hoped that this measure will make it easier to tackle tax evasion and to take action against jurisdictions that fall outside the norms governing the taxation of cross-border corporate transactions.
The Commissioner's report will look at ways of closing-off access to loopholes that facilitate the development of aggressive tax avoidance structures. To this end, it has been suggested that states adopt "general anti-abuse" legislation that would allow tax authorities to disregard any corporate arrangements deemed to solely serve the purpose of tax avoidance. In addition, the Tax Commission will outline the need for countries to insert a clause into their double-tax agreements specifying that one country is precluded from taxing income only if that income is taxed in the other contracting state. It is hoped that is would prevent double non-taxation of income.
Efforts to extract a greater tax yield from transitional businesses must address several challenges. TASC's report highlights the difficulty of assigning a market value to transactions between subsidiaries of the same parent company. By making it hard for officials to identify and place a true value on intra-group deals that purely facilitate tax reduction, multinationals retain the capacity to substantially reduce the potential effectiveness of some of the measures being proposed. The 2006 European Court of Justice ruling in favour of Cadbury Schweppes established that putting subsidiaries in low-tax countries was not necessarily tax avoidance—so long as the activity carried out by the operation was not "wholly artificial"—which makes legislating for reform more problematic. Finally, Feargal O'Rourke recently argued that the increasing prominence of online business is reducing states' ability to collect tax from corporate entities, though it's difficult to establish the extent of the hindrance that this creates.
Effective regulation of the problem requires enhanced international co-operation. It's a well-worn argument, but aggressive tax code competition between countries results in jurisdictions that unilaterally decide to take a harder line with regard to taxing transitional subsidiaries being punished through the loss of foreign investment. Ireland's model of industrial development is, however, largely predicated on enticing multinationals to the jurisdiction on the basis our low-tax regime, so, in the medium term, the proposals represent a potential threat to economy. If the Commission's ideas gain traction—and the EU moves closer to the creation of a Common Consolidated Tax Base—pleasing the multinationals while remaining a full-fledged member of the EU could become an increasing precarious balancing act.
Reports suggest that the plan will detail the need to agree a concrete, shared definition of a "tax haven", and to create a blacklist of jurisdictions that match the definition. It is hoped that this measure will make it easier to tackle tax evasion and to take action against jurisdictions that fall outside the norms governing the taxation of cross-border corporate transactions.
The Commissioner's report will look at ways of closing-off access to loopholes that facilitate the development of aggressive tax avoidance structures. To this end, it has been suggested that states adopt "general anti-abuse" legislation that would allow tax authorities to disregard any corporate arrangements deemed to solely serve the purpose of tax avoidance. In addition, the Tax Commission will outline the need for countries to insert a clause into their double-tax agreements specifying that one country is precluded from taxing income only if that income is taxed in the other contracting state. It is hoped that is would prevent double non-taxation of income.
Efforts to extract a greater tax yield from transitional businesses must address several challenges. TASC's report highlights the difficulty of assigning a market value to transactions between subsidiaries of the same parent company. By making it hard for officials to identify and place a true value on intra-group deals that purely facilitate tax reduction, multinationals retain the capacity to substantially reduce the potential effectiveness of some of the measures being proposed. The 2006 European Court of Justice ruling in favour of Cadbury Schweppes established that putting subsidiaries in low-tax countries was not necessarily tax avoidance—so long as the activity carried out by the operation was not "wholly artificial"—which makes legislating for reform more problematic. Finally, Feargal O'Rourke recently argued that the increasing prominence of online business is reducing states' ability to collect tax from corporate entities, though it's difficult to establish the extent of the hindrance that this creates.
Effective regulation of the problem requires enhanced international co-operation. It's a well-worn argument, but aggressive tax code competition between countries results in jurisdictions that unilaterally decide to take a harder line with regard to taxing transitional subsidiaries being punished through the loss of foreign investment. Ireland's model of industrial development is, however, largely predicated on enticing multinationals to the jurisdiction on the basis our low-tax regime, so, in the medium term, the proposals represent a potential threat to economy. If the Commission's ideas gain traction—and the EU moves closer to the creation of a Common Consolidated Tax Base—pleasing the multinationals while remaining a full-fledged member of the EU could become an increasing precarious balancing act.
