Who will pay more and who will be protected in Budget 2012

Sinéad Pentony: Budget season is well and truly underway and the slow drip feed of information and kite flying continues. The broad thrust of the fiscal adjustment is presented as a fait acompli – ‘we have no choice’ but to continue on the long hard road of austerity, with those least able to absorb reductions in income and access to essential services being faced with bearing the brunt of the adjustment. TASC and others continue to point out that there is an alternative and this involves ensuring that those who can afford to make a greater contribution to the adjustment are made to do so.

Once again, child benefit appears to be in the firing line and it's filling plenty of column inches. There are also plans for a range of other savings across the Department of Social Protection In the area of health, the proposals being considered include the imposition of an annual fee of €50 for medical card holders along with increases in other user health charges covering prescriptions and access to A&E services.

Even if only some of these proposals make their way into the budget, when they are combined with the confirmation that the main rate of VAT will be increased by two percentage points, this year’s budget is looking very similar to last year’s budget.

In contrast to the debate about where the cuts should be made and by how much, last week Revenue provided details on the amount of tax that was collected through the ‘domicile levy’. This levy of €200,000 was introduced in Budget 2010 on Irish people who are domiciled in Ireland but non-resident for tax purposes. The levy is applied to individuals whose income and assets exceed certain thresholds.

Revenue reported that less than €1.5 million was collected and this was based on a average return of €147,000 by ten individuals who are liable for the levy. The returns are made on a self-assessment basis. Revenue also estimated that, in 2009, there were almost 6,000 individuals who were classed as non-resident for tax purposes and that 440 of these were considered to be very wealthy.

By anyone’s standard,s the domicile levy has failed to ensure that this particular group of Irish people is made to pay their fair share as part of the adjustment. The question is - will the up-coming budget send a clear message that this situation is not going to be tolerated any longer and that other measures are going to be put in place to ensure that the wealthiest Irish people will be made to contribute to the fiscal adjustment on a more equitable basis?

The Community Platform's taxation proposals have highlighted the types of measures used in other countries to tax wealthy non-residents – the US citizen-based tax and the French tax on global assets. The TASC proposals also include measures to increase the level of taxation on assets and passive income from assets held in Ireland, along with reducing the number of days that non-residents can be present in the State from 183 to 90 days.

The economic and equality arguments have been well rehearsed at this stage for targeting taxation measures high earners residing both inside and outside the country. TASC’s Equality Audit of Budget 2011 clearly illustrates who was made to pay more in the last budget. It will come down to the political choices and priorities in relation to who will be made to pay more and who will be protected this time around.

A life of luxury on the dole

Michael Taft: Every now and then we get an outbreak of misinformed commentary and calculations on the income relationship between work and social welfare; stories about how life is better on the dole than in a job. The latest outbreak comes courtesy of Jobordole.com. It purports to present an objective calculation of how much you would get on the dole as opposed to work. Go on – have a go. Just remember, it is a deeply flawed, highly misleading set of calculations. You won’t get the actual facts – but then what’s new?

On the website, it highlights the Irish Independent story about how an employer purported to offer a ‘good’ wage (€28,000) but couldn’t get anyone to accept it because people could get more on the dole. When you click on this link you get shock-horror calculation for a one-income couple with one child earning €28,000:

‘You could get €342.60 per week on the dole with €190.62 in rent allowance for a total of €533.22. You get €497.41 net per week working.’

Notice the subtle word-play here. You ‘could get’ x on the dole. But you ‘get’ x working. In short, this calculation claims ‘you could get’ €1,862 more per year on the dole.

But this is highly misleading. Let’s go through the above calculation.

1. The income from work is €497 per week. But this site (and many other calculations I’ve come across) conveniently omits income from Family Income Supplement for a family with a child. For this household this would be worth an extra €1,020 a year. Okay, it’s only a €20 a week difference – but if you’re in a low-paid job, that €20 is extremely helpful. And, yes, there is a low take-up rate (estimates from 35 to 55 percent). Therefore, we will use the website’s subjunctive ‘could’ in a consistent manner.

So income from work ‘could be’ €517 per week (and this doesn’t count income from Child Benefit and Back-to-School Allowance, which this household would qualify for – but as a household on social welfare income would get this too, it doesn’t change the differential).

2. The income from social income is way off target. The basic rate for a couple with one child is correct: €342.60. However, a real sleight-of-hand is used to increase this amount to €533.22. How is this done? The website uses ‘hand waving assumptions’. What a great phrase. It assumes in the calculation that the person earning €28,000 and losing their job will obtain a Rent Supplement of €190.62. In reality, this assumption waves away the substantial majority of unemployed.

How many people on Jobseekers Allowance and Benefit get Rent Supplement? Not many. The latest Statistical Information on Social Welfare Services 2009 shows that:

• 6.7 percent of those on Jobseekers Benefit get Rent Supplement
• 13.5 percent of those on Jobseekers Allowance get Rent Supplement

The overwhelming majority of unemployed do not get rent support, but the artful ‘hand waving assumption’ gives the impression they do. To be fair, the website does link to the Department of Social Protection’s explanation of Rent Supplement. If you read it, you will see why so few unemployed get this support, it being so means-tested and conditional.

And here’s the kicker. The website uses a rent figure of €930 a month for this family of three. This is the maximum level of rent paid allowable under the Rent Supplement scheme in Dublin (households paying rent above this level may be denied any Supplement at all by the Department). However, according to the latest Daft Rental report, average rents for a two-bedroom let is €993. So renting an average two-bedroom in Dublin could mean no Rent Supplement at all. Outside of Dublin, a household paying this rent would be well above the thresholds: in Cork the maximum threshold is €705 per month; in Limerick €605 per month.

But there’s more. Let’s say you happen to be in the small minority of unemployed who do qualify for rent supplement. How much would you get? Of course, this all depends on where you live, how much rent you pay and the application of a complex means-test; no website could cover all these contingencies. So let’s just assume the average. We can get this again by referring to the Statistical Information report.

The average Rent Supplement payment is €106 per week, not the €191 per week assumed by Jobordole.com. And this was in 2009. Average Rent Supplement has been falling over the years. In 2006 it was €125 per week, falling each year since. So we can reasonably assume that Rent Supplement will be less in 2011 – especially as the Government announced a cut of €60 million in Rent Supplement.

So what have we got?

For the vast majority (90 percent) a household of three on €28,000 income from work ‘could’ be over €9,000 better off than on the dole.

For the 10 percent on Rent Supplement, on average a household in work ‘could’ be over €3,500 better off than on the dole.

Of course, this is a just a narrow accountancy view of how people act in the real world. The fact is that almost all people want to work. Even though Ireland suffered from one of the highest levels of low-pay during the Celtic Tiger boom (over 20 percent were officially categorised as low-paid), people took up jobs. Our four percent unemployment rate is a testament to that – even though social welfare rates were increasing above the rate of inflation. When the jobs were there people took them, even if the pay rates weren’t great and working conditions were poor. So why aren’t a large number of people working now? Guess.

But there is something more insidious. This type of exercise feeds into a politics that calls for reducing social welfare payments because low-pay is so low, because our in-work benefits are so poor, because the social wage (healthcare, pension supports, other in-kind supports) is so limited. Instead of addressing the real problems in our labour market and social protection infrastructure – we go after the poor. Again.

But, assuming the best in people, I’m not suggesting that the operators of this website are being intentionally misleading in pursuit of an ideological goal. However, they should now either redo their calculations to reflect something approximating reality (though it’s not as tabloid-sexy to show that income from work is higher than social welfare income). Or they should take down the site. As it is constituted now, it only degrades an already degraded debate.

A new emergency Budget

Michael Taft: Whatever about the disputes over facilitating the passage of the Finance Bill, what people want to know is what parties are going to do about it when they get into office. And this is where progressives can stop feuding with each other and get the debate back to where it belongs – showing how Budget 2011 will do such harm to economic recovery and fiscal stability. And, more importantly, what can be done to remove that harm and show how a progressive platform will bring immediate benefit to the economy and living standards.

Here’s one way of doing that: a precondition for entering government should be the enactment of an emergency budget within 60 days based on three concrete pledges:

• Repeal the Universal Social Charge
• Immediately release funds for public investment
• Reverse the cuts in social welfare income and the minimum wage

Let’s go through these three pledges.

