Is Ireland Getting More Equal?

James Wickham:  Latest CSO figures...
 
On February 1st the CSO released the latest Irish results of the EU-SILC (European Union Survey on Income and Living Conditions).   It’s important to notice that these figures are for the year 2015 so they don’t necessarily describe the situation today in February 2017.  If the trends identified in these figures in 2015 have continued, the situation today should be even better.

Things are getting better?

Overall these figures show some welcome improvements: employment of course has been rising, but also for nearly everyone income has risen and for most people deprivation rates have fallen.  Crucially there has been a small but significant reduction in income inequality.

Do these results challenge the claim that inequality and deprivation continue within the recovery?  In terms of the Gini coefficient as a simple measure of inequality, certainly inequality has fallen somewhat:  in 2015 the Gini coefficient for annual equivalised income was 30.8, down from 32.0 the year before (Chart 1). 

Chart 1

But there is an enormous caveat.  These figures refer to the amount of disposable income that people have.  They say nothing about what people spend this money on.  If essential services (childcare, health, education, public transport) are effective and free, then the society will be more equal than in a society with a similar level of inequality in disposable income.  Furthermore, it may be the case that specific price increases (or increased taxes or charges) effect those on low incomes most.  In Ireland this seems to have happened with housing costs increasing – but most for those in the lower income groups. Nonetheless it is certainly possible that there has been some small reduction in income inequality. 

Measuring poverty

A crucial aspect of inequality is the extent of poverty.  This gets us closer to people’s actual experience.  The simplest measure of poverty is the so-called ‘at risk of poverty rate’, that is to say those people whose income is less than 60% of the median.  That hardly means that the poor are always with us.  It’s perfectly possible for nobody to have an income less than 60% of the median. Indeed in these terms some societies with broadly similar GDP to Ireland do better than us    – and many do worse (Chart 2).  Unsurprisingly, the at risk of poverty rate is lower in Denmark and Sweden than in Ireland.  Equally unsurprisingly, the rate is dramatically higher in Greece.  According to the latest CSO figures, the proportion of those at risk of poverty in Ireland stood at 16.9% of the population in 2015 – a non-significant fall compared to 2014.

Chart 2

Source: Eurostat [from EU-SILC]

Measures of material deprivation get us closest to the real experience of inequality.   The CSO defines the deprivation rate as the proportion of the population unable to afford two or more items from a list of eleven basic requirements (e.g. heating the house, a warm waterproof coat…).  This deprivation rate did fall from 2014 to 2015 but was then still 25.5% of the population.  The deprivation rate is significantly higher in households with children.  As Chart 2 shows, in Ireland the deprivation rate is significantly higher than in Scandinavia and indeed marginally higher even than Greece.  However, if we focus on extreme deprivation, the lack of four or more items, then Ireland appears more like a normal European country and now very different to Greece (and indeed most of the New Member States).    

A final statistical measure is that of ‘consistent poverty’, that is to say, the proportion of the population who both have an income below 60% of the median and live in a household without two or more of the list of basic necessities.  The new data shows the rate of consistent poverty staying essentially unchanged between 2014 and 2015 (it fell from 8.8% to 8.7% but this is not statistically significant).  As we have seen, overall deprivation rates have fallen, but worryingly for those in consistent poverty they have hardly changed at all.  In many ways therefore, those most at risk of poverty have actually been falling behind.

Comparing what matters

All of this depends on looking at net income – income after tax and social benefits. Every now and then you will hear people claiming that Ireland is the ‘most unequal society in Europe’ because of the inequality of gross incomes (i.e. before tax and transfers). Yet what matters for people’s living standards is not their gross pay, but how much money they actually have to spend – after tax and after any benefits.  To focus on gross income inequality while ignoring tax and benefits is like saying that Ireland’s summer is sunnier than Spain’s. Well, if you just count the hours of daylight that’s true, but there is the little matter of clouds and rain…

Chart 3

Source: Eurostat

In these terms the problem in Ireland is not that compared to other European countries we are uniquely unequal.  Chart 3 shows the Gini coefficients for all EU28 member states and ranks them from left to right in terms of inequality of disposable income:  states range from Slovakia, in these terms the most equal, to Lithuania, the most unequal.  Ireland is roughly in the middle.  Just a normal European country you might say.  However the right hand column shows the inequality of gross income, excluding transfers, and here Ireland is clearly the most unequal.  Furthermore, we have the largest gap between gross income and disposable income.