Thursday, 29 November 2012
Making Equality Count—the Case for Budgetary Impact Assessments
Clara Fischer: Ireland’s next budget is only around the corner, and people all over the country are bracing themselves for what is set to be another harsh exercise in cuts and tax increases. While much of this will be presented in abstract terms – a few percentages increased here, a few numbers decreased there – the very real effects of Budget 2013 will be keenly felt, especially by those already marginalised within our society.
Given the government’s reluctance to equality-proof or gender-proof the budget, it is more than likely that Ireland will continue in the current trajectory toward increased inequality and poverty, thus exacerbating a situation that has been worsening since the beginning of the economic crisis. In 2010 alone, there was a 25% increase in inequality in Ireland, with the top 20% earning 5.5 times the income of the lowest 20%. The percentage of people in Ireland living in consistent poverty increased, as did the percentage of children at-risk of poverty, which stands at 19.5%. Just recently, it was established that one in ten people in Ireland experiences food poverty.
Those are harrowing statistics, especially in light of the fact that people at the higher end of the socio-economic spectrum increased their wealth by 8% in 2010. The research clearly shows that ‘burden-sharing’, ‘collective belt-tightening’, or whatever similar misnomer successive governments have used and continue to use as a means of justifying disproportionate hardship for those at the bottom, is simply that – empty rhetoric that is not based on fact. The truth is that, at present, the government simply doesn’t have the required information to devise, implement and review policies that might actually result in a more level spreading of the economic burden across different sections of society. Instead, we are seeing the continued,disproportionate targeting of lone parents, people with disabilities, and women, to name but a few, as impact analyses are not undertaken, data is not collected, and information is not made available.
While one could be uncharitable about the political motives behind this, it is important to note that other countries do things differently. In Scotland, for example, it is common practice to publish a draft budget in September, which can then be debated before being finalised in January. Importantly, the draft budget is published alongside an “Equality Statement”, which provides a full impact analysis by equality category (such as gender, age, disability, etc.), as well as by budget theme (e.g. “health and wellbeing”). The budget process itself is also significantly at variance with the Irish process, as an Equality Budget Advisory Group, made up of civil society and government actors, ensures that equality is fully integrated in economic policy-making and planning. The meeting minutes of this group are readily available on the Scottish Government’s website, as are the draft budget, and the attendant Equality Statement.
The Scottish approach is far more transparent, and affords equality a central role in economic policy-making, planning and review. There is no reason why such an approach could not be introduced in Ireland. Given the pressure the government currently finds itself under, especially with regard to economic policies being perceived as unjust and unfair, adoption of an approach more akin to the Scottish model would actually take some of the sting out of the debate. The government would be able to point toward impact assessments and research, and could show that its decisions are based on evidence and carefully planned examination of the circumstances of different sections of Irish society with a view to implementing the most equitable policies. Equality budgeting would also halt the increases in inequality and poverty we’re currently experiencing in Ireland, while satisfying citizens’ demands for economic justice and true ‘burden-sharing’.
For the last number of months, the Equality Budgeting Campaign has been working toward the introduction of such a more transparent and equitable approach to economic policy-making, and has successfully won the support of the Sinn Fein parliamentary party, and of Labour, Independent and ULA representatives. More pressure must be brought to bear, however, upon the powers-that-be if a substantial reform like this is to be made a reality. The urgency of doing so cannot be stressed enough, as the brunt of the economic crisis continues to be borne by those least able to do so. For anybody interested in pursuing equality budgeting with us, we invite you to contact us or to follow us on Facebook, Twitter, or via our website. We also have a petition for the introduction of equality budgeting here. For further details on equality budgeting, see our information booklet here.
Contact:equalitybudgetingcampaign@gmail.com
Dr. Clara Fischer holds a Ph.D. in political philosophy and is a co-ordinator of the Irish Feminist Network. The network is part of a broad-based coalition of civil society organisations and concerned individuals seeking the introduction of equality budgeting in Ireland.