Pledge 1: Repeal the Universal Social Charge

The Universal Social Charge (USC) should be repealed and the previous tax regime – the Income Levy and Health Contribution Levy – should be reinstated. This has no budgetary implications as it would be, per Government estimates, fiscally neutral. But the benefit to households and the economy would be considerable:

As seen, low-income earners could benefit by up to €10 per week while higher income groups would lose out. This would help economic growth – low-income earners spend their additional income; high-income earners tend to save.

This platform could be developed. For instance, the Health Contribution Levy, while marinating its former thresholds, could be integrated into the Income Levy which has a more progressive base (e.g. rents and dividends are exempt from the Health Levy). Therefore, abolishing USC could actually be a revenue raising measure.

In addition, further progressive tax measures could be introduced alongside repealing the USC. The Community Platform, TASC, ICTU and other civil society organisations – all have put forward practical and easily implemented proposals in the areas of tax expenditures and extension of levies to capital income.

The total impact of this would be to increase tax revenue further while providing a small stimulus to low-average income households in the form of removing deflationary tax increases.

Pledge 2: Immediately Release Funds for Public Investment

The second pledge would be to immediately release €2 billion for investment – to come from a combination of the Pension Fund and Exchequer cash balances (we still have nearly €30 billion in liquid assets). This would be done in tandem with re-opening negotiations with the IMF/EU to ring-fence our cash and assets for investment/fiscal consolidation purposes.

To ensure it gets on-stream as quickly as possible, this investment would be largely pumped into ‘shovel-ready’ projects at central and local government (a good start would be refurbish every school to best standard in time for autumn classes).

However, we can go beyond ‘bricks and mortars’ – as UNITE has shown: modern information systems, preventative health initiatives, one-on-one tutoring to raise literacy and numeracy skills (both in schools and in the community), loan guarantee schemes for SMEs, etc.

The economy would not get a full year benefit from this increased investment. But let’s assume 50 percent of the total multiplier gets into the economy by year’s end (it will continue to benefit the economy for an additional 5 and a half years):

• 10,000 jobs created directly with an additional 3,000 to 4,000 spin-off jobs
• Reduction in unemployment and related costs
• An additional €350 million in tax revenue
• A GDP boost of 0.75 percent

A big impetus – which would take some time to get off the ground – would be an announcement that a public enterprise company will be established to build a Next Generation Broadband network to reach every household and business by 2015. While publicly-directed and owned, private investment can be leveraged in. This would be a clear signal of intent: that we are going to invest our way to economic recovery and fiscal stability.

Pledge 3: Reverse the cuts in social welfare income and the minimum wage

A pledge to reverse the cuts in social welfare income and the minimum wage should also be non-negotiable. This measure would boost demand and GDP, increase business turnover, protect retail employment and raise tax revenue (e.g. VAT, etc.). Therefore, it would end up costing the Exchequer far less than the headline cost of repealing the social welfare cuts (€397 million) while the reversing the minimum wage will actually boost Exchequer revenue.

There are other measures – minimal in cost but capable of lifting inequitable burdens on those on low incomes while increasing demand:

• Repealing the GMS co-payments – not likely to cost much after administrative savings are taken into account
• Protect all minimum wages – namely, no cut in pay rates and working conditions under Joint Labour Committees
• Increase Family Income Supplement by the amount as in Budget 2010 - €6 per child per week: this will enhance living standards of thousands of low and average income families with children.

Any increase on the public expenditure side would be more than compensated by tax measure introduced on high income groups (under Pledge 1), tax revenue from investment activity (under Pledge 2), and the benefit of higher demand that increasing people’s living standards would produce (under Pledge 3).

Its win-win-win.

* * *

This simple three-point programme does not address all the economic and social issues which progressive parties will have to address in their election manifestos, never mind when they are in government.

However, it would give a short, sharp signal to the electorate about progressive values and priorities. It will show people how people will be better off after 60 days of a progressive government. It will give everyone a clear picture of the medium-term direction of the new government.

And it will give something for progressive to agree over, instead of attacking each other. Such feuding only brings the prospect that more of the same failed economic thinking will dominate in the next government.

And who wants that?

View from the front line: impacts of cuts to community employment

Guest post by Dr Rory Hearne
In an effort to highlight what are the potential real human and economic impacts of some of the proposed December budget cuts I asked a few young women on the FAS-funded Community Employment scheme in the area where I work if they would tell me their approximate weekly income and expenditure.

One woman, with three young children, explained that her total weekly income is €517. That included a ‘double payment’ of €305 a week from FAS and €212 from Social Welfare. Her total weekly basic expenditure, at the minimum, is €461. This included €90 a week on the crèche, €25 on bus fare, €38 on rent, €30 on ESB, €30 on Gas, €200 on food shopping, not including kids lunches, €20 on mobile phones, €28 a week on football and other kid’s training costs. That leaves €56 at the end of the week. The other women were in similar situations. Another woman, for example, with two kids, had a weekly income of €405 (FAS and Social Welfare). Her basic expenditure was €385 including €60 a week on the crèche, €50 on rent, €30 on gas, €30 on ESB, €50 on travel, €150 on food shopping and €15 for mobile phone. Leaving her with a tiny sum of €20 euro to spare at the end of the week.

These people are finding it extremely difficult to survive at the moment on their low incomes. Just think about it. How do they afford additional costs of clothes, shoes, pharmacy medicines (not always covered under medical card), additional bus and rail travel, birthday parties, Christmas? Not to mind what many would consider basic things to do and have, such as going out for a meal or a trip to a leisureplex an odd time. They spoke similarly of the difficulty of paying for activities for their children - boxing clubs, dancing, football – which could cost anything from €40 to €50 a week. Even if these overall income and expenditure figures approximated to the truth, it demonstrates two things.

Firstly, further cuts in social welfare in the budget or increases in gas and ESB prices will have a terrible human impact. Those on such low incomes will ‘get by’ only with huge difficulty. As a result, and already we are witnessing as Christmas approaches, the use of money lenders is on the rise. Their grip of harassment and intimidation hanging over a family can be devastating.

Secondly, it provides strong supportive evidence to the argument that cutting welfare spending directly impacts on economic growth. Look at the areas of expenditure of these welfare recipients. It is on the local crèche, the local authority, Bord Gais, ESB, Dublin Bus, local and larger supermarkets, phone companies, local sports organisations etc. It is all being spent directly in the Irish economy. Indeed much is on the state and semi state sectors.

A notable double-edged sword for the Irish state is that the local authority rent is set according to the individual’s income so if their welfare payment is cut the local authority’s income will be reduced, requiring further subsidy from the state. The state thus cuts itself.

Another point that these figures raise is that the reduction in income will mean a reduced spend on the services being provided in the communities they live in – such as the crèche, local shops and sports organisations etc – so the retrenchment will hit the lower income sections of our society at two levels: as individuals experiencing a reduction in direct income and, as local areas, geographically. This is because lower income areas will have less spent in those areas after the budget as the individuals living in them experience income reductions. Thus the poor and vulnerable get disproportionally affected on multiple scales.

Interestingly it highlights also the important role of social housing. With significantly higher rents these people would simply not survive financially.

From a human perspective, how will children growing up in this household feel? The poverty causes depression. There is the stress of not being able to provide a ‘proper’ birthday party and presents or a ‘good’ Christmas. Where is the money to give to the teenagers for a new top or for the cinema? How stigmatised will those teenagers feel as a result? What social impacts will this have on mental health, on youth anti-social behaviour, crime, vandalism, education drop out? What wider costs will this have to Irish society and the economy?

The so called ‘double payment’ as part of FAS’ Community Employment scheme clearly plays a vital role in the lives of these individuals, and therefore, should not be cut in the budget. The schemes also provide much needed support in these communities in service provision providing employees for homework clubs, crèches, senior citizen support and others.

Guest post by Dr Pauline Conroy: Welfare for work

Pauline Conroy: The proposal that 10,000 unemployed people will be offered 19.5 hours of social or environmentally useful work a week is an answer to a question that few are asking. The question ought to be: how can the economy provide skills, further education, creative opportunities and decent employment for those the tens of thousands who are unemployed?

Instead, we are offered a solution to the question:
How can the government force ever growing numbers of unemployed people into a state of submission and subordination on the labour market?

