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.

Child Benefit and our values

Tom McDonnell: As Peadar Kirby said in the blog earlier today:
"Budgets should be seen as opportunities to debate national choices for expenditure and taxation, choices that ultimately involve values about the sort of society we want in the future."

So what do we value in this society? Deeds not words inform us about a person's values. On Monday and Tuesday we will learn the values of Fine Gael and the Labour Party.

The children's allowance was introduced in 1944 by Sean Lemass during the Emergency. It is a valuable tool for dealing with child poverty. The payment is for the child and is intended to deal with the cost of caring for the child.

However it seems that child benefit and the other child related social transfers are now in the firing line. Evidently these are luxuries for the good times. Despite having one of the lowest tax takes in the entire Western world when measured as a proportion of GDP we are told we cannot afford such luxuries. The special interests and their mouthpieces will say that you cannot tax wealth creators (such as themselves). They will bleat that if you put a further 2% tax on those earning over two or three times the average industrial wage the poor gossoons will simply lose the incentive to work. Heaven forbid we would cut back on pension related tax breaks, 80% of which goes to the top 20%.

Child benefit payments are not a luxury. For many people they are simply about keeping above water. Carol Hunt presents an excellent argument here. As Carol puts it:
"I really wish that we lived in a world where child benefit wasn't needed. A country where so many mothers didn't wait for the first Tuesday of the month -- the pain if it falls on the 4th or 5th -- with nothing left in the fridge. Where they wait for the one and only payment that they know they can spend on their child, on groceries, on childcare and other necessities.

I wish we lived in a world where couples split their income equitably, where women's contribution within the home was financially appreciated, where women weren't taking mainly low- paid part-time jobs, where working mothers were supported with subsidised childcare.

But we don't. Instead, we have the blunt one-payment-fits-all child benefit which is meant to give a much-valued nod to the sacrifice and cost of being a parent -- specifically a mother."

Means testing of course has its own difficulties as the Guardian points out here.
- Means-tested benefits are costly to administer and prone to high levels of error. Complexity and stigma reduces take-up. Given the hostility displayed by political parties and the media towards benefit claimants, it's hardly surprising that families are loath to apply for them.One parent told the Child Poverty Action Group: "You're made to feel like you're sponging off the system."

Taxing or means testing child benefit would impact on women's labour force participation decisions. Ireland ranks 74th in the world for female-to-male labour force participation (see page 452 of the World Competitiveness Report here). This places us on a par with Botswana, Mauritania and Peru. We do not have the type of structures in place to encourage women into work that are commonplace in most Western economies, for example free child care facilities. This is a consequence of our low tax regime.

As I said. We will soon find out the values of this Government.

Between the rocks

Slí Eile: Here we go again. Softening-up time. The summer schools, the rain, the Dáil holidays and…. exclusive inside news stories on what the Government might be thinking about. (strategic investment gosh not in your life) …..Somehow it reminds one of the summer of 2009 and the summer of 2008….Now, sir, would you like your leg amputated or your right arm? Good, lad, you have taken so much tough pain as a result of tough choices in the last 18 months that things are beginning to look up. The markets say so (really?). Now, the public finances are beginning to stabilise as the underlying indicators have stopped getting worse (well except for unemployment and emigration but who really cares about that ….).
Never before have statistics been so cruelly tortured to find inflection points and decelerations in the rate of decrease and positive signals from one Quarter’s data or one month’s data as if trends were linear and smooth (note that the statistical requirement arbitrarily used by some analysts to see two consecutive quarters of growth to announce a recovery has been left aside as GDP growth in Q1 of 2010 was enough to spin the story).
One of the aspects of being caught between a rocky hard place and a hard place is that the rocks have been arranged and the thinking arteries hardened so as to avoid any consideration of alternatives. Instead, we have the delusional recovery by a 1,000 cuts. But, the cuts agenda is running into trouble on three counts:
The underlying parameters (leaving aside Anglo which is a mighty big elephant in the fiscal parlour) are not shifting south rendering the 2014 SGP looking like the Emperor without a leaf.
Rising unemployment and contracting income are driving up some of the fiscal stabilisers such as eligibility for medical cards, unemployment welfare and other ‘automatic’ payments.
The politics of cutting again by some €3bn and then again by some equal amount in Election Year minus one look increasingly problematic.
Here’s the story:
1 Public sector pay bill (around 30% of total public spending) is pretty much pegged for the next three years unless there is some ‘unexpected deterioration’ in public finances.
2 Government is moving at snails pace to reform taxation especially in those areas where the rich gain the most (property, tax breaks and financial transactions). The promise of economies through changes in work practices doesn’t translate into lower public spending. Such changes in practices and greater flexibility might enable – over time – a better quality and quantity of public service (however measurable) for a given input of persons or money. It might even enable Government to – eventually – reduce spending by employing less staff in the key sectors (health, education and central/local government for a given outcome of public service). My bet is that:
* Numbers employed will grow in some areas and stagnate or fall a little in others
* The (nominal) pay bill will rise very slightly due to automatic increases (e.g. increments) as well a structural changes arising from the shedding of low-paid and low-skill jobs over time (just watch which vacancies are being filled).
* ‘quality’ improvements in service will be glacial
* Grass-root pressure will build up to revisit the terms of the nominal pay freeze especially as GDP starts to grow and prices erode real wages.
3 The Greens have – for now – taken ‘free fees’ and further changes to the staff-student schedule at primary and secondary level education off the agenda. That’s a lot of cash.
4 The banking tragedy (farce?) looks fearsome – with a roll over of debt bunched to maturity at end of September 2010 and with continuing pressures on the banks a fresh round of recapitalisations cannot be ruled out (thus pushing the measured General Government deficit to over 20% in 2010 and possibly 15% plus in 2011).
The counter-factual of ‘doing nothing’ – i.e. not following the deflationary line since 2009 is adduced as reason to stay the course and continue cutting more. Yet, nobody has shown, empirically, what would have happened if Government had adopted a different growth strategy and made different choices. Everything is predicated on static zero-sum analysis.
The choice of deflation (and it is a choice) leaves Government with some pretty stark new choices within its medium-range deflationary strategy:

- More cuts to an already crisis-ridden health system
- Amputations to significant public service programmes in local authorities and central government (you can guess which)
- Larger deflationary measures than those spoken of to date.
- Revisiting the Croke Park deal
- Further cuts in social welfare targeting this time older folk and children (so much for the fine sentiments behind the proposed Childrens’ Rights referendum)
- An IMF-EU rescue plan later on
- An early election

Take your pick.

Fancy being in the opposition benches? – supporting the broad parameters of the fiscal contraction and yet hedging bets on just how these cuts would be implemented and which taxes would be raised if one were in Government.
Some day, the case for a sane, investment strategy to grow our way out of this fiscal, banking and human skills utilisation hole will become inescapable.

Child Benefit and teddy bears' picnics

"As we are all frog-marched down to the Finance Minister’s picnic, let’s see what effect cutting Child Benefit will have. For all the indications are that this payment is in the firing line. Many have argued that it’s a no-brainer – sure, doesn’t Child Benefit get paid to rich folk? Doesn’t that mean it’s regressive? We could cut the payment without harming (too much) low and average income groups – and save the state a lot of money". You can read the rest of Michael Taft's post on the effects of a cut in Child Benefit here.