Given the government’s reluctance to equality-proof or gender-proof the budget, it is more than likely that Ireland will continue in the current trajectory toward increased inequality and poverty, thus exacerbating a situation that has been worsening since the beginning of the economic crisis. In 2010 alone, there was a 25% increase in inequality in Ireland, with the top 20% earning 5.5 times the income of the lowest 20%. The percentage of people in Ireland living in consistent poverty increased, as did the percentage of children at-risk of poverty, which stands at 19.5%. Just recently, it was established that one in ten people in Ireland experiences food poverty.
Those are harrowing statistics, especially in light of the fact that people at the higher end of the socio-economic spectrum increased their wealth by 8% in 2010. The research clearly shows that ‘burden-sharing’, ‘collective belt-tightening’, or whatever similar misnomer successive governments have used and continue to use as a means of justifying disproportionate hardship for those at the bottom, is simply that – empty rhetoric that is not based on fact. The truth is that, at present, the government simply doesn’t have the required information to devise, implement and review policies that might actually result in a more level spreading of the economic burden across different sections of society. Instead, we are seeing the continued,disproportionate targeting of lone parents, people with disabilities, and women, to name but a few, as impact analyses are not undertaken, data is not collected, and information is not made available.
While one could be uncharitable about the political motives behind this, it is important to note that other countries do things differently. In Scotland, for example, it is common practice to publish a draft budget in September, which can then be debated before being finalised in January. Importantly, the draft budget is published alongside an “Equality Statement”, which provides a full impact analysis by equality category (such as gender, age, disability, etc.), as well as by budget theme (e.g. “health and wellbeing”). The budget process itself is also significantly at variance with the Irish process, as an Equality Budget Advisory Group, made up of civil society and government actors, ensures that equality is fully integrated in economic policy-making and planning. The meeting minutes of this group are readily available on the Scottish Government’s website, as are the draft budget, and the attendant Equality Statement.
The Scottish approach is far more transparent, and affords equality a central role in economic policy-making, planning and review. There is no reason why such an approach could not be introduced in Ireland. Given the pressure the government currently finds itself under, especially with regard to economic policies being perceived as unjust and unfair, adoption of an approach more akin to the Scottish model would actually take some of the sting out of the debate. The government would be able to point toward impact assessments and research, and could show that its decisions are based on evidence and carefully planned examination of the circumstances of different sections of Irish society with a view to implementing the most equitable policies. Equality budgeting would also halt the increases in inequality and poverty we’re currently experiencing in Ireland, while satisfying citizens’ demands for economic justice and true ‘burden-sharing’.
For the last number of months, the Equality Budgeting Campaign has been working toward the introduction of such a more transparent and equitable approach to economic policy-making, and has successfully won the support of the Sinn Fein parliamentary party, and of Labour, Independent and ULA representatives. More pressure must be brought to bear, however, upon the powers-that-be if a substantial reform like this is to be made a reality. The urgency of doing so cannot be stressed enough, as the brunt of the economic crisis continues to be borne by those least able to do so. For anybody interested in pursuing equality budgeting with us, we invite you to contact us or to follow us on Facebook, Twitter, or via our website. We also have a petition for the introduction of equality budgeting here. For further details on equality budgeting, see our information booklet here.
Contact:equalitybudgetingcampaign@gmail.com
Dr. Clara Fischer holds a Ph.D. in political philosophy and is a co-ordinator of the Irish Feminist Network. The network is part of a broad-based coalition of civil society organisations and concerned individuals seeking the introduction of equality budgeting in Ireland.
Tuesday, 2 October 2012
Choices Around Cutting Child Benefit
Nat O'Connor: Despite the helpful reminder from Joseph Stiglitz that "Austerity has almost never worked", the Government has decided to cut further and deeper in the next Budget, with reports that Minister Noonan will again prefer two-thirds spending cuts combined with one third tax increases.
There are no easy choices left for the Government, as it seeks to close the deficit through €3.5 billion of measures. While it is necessary to close the deficit, there are a couple of significant questions to be asked that provide important context for any consideration of cutting Child Benefit.
First of all, what is the Government's end goal in terms of public versus private provision of vital matters like health and education, childcare and housing, pensions and income?
Secondly, if 'everything' (including Child Benefit) is on the table for discussion, what are the values and principles that will guide the decisions about what to cut and who to tax?