The OECD has examined in detail Ireland's approach to and outcomes of labour market activation programmes (Working Paper No.75 8. January 2009). They note criticisms of Community Employment Schemes relating to limited impact on regular employment, limited training content and repeat participation. The OECD observed tha,t while Community Employment was supposed to be a training and stepping stone to regular employment, in fact it became a form of subsidised employment for those with 'reduced work capacity' and a form of funding of social services (page 103).

My own studies of some of the schemes found that they were recipients of large numbers of lone parents who had not been referred for skills training from which they might have benefitted, and people with disabilities who wanted part-time employment in a more sheltered environment than the open competitive labour market could provide.

The OECD recommends that, if creches are needed or maintenance of the local environment, these services should be purchased by local government at prices that reflect cost rather than the coincidental availability of Community Employment Schemes (page 136).

The suggestion that the unemployed should provide free labour is certainly likely to depress the lower levels of wages on the labour market. That pressure is already present.The minimum wage of less than €9 euros an hour is not obligatory in several regards. It is not obligatory for young people taking up their first job or for people with disabilities who have less perceived productivity compared with others. It is not obligatory in those instances where potential employees are asked to start out on probationary periods or internships.

Perversely, the Minister's proposal may actually displace existing volunteers who are not registered as unemployed.

The proposal to engage 10,000 unemployed should be scrutinised as to its specific objectives and whether these can be achieved in the current labour market context, consistent with such objectives as increasing the education and training levels of the population and providing decent work for all.
Dr Pauline Conroy is an independent social policy analyst

Why do we pay people social welfare?

Nat O'Connor: We pay people social welfare because, in a democracy, every participant is entitled to a minimum share of our national wealth to provide themselves with the essentials for survival.

In which case, we should be worried if a proposed Government policy threatens to undermine the democratic basis for the social welfare system.

It is reported that the Minister for Social Protection has announced a new scheme for recipients of Jobseekers Allowance (JA) to engage in social employment "for 19.5 hours work every week by helping out with local after-school and childcare services, sports clubs, services for older people and environmental projects".

Note: JA is the allowance people apply for once the period of their Jobseekers Benefit (JB) expires. JB is an entitlement, based on social insurance payments, whereas JA has to be applied for and payments are means-tested. It is worth noting that recent budgets have shortened by three months the period for which people can claim JB, as well as doubling the amount of social insurance contributions required to receive it in the first place. So more people have been pushed towards JA, where payments to people under-25 have been much reduced.

The Minister is quoted as saying "We must create a better future for people who find themselves without a job; to provide them with work activity in the short term, to up-skill them and give them opportunities to get back into the mainstream workforce as speedily as possible."

These are real incentives and it is to be welcomed that people should have an opportunity to do some useful work while unemployed. However, the carrots are matched with a big stick. It is reported that "Those who fail to show up or miss hours will be struck off the dole under the plans."

The above report is not backed up by the official press release, which simply reports that employment schemes are being transfered to the Department of Social Protection, which was already flagged by the Taoiseach when he 'reshuffled' the cabinet recently. So, we can assume the Irish Independent had a further interview or some other information to draw on.

Anyway, if someone is flying a kite about 'workfare' there are a host of problems to be considered with this approach, including:

1. Forcing people to engage in 'voluntary' work may undermine the volunteeristic spirit of those already taking part;
2. Forcing people to work may result in very unhappy people with an attitude wholly unsuited to the role they are meant to play in voluntary activity;
3. Cutting off welfare payments undermines the basic principle that in a democracy, we are all participants in decision-making and we all share the resources of our country;
4. Cutting off welfare payments will lead to people suffering poverty, deprivation and a host of other problems - which could lead to increased mental ill health, addiction, crime, suicide, etc;
5. It is likely that certain people will be badly affected, such are people who are already long-term unemployed due to mental health problems, including addiction. Neither forcing them to work, nor cutting off their dole, is in any way an intelligent or humane response. Dealing with our failing mental health system would be preferable. Offering people the option of work could be very constructive, but not as part of a work-or-else approach;
6. These schemes are likely to rely on existing community and voluntary bodies providing supervision, training, etc in exchange for labour. This could overwhealm some of these bodies;
7. There are other costs to be considered, such as insurance, transportation, etc.

To pick up on the final point, how will the additional costs be paid for? One of the reasons why many Western governments do not provide large schemes offering people useful work to do is because the operation of these schemes is likely to be significantly more expensive than simply giving people a basic umemployment payment. This is not to say that the longer-term benefits, in terms of upskilling, keeping people active, useful work achieved, etc. might not outweigh these costs, but it helps explain why the idea of 'workfare' hasn't be much developed.

I dislike the negative tone that so often surrounds the discussion about offering people on welfare some form of community work. It feeds into tired and disingenous arguments about forcing 'lazy scroungers' to work. But people receiving JA are not lazy scroungers. The vast majority of people who are unemployed want to work. The problem is economic. There are no jobs.

In economic terms, the supply of jobs is less than the demand for them. Hence, there is unemployment. In fact, in a well-functioning economy, there will always be an element of unemployment as people move between jobs. And moving between jobs is part of the vaunted flexibility we are supposed to be encouraging in our labour force.

The supply of jobs is low because (a) there is a lack of credit for businesses and (b) there is a lack of demand in the economy. The Government has done little to solve the credit problem, and has crushed demand with a will, by lowering welfare payments, cutting public pay and encouraging the private sector to cut pay. If people have less money, they spend less, so there are less jobs.

If the Government wants to fund thousands of worthwhile jobs in the community, then this should be a positive step towards addressing the unemployment crisis. Any such scheme would probably be over-subscribed by willing volunteers.

We don't need to cast a shadow over this by making community work manditory. This feeds into negative stereotypes about people claiming welfare payments and encourages sadistic diatribe about forcing 'lazy' people to work. That way lies the Gulag.

Budget 2010: landlords 1, SW recipients nil

in 2010, the savings made by cutting Social Welfare will be almost exactly the same as the spend on tax breaks for landlords (SW saving = €809 million in a full year, landlords tax breaks = €782 million in a full year). You can read the full details in TASC's post-Budget analysis, available here.

Oh, for the good ol' days

Michael Taft: With public sector pay and social welfare cuts, with the Minister announcing a ‘national downward adjustment in wages’ (that’s pay cuts across the economy), and with the Government now sizing up public enterprise (which isn’t part of the Exchequer pay bill), it’s informative to look back at the previous ‘tough budget’ days – 1987 to 1989. What happened then?

Between 1986 and 1989:

Public sector wages rose by approximately 10 percent during that three-year austerity period – or above 3 percent per year. Between 1988 and 1989, public sector wages grew by 4.9 percent in one year alone.

General social welfare rates rose by even more – by more than 10 percent, or nearly 4 percent annually. But this masked targeted increases for the lowest income groups. For instance, those on long-term unemployment assistance saw their social welfare income grow by 24 percent in the two years between 1987 and 1989.

Private sector wages grew as well. The average industrial wage grew by 14 percent, or nearly 5 percent annually.

This was a period of high debt, high budget deficits and high unemployment. Of course, this was also a period of inflation, unlike today. But the Government tried a two-hander – it kept public sector wages and social welfare rates growing, while reducing taxation to ensure that net income grew in real terms; mostly with success.

And it paid off. Between 1986 and 1989, consumer spending increased by over 21 percent. Compare that to today’s collapse of 10 percent between 2008 and 2010 – more than ten times the rate of collapse in the Eurozone.

Back then, this increased consumer spending growth contributed to a growing economy. Today, wage and welfare cuts are contributing to a deflating economy.

I’d like to think that, even at this late stage, the Minister for Finance might take note. That’s the optimist in me. But with this government and its deflationary strategies – a lot done, a lot more to do.

Budget 2010 will do nothing to get the economy out of recession

Tom O'Connor: Budget 2010 will cause immense hardship and will do nothing to get the economy out of recession. The four billion in savings could have been found in a variety of ways which would not drive people in to unemployment, poverty and housing repossessions, as this one will.

The current approach has been driven by a business group agenda which is hell-bent on driving down wages and social welfare across the economy. More of the same will be sought next year, with further demands for wage reductions and cuts in welfare spending. If left unchallenged, this will ultimately bring Ireland in to the low wage and poor welfare state model of the USA.

The government has cut public service pay by 5% on a €30,000 earner with a sliding scale of further cuts on extra slices of income between 7.5 and 15% ranging over incomes from 40,000 up to 200,000 and beyond.