In Ireland the state has to work extraordinarily hard even to ensure our ‘normal’ level of inequality.  So much state expenditure has to go on income support that there is little left over for services and capital investment.  And in turn, the resulting deficiencies in education, childcare and health mean that as soon as they can afford it (and even if they can’t), people opt for private provision.  Rather less obviously, there is the question of state competence.  In some areas the Irish state is efficient and effective, but it clearly lacks the competences skills and institutional knowledge to organise effective healthcare and social services and is notoriously incompetent in physical planning and infrastructure.

Minimum Essential Budgets

Nat O'Connor: The TCD Policy Institute recently published a volume by the Vincentian Partnership for Social Justice and Dr Micheál Collins, which examines the 'minimum essential' budgets required by different household types. The Vincentians have been working on this kind of study for a number of years, and a copy of the report can be found under publications on budgeting.ie.

I think Dan O'Brien rather unfairly criticises the report in his Irish Times editorial. He argues that taxpayers’ money should not have funded the research, and that "Impartiality and objectivity are hallmarks of academic research. Publishing the views of a lobbyist blurs the line, thereby undermining TCD's credibility."

In fairness, one of the authors, Micheál Collins, was working as an academic member of staff at TCD at the time of receiving the grant. If anything, his work on the report has helped document the method and findings in a more academically rigorous way. Money was not being given to lobbyists, as Dan O'Brien portrays it.

Every piece of research comes from implicit or explicit normative assumptions. What matters is whether or not the method is robust and the evidence is clearly visible so that others can make alternative interpretations of the same data. In fairness to this study, it is based on an established, qualitative method involving focus groups who discuss what they regard as a reasonable standard of living and it does provide quite a lot of detail about the weekly costs they regard as 'minimum' broken down under a range of headings.

This standard of living does involve more than survival and includes a modest degree of "social inclusion and participation". However, Appendix A shows what is involved in minimum social participation remains frugal. For example, the €12.66 per week in a family budget for socialising is based on ten social events per adult each year. The researchers then go to the local shops and services and check out the prices to pay for the list.

What the report highlights is that, unsurprisingly, a great number of people on modest incomes in Ireland do not have an income sufficient to meet a 'minimum essential' budget. In particular, families with children in a number of cases have insufficient incomes. Moreover, it is of concern that a single person working full-time on the minimum wage also cannot afford an essential budget.

However, some households do have sufficient income. For example, a pensioner couple's income from the non-contributory state pension is sufficient to cover their minimum essentials because of the range of other non-cash supports, like fuel allowance, free travel and medical card. That's a useful validation of the welfare system and hardly a 'lobbyist' perspective.

What is missing from the report is a more full exposition of the costs. The publication notes that grocery prices are typically based on the least expensive supermarket 'own brand' items, but we only see aggregates and it would be useful to see item-by-item breakdowns; I imagine that this would be of particular use to the Department of Social Protection and services like MABS who advise people on how to budget their income. It should also be of interest to businesses to see evidence of market niches for cheaper goods and services.

The focus on weekly itemised expenditure is also of value because it highlights in very tangible terms how vulnerable household budgets are to relatively small ‘shocks’, like medical expenses or the costs of a funeral. What happens in reality is that people on low incomes are particularly badly insulated against such one-off expenses and these can lead to the use of moneylenders. In 2007 (latest survey) more than one in five people had difficulty accessing banking facilities (i.e. getting a basic bank account). This gap is filled for people on the lowest incomes by “52 licensed moneylenders in Ireland, 36 of whom operate ‘doorstep collection’ businesses” and who can charge over 150 per cent interest on small loans. See TASC (2010) Life and Debt.

The issue of one-off 'shocks' emphasises the importance of non-cash supports as 'shock-absorbers'; such as the medical card or social housing. These help people to cope with sudden expenses, without having to use up any savings they might have or take a loan. The study also usefully opens the door to more in-depth examination of where non-cash supports can help people get by without getting into debt.