As this chart shows, the net result of budgets to date has been to 'flat line' Ireland's overall level of taxation while reducing public spending. Any talk of a 'balance' between tax measures and spending in the actual effect of recent budgets is simply not true.
The figures are based on the Government's plan (in Economic and Fiscal Outlook, Budget 2012, page D.19) to end up with total revenue of 34.6 per cent of GDP and total public expenditure of 37.5 percent of GDP by 2015. While these figures might be slightly different in Budget 2013's documentation, there is little evidence of a changed strategy by Minister Noonan.
What level of public services can be delivered through spending at around 37.5 per cent of GDP?
The answer is, not anything like as much as what was delivered at the height of the boom and not the same kind of 'welfare state' as most Western European countries. The long-term EU27 average level of spending is roughly ten percentage points higher than Ireland. As such, if the Government chooses such a low target level of public spending, it should come as no surprise that some core elements of the 'social contract' between Ireland's State and its citizens are now being questioned.
One of those core elements is Universal Child Benefit. There are three clear features of this payment, which indicate fundamental values and principles: (1) It goes to all children equally; (2) It is paid to all citizens with children regardless of their income, as part of the 'return on investment' of taxation and social insurance; and (3) It is a payment from everyone to Ireland's children, regardless of whether or not they have children of their own.
Universal Child Benefit should not be considered a 'sacred cow' any more than the 12.5 per cent corporate tax rate or the existence of the Senate. However, these are major building blocks of the Irish social contract and they should not be radically changed without serious discussion of the implications.
Instead of an open discussion on the issue, there is a risk that the guiding principles underpinning Universal Child Benefit are being discarded without adequate discussion of the changed nature of Ireland's welfare state and social contract that is implied by those changes.
For example, there are endless reports that wealthy people don't need Child Benefit and should not get it. Somehow it is taken as the 'obvious' and 'easy' solution to means test Child Benefit or tax it. However, this argument sweeps aside all three guiding principles. Universal Child Benefit is a social contract, not an individual contract between a person and the State. It is only from an individualistic perspective that it makes sense to say Person A is too rich, therefore tax or cut his/her Child Benefit.
In reality, the administrative burden involved in means testing, plus the highly contentious issue of deciding who needs it and who can't have it, is expensive and fraught with difficulties. A much simpler solution is to say that, if some wealthy people don't need Child Benefit, than simply increase general taxes on wealthy people. At the end of the day, we all benefit from Ireland's children who are the future tax payers, health workers and others that we will need when we are old (whether or not we have children ourselves).
However, if we decide that Universal Child Benefit in its current form is too expensive (because of the decision by Government to target public spending at 37.5 per cent of GDP) than it is possible to imagine alternative uses of public money that would uphold the values and principles of the welfare state.
For example, if we decided that the provision of municipal crèches and pre-school education was a pressing social need (which it is) then we could provide places free-of-charge, to all children equally, regardless of their parents' means and paid for by everyone; because we will all benefit from all children in Ireland having a better start in life and better educational development.
For example, the OECD advises on the benefits of spending early on children.
This chart from another OECD presentation shows that Ireland (in 2008) had the highest net childcare costs in the OECD. No wonder so many families rely on Child Benefit payments!
What is so rarely mentioned in Ireland is that when taxes are low, people end up paying privately out their own pockets. It can be cheaper to pay more tax or social insurance to purchase certain kinds of goods and services collectively. And of course, when we pay collectively, we all share the cost of our children from whose future contributions we will all benefit. When we pay privately, the burden of paying individually is placed squarely on the shoulders of young families, who are not the best placed to carry that burden.
If we see Universal Child Benefit being systematically dismantled in the next Budget (as is suggested in recent reports), while we retain tax breaks, such as those for private pensions that massively benefit people with the highest incomes, then the fundamental values underpinning Ireland's budgetary policy need to be questioned.
The next three or four Budgets are not just about closing the deficit, they are about the nature of the future relationship and social contract between citizens and the State in Ireland for decades to come.
There are no easy choices left for the Government, as it seeks to close the deficit through €3.5 billion of measures. While it is necessary to close the deficit, there are a couple of significant questions to be asked that provide important context for any consideration of cutting Child Benefit.
First of all, what is the Government's end goal in terms of public versus private provision of vital matters like health and education, childcare and housing, pensions and income?