A young fireman or nurse will be earning 34,000. At present, before their tax credits are applied, they pay 36.5 % of their income in taxes: In addition to the 20% basic tax rate, they pay an income levy of 2%, a pension levy at 6.2%, a health levy of 4% and PRSI at 4%. The budget pay cut will now reduce his and her income by 1,800 to 32,200. All of the above deductions will now still apply.

The tax take on this 32,200 will now amount to 7,932, so (s)he will come home with 22,268. Before last year’s budget 09 and the supplementary budget, at Oct 08, (s)he would have taken home 28,650. In 14 months to date, the nurse and fireman have lost 6,382 which is 22.3% of their disposable income. They will also have read on the papers that only 30% of private sector workers have taken any pay cut all.

Now consider the man or woman who earns over 500,000 per annum and who is self employed. Up to now (s)he has been able to avoid paying taxes through taking advantage of the 111 tax avoidance schemes that were in operation. Over the Celtic Tiger, s/he may have earned millions per year. Irrespective of how many millions he earned, s/he would only have paid a maximum of 20% in tax by taking advantage of tax shelters.

Now given that s/he has fallen on hard times and his/her income is down to maybe 500,000, s/he will have to pay 30% while still using many of the same avoidance schemes. The government only hopes to save 55 million in these schemes in 2010 even though, it is estimated that the current value of all of these is about 4.5 billion.

We can compare this position to a physiotherapist in a public hospital who now earns about 54,000. In the past 14 months, she has seen her overall tax burden, including the pension levy of 7%, PRSI, health levy and income levy grow to 57% on income over 35,400. So she wonders why now the self employed income earner only pays 30% on income of half a million or even 10 million.

Now her income after the cuts of 5%-7.5% is 50,700. She now also has a total tax and deductions bill of 18,159, taking home now only 32,541 paying tax and other levies at 58% on the income over 35,400. Going back 14 months, her total deductions were 14,370 out of her then income of 54,000, when she paid marginal tax and PRSI at 46%. Her net income then was 39,630. She has now lost 7,000 of her disposable income, a cut of 22% in little over a year.

The fireman, nurse and physiotherapist are now led to believe that pay cuts of the same order are in store for next year, and even a further pay cut the year after. It is more than likely that many of them have already become part of the 27,000 people who are currently defaulting on their mortgages. The public are also being told that they are part of the problem with the public finances.

However, people have forgotten that 13 billion Euros were spent on tax breaks to the wealthy up to 2006 which was over half the exchequer deficit this year. Essentially, if these tax breaks were not delivered, then our exchequer deficit now would be only 12 billion.

These public servants know that they did not cause the current crisis in public finances. So also do the 425,000 people on the dole who worked hard to fuel the Celtic tiger. Many of these were young people who worked in construction at 18-19 years of age, and who are now being offered 100 or 150 per week, less than half of what they were getting, even though they are not able to find work, given the collapse of construction.

These are part of the hundreds of thousands of unemployed who know that despite cutting their dole massively, the government is doing nothing to create jobs. The so called ‘stimulus package’ in the budget amount s to a modest cut in alcohol prices and a paltry scrappage scheme. This will keep the 425,000 people on the dole.

What these jobseekers don’t know is that the government has 14 billion in reserve in the National Pension Reserve Fund, and they won’t use a single cent of it to stimulate the economy. It is clear that 7 billion of this has been given to the banks but the government will spend nothing to get the economy going.

Why? Insiders in the financial world have stated that it is the government’s intention to give this 14 billion to the banks to bolster their share capital base, while leaving hundreds of thousands on dole queues and cutting welfare payments to the point where people may even suffer ‘food poverty’, the fancy name for hunger.

The huge loss of income to the public service, welfare cutbacks and the huge cut in capital spending of over 7 billion from the government capital spending programme will prevent any possible move out of recession next year. It will drive growth next year down well beyond the 3% fall projected to at least double that number. It may well prevent the economy recovering even by 2011.

The social cost of this budget in terms of massive unemployment, a definite sharp rise of those in serious poverty, a likely strong rise in emigration, cuts in community services, and its certain effect of increasing housing repossessions will be enormous. Hundreds or even thousands of young unemployed people living in rent allowance accommodation will almost certainly be driven to homelessness.

The reason for this unthinkable harshness has been the government’s pandering to those in the high echelons of international financial markets and large business groups in Ireland. The breakdown of the public service pay talks has now been shown to be a result of a desire to please IBEC.

The government could have introduced a wealth tax and raised 1.5 billion, and could have ended 1.5 billion worth of tax breaks. It could have raised the PRSI Ceiling to force those earning over 75,000 to pay PRSI earning about 700 million. It could have doubled the income levies across the public and private service for those earning over 50,000, and this would have brought in 1 billion. It could have agreed the ICTU proposals saving 1 billion and avoiding strikes and public service reform, including lower numbers and higher productivity would have been agreed.

The government chose to do none of those things. This budget is pushing Ireland towards a Hong Kong or Taiwan model of economic and social development. It will cause immense hardship, strikes and push half the population to the brink. This is both economically and socially unnecessary. In fact it is disastrous on both counts.

Some stories are too good for facts

Michael Taft: It’s good the administrators of this blog brought Peter Connell’s post back up to the top. Last night, Prime Time Investigates examined social welfare fraud (and errors and over-payments, which they never differentiated). The programme included the now-famous story of Ballyconnell, Co. Cavan. According to PTI, there were 700 people living in that border town at the time of the 2006 census, but now 1,300 people are signing on in the local social welfare office. PTI took this as proof of ‘rampant welfare tourism’. What else could explain this strange figure?

Well, there’s a very simple explanation which Peter identified. The social welfare office caters for more than just those living in Ballyconnell. According to the Social Affairs website, the Ballyconnell office caters for the town and a significant area of Cavan: Bawnboy, Carrigallen, Belturbet, Killeshandra, Redhills, Swanlinbar, and Corlough. In fact, Ballyconnell is one of only two social welfare offices serving the entire county of Cavan – the other being situated in Cavan town. Maybe that could explain it.

Of course, a little bit of research would have discovered this explanation. If you google "Ballyconnell" AND "social welfare" AND "fraud", Peter’s article comes up 11th. That should have alerted the researchers to other explanations. But the story was too good to let a little research and a few facts get in the way.

Indeed, the whole treatment of border towns experiencing disproportionate increases in the Live Register was highly selective and distortive. PTI examined the Live Register increase from July 2008 to July 2009. Nationally, the average was 83 percent. PTI cited Ardee, with a 100 percent increase, as an example of social welfare fraud – with potentially ‘a lot’ of people coming down from Northern Ireland to sign on illegally. 100 percent sounds pretty conclusive. Could welfare tourism account for this? Possibly. But, then, why was the rise in the much closer-to-the-border Dundalk only 72 percent? Are Northern Irish welfare cheats picky about the town they sign on in?

Again, PTI cited Ballybofey with an 85 percent increase (about the national average, by the way) and Ballyshannon with 91 percent as more towns with welfare cheat problems. Interestingly, they omitted other Donegal towns near the Northern border such as Buncrana and Letterkenny – the latter having a rise of only 67 percent.

They also cited Carrick-on-Shannon, a place I’m familiar with. Anyone with a passing acquaintance with the place could easily point out to you the reason why the local social welfare office experienced a 90 percent increase in signing on: the half-finished and ghost estates around the area. The town and surrounding area experienced the worst of the collapse of the property market, with hundreds of construction workers laid off. Interestingly, Manorhamilton, which is closer to the border, experienced a rise lower than the national average. That town, however, was not mentioned by PTI.

Maybe there is a horde flooding across the border to sign on illegally. But the rise in all the Border counties was less than the national average – 78 percent as opposed to a national 83 percent. Again, this fact didn’t emerge in the PTI story.

Let’s return to Ardee’s 100 percent increase. What could explain it? Maybe the same factors that explain Edenderry, Loughrea, Ballinrobe, Westport, Dun Laoire, Balbriggan, Maynooth, Kells, Navan, Trim, Bray, Kilmallock, Newcastle West, Nenagh, Thomastown, Cahir, Cashel, Bantry, Carrigaline, Cobh, Macroom, Midleton, Newmarket, Skibbereen, Kenmare, Killarney, and Kilorglin. All these places experienced a percentage rise in the Live Register in excess of Ardee – more than 100 percent. Yes, that would be an interesting Prime Time Investigates – why is unemployment rising so high and what can we do to, first, to halt it, and then reverse it as quickly as possible?