The impoverishment of Ireland

Michael Taft: The CSO has produced the preliminary results from the annual EU Survey on Income and Living Conditions. And the results show an inexorable decline into poverty, deprivation and hardship (see also Sinéad Pentony's post here).

The headline figures show that those ‘at risk’ of poverty have increased from 14 percent in 2009 to nearly 16 percent last year. However, we should treat this cautiously for it is not an absolute measurement. This ‘at risk’ figure is based on 60 percent of the median income (that is, the figure at which 50 percent of the population is below and 50 percent above). When the median figure falls, as it will during the recession, so does the at-risk poverty threshold of 60 percent.

Since equivalised median income fell between 2009 and 2010, so did the threshold – by `10.2 percent each. This sets up the anomalous situation whereby someone on an equivalised income of €12,000 in 2009 would be below the at-risk threshold. If their income fell by 5 percent last year you’d assume they would be worse off (and they would be). However, since median income fell (and, so, the threshold) by a larger amount, that person is now not considered at-risk of poverty.

This doesn’t undermine the validity of the relative at-risk threshold – but we should always be careful about what relative measurements tells us and what they don’t. For instance, even with the threshold falling by 10 percent, there are still more people in the at-risk category.

There is, though, another measurement we can turn to that assesses in absolute terms another definition of poverty: the deprivation indicators. This measures how many people experience certain types of enforced deprivation. This tells a rather alarming story.

The most widespread deprivation indicator shows that one-in-five of our fellow Irish residents can’t afford to replace worn out furniture (this rises to 30 percent among those living in poverty risk but even those not living in poverty risk suffer nearly the national average).

Further, we are creating a nation whereby a number of people cannot afford simple social activities – an evening out, having friends over. These are top deprivation categories. That one-in-ten can’t afford heating at some stage (rising to nearly one-in-five for those living in poverty risk) tells a real story of unhealthy living standards.

The growth in just the past few years in people suffering these deprivation experiences tells the real story behind the growing impoverishment of Irish society.

More than one-in-five of all people suffer two or more of the above deprivation experiences. Almost as many who are not at risk of poverty also suffer these experiences. This is a serious indictment of the failed austerity policies. These proportions have risen dramatically since 2007.

It is likely that deprivation will increase. These numbers take us up to 2010. However, the last budget cut social protection rates, Child Benefit and Rent Supplement, while imposing extra taxation (though the USC and cutting personal tax credits) on the low-paid. This will drive more people into more deprivation experiences.

The idea that we can promote economic growth and repair public finances with policies that drive more people into deprivation is an economic nonsense and a social obscenity. In the run-up to the Budget all Government Ministers and backbenchers should memorise and internalise these figures.

And act accordingly.

Inequality and the UK Riots

Aoife Ní Lochlainn: Amongst the acres of news coverage devoted to the UK riots, comes an interesting piece of work in the Guardian, ‘Mapping the Riots with Poverty’. Using Indices of Multiple Deprivation which are published by the Department of Communities and Local Government, the researchers mapped poverty and the location of the riots. Unsurprisingly, the majority of the incidents took place in or adjacent to the poorest areas. Elsewhere in the Guardian, Nina Power looks at the riots in the context of child poverty and inequality, writing that Haringey (the borough that includes Tottenham,) has the 4th highest level of child poverty in London. Over at the New Economics Foundation Blog, riot-related discussions centre on inequality and how our ‘materialist economics’ encourages us to work and thus yearn for ‘tat’.

Social Justice Ireland

Slí Eile: Some strong and clear messages emerge from Social Justice Ireland in its latest Socio-Economic Review. It makes the case that: 'It is profoundly wrong for example that poor people carry a major burden while senior bond-holders, who carry a large part of the responsibility for Ireland’s implosion, make no contribution to sharing the burden.' The full document may be downloaded here.

VAT paid by people on low incomes

Nat O'Connor: This is a follow up to comments on the Corporation Tax post about VAT.

As was pointed out to me, although the main VAT rate is 21%, this means that for every €100 I spend, €17.35 is tax (i.e. 17.35 per cent). That is because €82.65 plus VAT at 21 per cent is €100. (That is, €100 minus €82.65 equals €17.35).