Secondly, if 'everything' (including Child Benefit) is on the table for discussion, what are the values and principles that will guide the decisions about what to cut and who to tax?
As this chart shows, the net result of budgets to date has been to 'flat line' Ireland's overall level of taxation while reducing public spending. Any talk of a 'balance' between tax measures and spending in the actual effect of recent budgets is simply not true.
The figures are based on the Government's plan (in Economic and Fiscal Outlook, Budget 2012, page D.19) to end up with total revenue of 34.6 per cent of GDP and total public expenditure of 37.5 percent of GDP by 2015. While these figures might be slightly different in Budget 2013's documentation, there is little evidence of a changed strategy by Minister Noonan.
What level of public services can be delivered through spending at around 37.5 per cent of GDP?
The answer is, not anything like as much as what was delivered at the height of the boom and not the same kind of 'welfare state' as most Western European countries. The long-term EU27 average level of spending is roughly ten percentage points higher than Ireland. As such, if the Government chooses such a low target level of public spending, it should come as no surprise that some core elements of the 'social contract' between Ireland's State and its citizens are now being questioned.
One of those core elements is Universal Child Benefit. There are three clear features of this payment, which indicate fundamental values and principles: (1) It goes to all children equally; (2) It is paid to all citizens with children regardless of their income, as part of the 'return on investment' of taxation and social insurance; and (3) It is a payment from everyone to Ireland's children, regardless of whether or not they have children of their own.
Universal Child Benefit should not be considered a 'sacred cow' any more than the 12.5 per cent corporate tax rate or the existence of the Senate. However, these are major building blocks of the Irish social contract and they should not be radically changed without serious discussion of the implications.
Instead of an open discussion on the issue, there is a risk that the guiding principles underpinning Universal Child Benefit are being discarded without adequate discussion of the changed nature of Ireland's welfare state and social contract that is implied by those changes.
For example, there are endless reports that wealthy people don't need Child Benefit and should not get it. Somehow it is taken as the 'obvious' and 'easy' solution to means test Child Benefit or tax it. However, this argument sweeps aside all three guiding principles. Universal Child Benefit is a social contract, not an individual contract between a person and the State. It is only from an individualistic perspective that it makes sense to say Person A is too rich, therefore tax or cut his/her Child Benefit.
In reality, the administrative burden involved in means testing, plus the highly contentious issue of deciding who needs it and who can't have it, is expensive and fraught with difficulties. A much simpler solution is to say that, if some wealthy people don't need Child Benefit, than simply increase general taxes on wealthy people. At the end of the day, we all benefit from Ireland's children who are the future tax payers, health workers and others that we will need when we are old (whether or not we have children ourselves).
However, if we decide that Universal Child Benefit in its current form is too expensive (because of the decision by Government to target public spending at 37.5 per cent of GDP) than it is possible to imagine alternative uses of public money that would uphold the values and principles of the welfare state.
For example, if we decided that the provision of municipal crèches and pre-school education was a pressing social need (which it is) then we could provide places free-of-charge, to all children equally, regardless of their parents' means and paid for by everyone; because we will all benefit from all children in Ireland having a better start in life and better educational development.
For example, the OECD advises on the benefits of spending early on children.
This chart from another OECD presentation shows that Ireland (in 2008) had the highest net childcare costs in the OECD. No wonder so many families rely on Child Benefit payments!
What is so rarely mentioned in Ireland is that when taxes are low, people end up paying privately out their own pockets. It can be cheaper to pay more tax or social insurance to purchase certain kinds of goods and services collectively. And of course, when we pay collectively, we all share the cost of our children from whose future contributions we will all benefit. When we pay privately, the burden of paying individually is placed squarely on the shoulders of young families, who are not the best placed to carry that burden.
If we see Universal Child Benefit being systematically dismantled in the next Budget (as is suggested in recent reports), while we retain tax breaks, such as those for private pensions that massively benefit people with the highest incomes, then the fundamental values underpinning Ireland's budgetary policy need to be questioned.
The next three or four Budgets are not just about closing the deficit, they are about the nature of the future relationship and social contract between citizens and the State in Ireland for decades to come.
Thursday, 9 August 2012
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?
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?
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