Are there people crossing the border to sign on illegally in the Republic? Yes. In fact, it would be a shock it if weren’t the case. How many? PTI could have done a bit of work and tried to describe the problem as accurately as possible. That is always the first step in resolving a problem. But rather than try to be accurate, they chose to be exploitative. We are, therefore, left no wiser.

I’ll leave you with one more stat attack: PTI’s selectivity can be seen in the period they chose to highlight. They used the July 08 to July 09 figures. However, the latest Live Register Additional Tables were published over a month ago – featuring the October to October figures. This up-to-date information was readily available to the PTI team. The only problem was that it wouldn’t have supported ‘the story’ of wide scale social welfare fraud.

The national average at year-to-end October was 65 percent, while the percentages for the border towns they cited were:

Ballybofey: 56 percent
Ballyshannon: 71 percent
Carrick-on-Shannon: 62 percent
Carrickmacross: 51 percent
Ardee: 77 percent

This doesn’t tell quite the same story, though. And above all else, we must maintain the story even if it means we miss the opportunity to describe a situation accurately.

League tables and losing the plot

This post was originally written on April 21st in response to an article in the Sunday Business Post. We are re-posting it following last night's Prime Time Investigates programme on social welfare fraud.
Peter Connell: As the Irish economy has spiralled downwards over the past six months, those with an interest in attempting to understand what’s happening and evaluating the solutions being proposed are, at least, being exposed to an increasing informative public discourse. You may not always agree with what economists write as opinion pieces in the national media, over at Irish Economy, here at PE or elsewhere in the blogosphere but, generally, you’re presented with reasoned, well informed arguments that represent genuine attempts to enlighten.

Instinctively when you prepare to read an opinion piece on the solutions to the country’s economic ills by Dr. Ed Walsh, ex-president of the University of Limerick (UL), you know it will be written from a particular ideological perspective. No problem there. We all have ideological perspectives, whether acknowledged or not. Dr. Walsh, since being appointed the first president of UL (then the National Institute for Higher Education) in 1970, has almost four decades of experience of public policy formation in Ireland and has held numerous influential positions in areas key to the country’s economic development including chairperson of the Irish Council for Science Technology and Innovation that advises the government on science policy. So, you could reasonably expect to find some good ideas in Dr. Walsh’s piece in the Sunday’s Business Post entitled ‘Back to when we were winners’.

According to Dr. Walsh it’s all about competitiveness. We were winners in 2000 when we were the fourth most competitive country in the world. Then we ‘lost the plot’. In 2007-8 we were back in 22nd place. And why are we down in 22nd place? The World Economic Forum said the poor quality of our infrastructure was the most problematic factor for those wanting to do business in Ireland. So, does Dr. Walsh identify some innovative ways in which we can fund investment in our infrastructure? Or perhaps he has some insights into how we might convert the significant state investment in fourth level education into innovative, hi-tech enterprises? The strange thing is he doesn’t mention the state of our infrastructure at all and, in this article at least, has nothing to say about the role that technology and innovation might play in growing jobs and creating wealth, an area in which he has considerable expertise. Instead, his piece identifies our overly generous welfare system, high wages in the public sector and failure to tax those on low incomes. Into the mix he adds rigid labour laws, the undue influence of teachers unions in curriculum development and the lack of reform in local and national governance as being the cause of our problems. That’s quite a list. And he backs his arguments up with some figures.

First of all, he suggests that we reduce the size of the public sector workforce by 85,600 to get us back to the level in 2000. Even at the crudest level we can say that, thankfully, we’ve about half a million more people in the country than we had in 2000. That’s about 70,000 more children of school-going age who require teachers in schools that have some of the highest class sizes in the OECD, and it’s up to 40,000 extra older people aged 70 and over who depend on public services more than other sections of the population. In 2000 our health service was just beginning to receive the investment it required to repair the damage done by cuts in the late 1980s. Since then an additional 9,000 nurses have been recruited, but I guess they’re surplus to requirements if we’re to ‘get back to when we were winners’. Certainly, there’s scope to reform the public sector, but not with a demolition ball.

Next up, public sector wages. Dr. Walsh argues that ‘benchmarking against other EU countries provides the framework within which Irish public sector salaries can be brought into line’. He goes on to claim that Irish teachers are paid 37% more than their British counterparts and 26% more than those in Germany. This claim appears to be a quote from Danny McCoy of IBEC writing in the Irish Independent in November 2007. The data is from 2004. But OECD data from 2005 shows something quite different (see pages 384-387). While Irish teacher’s salaries were towards the top of the table internationally, they were lower than in Germany, somewhat higher than in England, but lower than in Scotland. The OECD report also shows teacher’s salaries as a ratio of GDP per capita as a way of assessing the relative value of teacher’s salaries across countries. A secondary school teacher in Ireland with 15 years experience earns a salary equal to 1.2 times GDP per capita. This places the Irish teacher at 14th in the international league table of 30 countries reviewed by the OECD.

Next, Dr. Walsh, pleading the case of high earners, quotes the discredited statistic that the top 6.5% of earners contribute half of all income tax collected, and that 38% of the workforce paid no income tax at all. Colm Keena of the Irish Times, in an article I quoted in an earlier post, presents an alternative perspective on the data on which these statistics are based focusing on individual earners rather than revenue cases. If Dr. Walsh cares to examine the data, he will find that perhaps the most striking fact is that just 9,129 individuals earned €6.7 billion in income, while the lowest 1.2 million earners had an income of €13.3 billion between them.

And now we come to welfare fraud. According to Dr. Walsh ‘welfare fraud and welfare tourism are now a major burden on taxpayers’. And the evidence? Apparently, there are 1,044 welfare claimants at Ballyconnell Welfare Office and the town only has a population of 747 according to the 2006 census. This, he remarks, is an alarming statistic. The source of his information on the number of claimants is a Department of Social Welfare and Community Affairs press release issued by Mary Hanafin. And the implicit aim of the press release is to lay the blame for the doubling of unemployment rates in the border counties on fraudulent claimants.

Unfortunately the situation is worse than Dr. Walsh thinks. The most recent figure for March 2009 is 1,161. This information is readily available from the CSO website, which is generally a more reliable source of information than ministerial press releases. Anyone who has ever dealt with a Social Welfare Office would also know that they serve wide hinterlands, not just small towns. Preliminary research suggests that the Ballyconnell office serves a population of about 14,000. It’s one of two covering the whole of Co. Cavan. Unfortunately there are over 6,500 people now unemployed in the county, many of them young local men who worked in the construction industry.

Dr. Walsh suggests that this welfare tourism is down to our over-generous welfare payments. I suggest he reads Michael Taft’s excellent piece on this topic over at Notes From the Front. Referring to another league table, he shows that we’re in 13th position out of EU 15 when it comes to the level of unemployment benefit paid to a single claimant. Dr. Walsh chooses to compare Irish rates with wages in Lithuania and Romania.

So, unfortunately I wasted seven or eight minutes reading Dr. Walsh’s piece in Sunday’s Business Post. It’s disappointing that one of our brightest opinion formers didn’t do his homework, but presented an argument based on press releases and snippets of information chosen to bolster a particularly extreme view of where we’re at and how we can solve our problems.

In any case I’m not convinced that we should set our sights exclusively on climbing the competitiveness league table. We’re now 22nd. Above us, in 20th place, is Iceland.

Tax Breaks

Nat O'Connor: TASC has estimated that tax breaks ('tax expenditure' to use the technical term) on personal income tax and corporation tax will cost €7.4 billion in 2009 in lost revenue. Tax breaks benefit the better off, whereas social welfare cuts will increase the number of people at risk of poverty. TASC argues that the Minister for Finance should cut tax breaks. You can read TASC's full submission here.

In this blog post I want to explore our (the broad public's) complicity in our tax break regime and what we can do next to make it economically and socially beneficial.

The OECD's Economic Surveys: Ireland reports that in 2005 (which is the latest full data) tax expenditure on personal income tax in Ireland cost three times as much as the average of 22 other EU countries. Tax expenditures on corporation tax costs seven times as much. In total, in 2005, tax expenditure cost €10.7 billion (not including personal credits).

Some questions:
1. What's the problem?
2. How did this happen?
3. What do we do about it?