Similarly, if I buy things at the 13.5% reduced VAT rate, I pay €11.90 per €100. And I pay €4.58 per €100 at the 4.8% super reduced VAT rate.

Let's work out how much VAT I might pay if I was on a low income.

The Vincentians (http://www.budgeting.ie/) provide typical weekly baskets of goods in their analyses. Let’s imagine that I am living on an example weekly household budget they give, as follows:

• €40 on Food;
• €10.50 on Travel;
• €63.00 on Housekeeping;
• €19.24 on Clothing;
• €11.00 on Rent;
• €4.00 on Education.

This comes to €147.06 per week (although the point of the Vincentian study is that the family in question only had an income of €121.15).

But let’s just stick with the €147.06 total for the moment. I got more details on Ireland’s VAT from an EU publication. This gives the following information about VAT, based on the above spending:

• Basic food has 0% VAT, but some processed food attracts 4.8% or 13.5%. Let’s split this three ways across my €40;
• Travel is exempt from VAT;
• Housekeeping includes ESB, fuel, telephone, TV licence (€3.50 a week), cleaning products, pocket money for kids, bus fares, chemist and €8 for social life. I’m going to assume 0% VAT for most of this, except for (a) the €8 social life, which I am going to allocate to two pints of beer at €4 each (VAT 21%), and (b) €10 telephone and €5 on cleaning materials at 21% VAT;
• Clothing and shoes include 13.5% VAT;
• Rent in social housing includes 13.5% VAT;
• I’m going to count Education as 0% VAT as well (e.g. books are 0% as I’m not sure about education services; although newspapers include 13.5% VAT).

In this scenario, my VAT tax bill will come to €8.49 out of the €147.06 I spent; that is 5.75 per cent of my spending.

That’s surprises me, as I thought it would be higher given that I usually think about VAT at the standard rate of 21%. (Please let me know if I have missed something important in this calculation!)

I think I can reasonably include the TV licence as another €3.50 tax, for €11.99 total (8.1 per cent of my spending). Carbon tax, Excise, etc. are also relevant, but I haven’t time to make a full study out of this.

Nearly €12 paid in tax is highly relevant in the real-life context that the Vincentians are describing, where the family in question had a shortfall of €26.59 in making ends meet every week.

It also cannot be said, as one Government minister did recently, than many half of households in Ireland are “not paying a bob of tax”.

For contrast, in a 2010 report (on 2008 data) Revenue reports 56 cases of people earning more than €250,000 and paying less than 5% effective income tax. If we imagine €50,000 of this income is spent on goods at 21% VAT, this comes to another 3.5% of their income; that is, less than 8.5% tax in total. So on a very low income (€7,682 per year), I could be paying close to the same proportion of my income on tax as someone earning a quarter of a million euro!

And unlike people on high incomes, who can avail of many tax breaks, there is no relief from VAT for people with insufficient incomes to buy the essentials. Instead, many people on low incomes go to moneylenders who can legally charge 150% interest or more (see for example Life and Debt, TASC's latest report).

Options for future economic policy in the EU

Slí Eile: I very much agree with Paul Sweeney, writing on this blog site recently

It seems to me that we need more effective EU institutions. We also need EU leadership which is more responsible to its people. Neither are in this plan. But the European people gave the conservatives the majority – even after the collapse of a virulent form of liberalism espoused by those conservatives.

In the new draft strategy for EU2020, as with many EU communications we have a case of all things to all people with something for everyone in the audience – competitiveness, innovation, green technology and of course social inclusion.

While the EU plays an important role as a global player – its institutions and provision for coordination of fiscal and monetary policy across the Union remain weak relative the scale of the challenge, the competition from other world players and the diversity of cultures and levels of economic development within the Union –including the Eurozone.

A major criticism of the draft Strategy is that it speaks of ‘growth’ (growth in GDP) as this is the holy grail and the basis on which various other policy goals can be realised. What about the work of the ‘Sarkozy Commission’ on measuring progress that goes beyond simple GDP?