Some answers:
1. There are three problems. Firstly, economic inefficiency. Secondly, inequality. Thirdly, the resulting non-progressive tax system.

An example of economic inefficiency was shown by the Goodbody and Indecon reports on property- and area-based tax breaks published as annexes to Budget 2006. They showed considerable deadweight - that is, people benefiting from tax breaks for investments that probably would have happened even without the tax breaks. This inefficiency was accepted by Government and these tax breaks are being discontinued.

An example of inequality is that high earners have disproportionately benefitted from pension relief (see this recent post).

The non-progressive tax system results because better off households can use more tax breaks. There is probably an income/wealth threshold after which it is cost-effective to pay a tax advisor, which in turn opens up more possibilities to avoid tax. Hence, we have a theoretically progressive tax system, with a higher rate for higher earners, but the reality of income tax paid is more like a curve. Low earners pay little of their salaries in income tax, middle earners pay a higher proportion, but higher earners pay a lower proportion.

Both the inefficiency and the inequality stem - in part - from a lack of caps and limits being placed on tax breaks. Whether or not you think that tax breaks are a valid and useful tool for Governments to use to encourange economic activity, it seems that successive governments were inexpert in designing and implementing tax break schemes. They may not have been concerned about equality, but is there evidence to show that successive Ministers for Finance signed off on tax breaks that would deeply harm the economy in order to benefit a small number of wealthy people?

2. There are probably a number of suggestion for why tax breaks grew in number and cost. Paul Sweeney, for example, has suggested they were seen as "costless" by some ministers. They certainly dovetailed with a low tax ideology. Maybe in the past ministers found it easier to persuade their colleagues to grant tax breaks, rather than increase departmental budgets.

It has been suggested that tax breaks permitted State supports to enterprise that would have been more difficult or forbidden under EU rules.

Many specific tax breaks are a response to the demands of specific sectors, such as construction, farming, mining, fund management, etc.

Tax breaks were also introduced to achieve parity with tax concessions or spending in other sectors. So more tax breaks were created to even out markets that had been distorted by other tax breaks. One cannot escape the classic image of someone sawing off the ends of table legs with increasing fervour in order to correct a relatively minor original imbalance.

3. The remaining problem is that many households, on low and middle incomes, benefit from tax breaks. Although this is nothing like the extent to which high net worth individuals have benefitted, an immediate cut of tax breaks (such as mortgage interest tax relief) would represent hundreds of euro per month taken out of many households' net incomes. The prices people paid for their homes were in turn inflated by the distorting effect of mortgage interest tax relief in the housing market, so cutting the tax break immediately would be a double blow. Nevertheless, we really do need to make major cuts in tax breaks.

One immediate solution is for the Government to impose strict caps and limits on the full range of tax breaks - including the many tax relieving measures that the Commission on Taxation identifies as part of the benchmark tax system. Strict caps will means that low to middle income households will not suddenly face a few hundred euro less in their net incomes (which is significant). Higher income households will benefit less. Over the following few years, more and more tax breaks can be cut completely, to lessen the shock to any particular part of the economy (except tax advisors).

Tightening up on tax breaks should also be more efficient than increasing income tax, as the amount of tax actually paid is much more effected by breaks than rates.

The Procrustean bed of statistics

Michael Taft: In Greek mythology the rogue Procrustes had an iron bed in which guests were invited to rest on. He would then hold them down and, if they were too large he would lop off their limbs; if they were too small he would stretch them. The last place you want to be is on Procrustes’ iron bed, especially if you don’t fit.

Suzanne Kelly brings the spirit of Procrustes’ iron bed to her table of statistics in today's Irish Times. She took households with a couple with two children and compared their net incomes in three different situations:

PAYE employee: €36,078
Self-employed: €35,159
Unemployed: €40,261

Wow. It would appear that if a below-average worker loses his or her job, or the self-employed see their business go down the tubes, they shouldn’t despair. They should celebrate their big income increase. These ‘facts’ led Suzanne to comment:

‘A social welfare package where the cash and benefits exceed wages will stop potential staff from returning to work when the economy lifts.’

Maybe. Except that Suzanne has put this set of statistics on a Procrustean bed where she has pulled and chopped them to fit her argument.

To arrive at the income for the unemployed scenario she includes Rent Supplement. This is a big item. It makes up €12,168, or over 30 percent of the total. Without this supplement, the couple would be on an income considerably below both the PAYE employee and the self-employed.

So how valid is it to put this Rent Supplement figure into the total for the unemployed? Not very. Not very at all.

The 2008 Social Affairs Annual Statistical Report shows that 95 percent of all those on Jobseekers Benefit do not receive Rent Supplement. When you add up all those on some form of unemployment payment (benefit and allowance), 90 percent do not receive Rent Supplement.

But for that small minority who do qualify, would they get this amount? €12,168? On average, no. In fact, they would get half that amount. The 2008 Social Welfare report, again, shows the 74,000 recipients of Rent Supplement receiving on average €5,953 a year (there is no breakdown by welfare payment). The reason why this is so much lower than the headline maximum rate is that Rent Supplement is rigorously means-tested.

So, we have a table that includes an item which only a very small minority of unemployed obtain and of those who did get it, on average they receive less than half the amount as the table states.

If Suzanne had included these caveats it wouldn’t have supported here statement. But, hey, if the facts don’t fit – just chop and stretch until they do, just like Procrustes. Of course, not many of his ‘guests’ survived the ordeal.

Crises: Not 5 but 7

Slí Eile: The National Economic and Social Council (NESC) has recently published its Next Steps in Addressing Ireland’s Five-Part Crisis: Combining Retrenchment with Reform. You can download the full report here and the executive summary here.

The title by-line ‘retrenchment’ with ‘reform’ gives all away. Following earlier work by the Council – which represents the various social partners – it attempts to pull together various strands of the current economic crisis and to propose an ‘integrated approach’. This is welcome. To the five-part crisis (banking, fiscal, competitiveness, unemployment and reputation) must be added a sixth dimension as pointed out by a speaker at last week’s TASC Economic Conference: a political crisis. I would even suggest a 7th: a moral crisis. Do we care enough about people, their well-being and the planet in which we survive? Markets, States and non-governmental actors have failed, so far, to act with sufficient moral responsibility.

Like all NESC documents there is a good conceptual framework underlying its work. But, inevitably, reflecting its structure, function and composition there is a strong element of ‘on the one hand and on the other hand’. Here is a sample:

It is necessary to combine unavoidable retrenchment with major reform in a range of policy areas and systems.

‘unavoidable’ mirrors a highly held view these days:
TINA – There-Is-No-Other-Way (e.g. deflation)
TOGIT – The-Only-Game-In-Town (e.g. NAMA)

Joseph Stiglitz has warned us about being intimidated. Other adjectives used in the NESC document are ‘severe retrenchment’ (p7) and ‘immediate retrenchment’ (p9)

Interestingly, the NESC document goes on to say (p60):

The deterioration in the labour market, in the lives of many households and individuals, is being compounded by falling disposable incomes and retrenchments in some areas of current public social spending.

Government has achieved savings of c10.5 billion or 6.3 per cent of GDP and published the McCarthy Report. But there continues to be a huge gap in the public finances.
Policy and public debate on the fiscal, economic and social aspects of the crisis still seem dominated by short-term, immediate and zero-sum aspects; it has not proven possible to secure support for a perspective based on long-term mutual gains.

And, on page 61, the Report rightly draws attention to the way cuts in public spending can impact adversely on vulnerable and low-income groups.

In its response, the Government clearly sees this work of NESC as offering a talking and thinking platform on which to get buy-in for a new a ‘agreement’ (From the Govt Press Release: "In response to the challenge set out in the Report, the Government proposes to invite the Social Partners to meet to discuss whether there is sufficient basis for entering substantive negotiations to secure an agreed national response to the current economic crisis")

A classic nescism is the following:

There remains a tendency for opinion on the fiscal crisis to polarise into two camps, with one stressing the need to reduce the gap between spending and revenue and the other the need to maintain existing services and conditions. These positions tend to cancel one another out, rather than pushing the debate into new terrain in ways that makes policy decision clearer and public understanding greater.

But, in the meantime, the following questions have to be faced: The General Government Deficit is in the order of €20bn this year
Government can either (i) cut spending (ii) raise taxes (iii) borrow more or draw down on cash reserves (it is too late, apparently, to divert NPRF cash since Government diligently pre-paid next year’s amount as well as this years – called APCS – Acute Pro-Cyclical Syndrome). NESC clearly favours raising the share of taxes as % of GDP to bring us up closer to EU norms. But, it does not specify its stance on some of the major issues:
Pay cuts
Welfare cuts
Which areas of public spending would be cut
Instead it opts for ‘severe retrenchment’. Then again, it is hard to imagine the partners to NESC agreeing to a common approach on the above.

'Principle of revenue neutrality' proves Government's lack of vision

Mary Murphy: The average percentage of GDP spent on social protection in the EU-15 is 27.5% (Eurostat, 2007) . The Irish rate of 18.2% compares badly with high spenders France (31.1%) and Sweden (30.7%), with our nearest neighbour the UK at 26.4% but also with countries like Greece (24.2%) and Portugal (25.4%). Ireland, to make any meaningful social or economic progress, should be moving toward a higher percentage of GDP on social protection.

However, the objective of a low tax economy and the principle of revenue neutrality that lie at the heart of the Commission on Taxation can only lead to one place: a low level of social expenditure that limits Irish social development and cohesion. Further, given that revenue has dropped substantially (by over 6 billion euro since 2007) a revenue neutral scenario locks Irish social expenditure into even lower levels than the relatively poor levels of 2007. This post argues that, despite the fact that there are revenue policy choices available to the government that could increase overall revenue for social expenditure, Government has made an explicit policy choice not to avail of these policy options but to instead let those on the lowest incomes bear the brunt of our crisis. This policy choice exposes the vision of this government. Quite simply, there is no social vision.

We grew accustomed to the government mantra that Government policy is to protect the most vulnerable. However, the new mantra is that because social welfare accounts for a third of social expenditure it must contribute one third of savings in public expenditure required in this forthcoming budget (1 billion euro in expenditure cuts). To justify this failure to ‘protect the vulnerable’,the government is selling two myths to the Irish public. The first myth; that the level of Irish welfare is problematic, the second; that cuts are inevitable.

First, the reality of poverty has been obscured by a deluge of myths: welfare is the most generous in Europe; it does not pay to work; the cost of living has fallen, welfare soared in recent years. Every one of these myths has been endlessly exposed. OECD figures show payments to single claimants in Ireland are the third lowest in the EU15, while a family with two children gets just above the EU15 average. Welfare is not ‘high’ or ‘generous’, and if you are living on it you are below the Government’s own ‘at risk of poverty threshold’. You are not better off on the dole – not only single people, but also those with large families, get higher incomes from working (through Family Income Supplement). This is true whether they are on the minimum wage or the average wage. While the overall cost of living is falling, the things that low income families buy more of (solid fuel, public transport, childcare) are rising. If you are interested in facts there are more on The Poor Can’t Pay website.

The second myth involves convincing the public that there is no alternative to cutting welfare payments. This is not true. The most plausible and realistic policy alternative to welfare cuts is to raise the 1 billion euro through taxation. However, from the very start the Commission on Taxation was asked to be ‘revenue neutral’ and McCarthy was told not to look at taxes - or pay. Ironically, the Commission on Taxation draws our attention to the multiple instruments government has available to increase government revenue - instruments with capacity to generate as much revenue as welfare cuts would save. These include a property tax, an increase in the top tax rate for high earners, the abolition of remaining discretionary tax allowances, a policy of standard-rating pension reliefs, increases in corporate taxes and the introduction of carbon taxes. However, in the context of a principle of ‘revenue neutrality’ none of these become viable policy alternatives to stave off cuts in welfare.

A leaked comment from April shows that the Cabinet believes that the €1 billion it could raise from property tax is ‘probably not worth the bother’ (Irish Times, April 19th). It is true that such tax reform would not be popular and those on middle and higher incomes would find life more difficult. Clearly, taking 1 billion euro from welfare recipients is an easier political option, and so worth the bother.

Minister Lenihan justifies his revenue neutral principle with the assumption that the ‘burden of taxation in this economy is high enough’ and assumes Irish people are unwilling to pay more taxes to tackle inequality and poverty. This is simply not true. A 2009 Behaviour and Attitudes poll commissioned by TASC shows 72% of adults are concerned at the level of wealth inequality in Ireland and that 85% of adults (60% strongly) agree to government taking steps to reduce income inequality.

Irish people care more then their ministers about the ‘burden of poverty’. Let us be clear: This Government is making a conscious choice. It is declining an opportunity to raise upwards of €1 billion in revenue. If this government cuts social welfare it is because it has chosen to do so, and because it has chosen not to develop alternative revenue raising tools. The Minister should think again.

Crude welfare cuts do not make social, practical or moral sense. There are significant economic benefits from social welfare expenditure. In the short term every penny of social welfare expenditure is spent in the economy and stimulates demand. Cutting such expenditure is deflationary. In the longer term, social welfare expenditure and broader social inclusion policies are a vital part of every successful modern economy. Decent welfare enables workers be more flexible and adaptable in the face of global economic change. A cut in social welfare cuts competitiveness, reduces social cohesion and reduces our collective capacity to fight this recession. Restoring our competitiveness, saving jobs and closing the fiscal deficit can be achieved in ways other than forcing society’s poorest families into deeper levels of poverty. This is about choices. Nothing is inevitable.
Dr. Mary Murphy is a member of the Steering Group of The Poor Can't Pay. She lectures in Irish Politics and Society in the Department of Sociology, NUIM.

Placing citizenship centre-stage: Michael D's take on the debate and what's missing

Michael D. Higgins' opinion piece in today's Irish Times is well worth a read, especially in view of recent debates here on social welfare, rent supplements and the minimum wage. He writes:

Missing from the debate so far is any concept of citizenship. Indeed, former taoiseach Bertie Ahern reduced the debate on citizenship to a debate on volunteering, important but not the same thing. This is quite extraordinary in a republic. It is regarded as radical and unacceptable by the conservatives who cheered on the property rackets to speak of social security, of a floor below which citizens would not be allowed to fall. After all, the most extensive interview given on our public service broadcaster by the leading banker/gambler who did the most damage to Ireland’s financial reputation called for cuts in social welfare. Yet citizenship is what we should now be discussing. The more socially-concerned elements of the public surely do not want a return of more of the same.

Read the full piece here.

Social welfare debate: What it really boils down to

Michael Taft: Having previously shown that the claims that we have a comparatively ‘lavish’ social welfare system’ are clearly false and not backed up by the data in the hotly debated OECD report, let’s address another issue this debate has raised (or should raise). That is, how low social welfare payments are in the Irish context.

There is a crude and, at times, vicious populist attack on the living standards of social welfare recipients. The OECD report showed that the overwhelming number of unemployed and lone parents survive on net replacement ratios well below the EU-15 average. But let’s use some numbers close to home – and use the 2007 figures on which there is considerable data (later years would require extrapolating and estimating) – to give a full picture of poverty and low incomes in this country.

The CSO – in line with international practice – uses the relative poverty line (60 percent of median income) as a measurement of how many people are ‘at-risk’ of poverty. There is some controversy over how valid this measurement. But all it tells us (and all it seeks to tell us) is how many are ‘at-risk’. It provides a starting point, a set of parameters. For instance:

• In households where the head is unemployed, 58 percent are at-risk
• In lone parent households, 36 percent are at-risk
• In households headed by someone ill or disabled, 49 percent are at-risk

Indeed, it is disconcerting to realise that of all households in the state, nearly one-in-five are at-risk of poverty. There’s a lot of risk out there and when one examine the level of social welfare payments, one begins to understand why.

The figures below show how much weekly welfare rates in 2007 would have had to increase to bring, in cash terms, the different categories up to the at-risk poverty line (for those with children, it includes Child Benefit). These are the categories which the OECD report dealt with:

Single Unemployed: €42.06
Lone Parent – 1 Child: €59.08
Lone Parent – 2 Children: €76.11
Unemployed Couple: €70.67
Unemployed Couple – 1 Child: €87.70
Unemployed Couple – 2 Children: 104.72

No payment in these categories exceed the 50 percent threshold of median income (remember that the poverty line is 60 percent).

Of course, this is not all there is to social transfers – whether cash or in kind. There will be (or was) the Christmas bonus. Households with children may receive school and clothing allowance. Social welfare recipients are eligible for the medical card (but short-term unemployed, especially younger people with little demand on medical services, are not as likely to hold one). But, as can be seen, these transfers are necessary if people are to have any chance of reaching the poverty line.