There are some ideas in the document about addressing unemployment – especially youth unemployment – (e.g. Eures jobs) based on ‘mobility across the EU’ [a slightly ambiguous matter given the history of unemployment and migration in an Irish context]. However, there is a complete lack of how this will be implemented and coordinated and, more to the point, how the devastating increase in unemployment among young Europeans can be reduced as fast as possible. Europe will pay a high price if this problem is not tackled effectively and quickly.

A key question to be asked – just as with the Lisbon Agenda for 2010 – can the EU and its Member States deliver on the multiple goals it can set itself? If the future needs to be very different to the past (pre-recession) modes of production and consumption is the political will there to effect change and to learn the lessons from the catastrophic failure of governance, regulation, trust and market stability witnessed in 2008?

The social dimension of EU2020 is weak and needs to be greatly strengthened.
May be I am missing something – but was there a debate on this draft in the Oireachtas recently? Someone might point to a web link. And has anything replaced the work of the (valuable) National Forum on Europe (axed in line with the Big Snip) in facilitating exchange of information and ‘townhall’ meetings up and down the country?

Social Justice Ireland made a good input during the consultation process towards Europe2020 here.

to quote directly –

The EU 2020 Strategy should therefore speak about values; it must address how the EU proposes to deliver solidarity and a just distribution of resources and well-being; how it proposes to contribute to the development of the impoverished parts of the world as well as fostering a people-centred and green economy.

The document reminds us that

‘80 million people were at risk of poverty prior to the crisis. 19 million of them are children. 8 per cent of people in work do not earn enough to make it above the poverty threshold. Unemployed people are particularly exposed.’

A notable feature of EU2020 is the absence of hard quantitative targets and specification of pathways to achieve particular goals - e.g. ‘Reduce the number of Europeans living below national poverty lines by 25%, lifting 20 million people out of poverty’. Why not just abolish poverty? Important as rolling out ‘ultra-fast’ (‘fast’ isn’t good enough you know) internet connections is – isn’t abolishing poverty more urgent? How about ultra-fast progress on tackling poverty and the causes of poverty to borrow a phrase from another domain.

Low corporate taxes and poverty

Sli Eile: In a letter to the Irish Times, Justin Kilcullen of Trócaire imagines what it would be like if ‘thousands of Africans, Asians, and Latin Americans – poor farmers, mothers and their hungry children, unemployed men from the immense cities, people living with HIV – have gathered at the Garden of Remembrance’ and proceeded to Dáil Eireann. The scandalous cut in Irish Overseas Development Aid and, with it, the reversal of commitments in regard to 0.7% of GNP by 2012 has received relatively little attention. As public services, in Ireland, enter rationing mode, the recipients of Irish overseas aid are the silent victims of Irish fiscal and banking sins in the recent past.

A significant window into the world of trade, taxation and resource transfer has been opened by research work undertaken on ‘trade misspricing’ and reported in an article by David McNair in the Irish Times recently. The nub of the argument and the main finding of research is that countries – like Ireland – have been party to a huge and difficult-to-quantify resource transfer by means of a combination of multinational price-transferring and low corporate tax. The art of ‘trade mispricing’ or simply tax-dodging is likely to be massive. Research work by Professor Simon Pak and cited in the article by David McNair suggests that

…. between 2005 and 2007, this abuse resulted in a total amount of capital flow from non-EU countries into the EU and US of €850.1 billion. If tax had been levied on this capital at current rates, non-EU countries would have raised €279 billion in revenue.

To put this in perspective:

Together, the total tax loss by emerging and developing countries is more than the annual global development aid budget and much greater than the $40 billion to $60 billion the World Bank has estimated would be required annually to meet the millennium development goals aimed at halving extreme poverty by 2015

So what for Ireland? The report found that

While most of the estimated €5.8 billion mis-priced capital that flowed into Ireland between 2005 and 2007 came from high-income countries, €268 million of that total came from the world’s 49 poorest countries. That figure was more than a quarter of Irish Aid’s total aid budget for 2008 (€899 million).

In summary, what we have been giving with one hand we have been taking back with the other. Now that ODA is being cut back drastically could it be that Ireland becomes a net beneficiary where less economically developed countries are concerned? Certainly, Ireland has benefited from the skills and contribution of immigrants in the boom years and there are other means by which countries such as Ireland benefits directly or indirectly from favourable and unfair trade deals.