One of the bigger additional payments is rent supplement (or Housing Benefit in the OECD). This is an example of a well-targeted payment. Some recipients will need it; others won’t (those living in local authority housing, owner-occupiers, young people living at home, etc.). In 2007, the average weekly rent supplement (and this is an annualised figure) was €126 per week, or €546 per month.

As pointed out previously, only a small minority of unemployed and lone parents receive this benefit – less than 14 percent. If that payment was abolished and the expenditure distributed through the basic social welfare payment, it would increase the social welfare rate by €17.37. This would still leave all categories well short of the poverty line (especially in households with children) and would be insufficient to assist those who face high rents in the private sector.

Rent Supplement is a curious thing. It puts money in the hands of the recipient in order to purchase shelter in the open market. Therefore, the level of Rent Supplement is inextricably tied to both market rates and the recipients’ need of it. For instance, as Nat O’Connor points out, Rent Supplement varies geographically. Recipients in Dublin will get a higher rate than those in Waterford. Does this mean that Dubliners have a resulting higher standard of living? No, just the opposite – since rent is much higher than in Waterford. They will get a higher social transfer but potentially live in worse conditions - all by accident of location.

There is considerable debate over the cost of Rent Supplement and, given the fall in rents, whether it should be cut pro-rata. Again, as Nat points out, this misses the point of both the continuing high need (getting higher in these recessionary times) and the continuing high market price vis-à-vis welfare recipients’ living standards. Of course, there are other solutions rarely canvassed by those demanding social welfare cuts (more public housing, direct state provision in the private rented sector based on the model proposed by Threshold, rent control, etc.).

All this goes to show that, whether one examines the OECD report or the current economic conditions in Ireland – we can only conclude that social welfare payments are too low, much too low.

But we tend to get lost in all these arguments and ratios and percentages. So let’s use two figures to put this debate into context as it inextricably moves its way towards the next budget and the strong possibility that social welfare rates will be cut. In the social welfare system there are:

Over 500,000 the age of 60 years
Nearly 450,000 are children

Elderly and children - nearly a million. Whether intentional or not, they are the true target of those who want to cut social welfare rates.

Is this how far we have come?

Myth of 'lavish' Social Welfare spending revisited

The myth of Ireland's lavish Social Welfare rates refuses to go away - its latest proponent was Constantiv Gurdgiev on RTE's Prime Time. The myth has been debunked several times, most recently by Sli Eile here on PE. Click here to read Michael Taft's deconstruction of Gurdgiev's claims.

Lower Rents Still Higher Than Rent Supplement in Dublin

Nat O'Connor: Rents drop 17% over 12 months according to DAFT’s latest Rental Report. This headline will be referred to in the next Budget to justify cutting Rent Supplement payments. But it isn’t that simple.
As noted previously, the Rent Supplement maximum payment will cover a significantly different proportion of average rents, depending on what part of the country you live in. So people in some areas are more likely to be squeezed into poorer accommodation and/or to make further top-up payments from their social welfare than are their equivalents in other areas, by the mere chance of what administrative area they live in.

Another problem with the headline figures is that it is an average across all housing units, from one-bed studios to 5 bed+ houses. However, some detail is given on page 7 of the report based on the number of bedrooms in the dwelling. So, let’s illustrate what Rent Supplement will do for you (bearing in mind the limits of the available data):

A three-bed unit will cost an average of €695 in Waterford City, €780 in West Leinster, €1,273 in Dublin 8 or €1,486 in Dublin 1.

Rent Supplement for a family with 3 or more children is the highest possible Rent Supplement payment, and it varies across the administrative regions of the health services (who administer the payment). Including the family’s contribution of €103 per month, the maximum payment is €788 in Waterford City, €909 in Meath or €1,203 in Dublin.

So far so good, if you don’t live in Dublin. Maximum Rent Supplement covers average asking prices. But given that it has already been cut and rents have fallen, is there really much scope for cutting RS further? Also, it is a maximum, so a CWO can simply decide to pay a lower amount. Do we need a further blanket cut of payment ceilings? Dublin already lags behind by €70 per month in Dublin 8 or €283 per month in Dublin 1, which is a lot of money for a family on welfare. So there is a clear problem with how this payment is calculated. And if other social welfare payments are cut in the next Budget, people’s ability to pay for their housing will be put further at risk.

Now take the example of a one-bed housing unit, which will be an apartment in most cases. A one-bed will cost an average of €532 in Waterford City, €511 in West Leinster, €849 in Dublin 8 or €892 in Dublin 1.

Maximum Rent Supplement for a single person living on his/her own (plus contribution) will cover €571 in Waterford City, €571 in Meath or €632 in Dublin. So, it’s sufficient in Waterford or Meath, but €217 too low in Dublin 8 and €260 too low in Dublin 1 (and these are not the most expensive areas in Dublin either). There is a massive gap in Dublin between average rents and Rent Supplement, which is likely to force single people into the cheapest accommodation and to make further top-up payments from their welfare payments.

Some people will say that we should expect people on Rent Supplement to move into the cheapest accommodation. But let’s examine this logic.

If lower Rent Supplement forces people into the cheapest accommodation, the taxpayer ends up subsidising the worst flats, which are often owned outright and can undercut modern apartments (e.g. buy-to-let) in terms of low rent. It also increases ghettoisation, as families on welfare become priced out of large areas of Dublin. The fact that market rents are lowering is an opportunity to move people into better quality, modern apartments and to achieve a better social mix. These are stated goals of national housing policy.

Bedsits have been banned, which is a move towards higher quality standards in the private rented sector. But this means that rents will be higher. So, we have to look at how we meet those costs. Rent Supplement will cost an estimated €490 million in 2009. But part of the problem is the decision to pay near-market rent rates to private landlords, rather than take a long-term view and build (or acquire) more social housing, which very soon becomes a cheaper option for the taxpayer.

How to distract from the main issues

Slí Eile: The right have uncovered evidence that, with the average rate of price deflation accelerating, the 'real' value of social welfare rates to the unemployed, sick, children, pensioners etc has increased by some few percentage points since the 'pre-October 2008' position (post by Colm McCarthy on irisheconomy Friday 14 August). And they're going to town on this. A number of observations are in order:

1 The real value of SW rates, as measured by changes in the CPI and HICP, has increased (as have some other forms of income, by the way as CSO earnings data series confirm). So what?

2 Cutting nominal SW rates is clearly on the agenda of those determined to shift the burden of fiscal adjustment wide and far. Lets say the Snip Report was a spray-gun approach. The actual impact socially, fiscally and economically has not be tested or seriously debated (see points raised by Michael Taft on Notes on the Front). In other words, the deflationary impact of these cuts is an issue that is not being dealt with by those arguing for cuts.

3 In a very good article in yesterday's Irish Times (Minimum wage debate is a fatal distraction), Ray Kinsella points out that:

So, at the level of the individual, the family, and the firm, the issue of the minimum wage matters. But at the macro level – ie turning the economy around – it is distracting attention from what really needs to be done.

I very much agree. Ray Kinsella could have also said 'social welfare rates' for 'minimum wage'.

4 The fundamental issue in the ensuing debate about SW rates is one of justice. Significant gains were made in recent years, not least thanks to the campaigning by some of the social partners. The appalling economic mess we find ourselves in was not caused by those who now find themselves without employment and very often without hope. But, as Kinsella observed:

...there is the devastating decline in self-esteem of those who lose their job, for reasons beyond their control. The significant increase in the number of people presenting at GPs with psycho-social stress would seem to confirm this.

5 Why should some well-paid economists in relatively secure positions of employment pursue - relentlessly - a campaign to reverse the gains made (including the unforeseen very small gain of recent months - notwithstanding the rise in overall SW numbers and cuts in welfare to young people)?

6 Nobody calling for SW cuts is dealing with the wider social trauma and the fundamentally unjust distribution of income and wealth at the heart of the now defunct Celtic Tiger.

7 Lets get back to a debate on how to get people into work through new employment. Lets give hope, not continuing despair and threats of Latvian punishment on those least able to afford it.

Kinsella wrote:

The only way out of the growth and competitiveness cul de sac into which the economy has been driven is a strategy for growing the economy. The Government doesn’t have one.

I couldn't agree more. But, does the 'left' have one?