Budget priority should be social welfare and not tax cuts, says ESRI
The issue of "fairness" has increasingly become a subject of debate amongst social partners and commentators in Ireland. In this context, an October 1998 study by the Economic and Social Research Institute (ESRI) states that the 1999 state Budget should devote more funds to increasing social welfare payments and less to cutting income taxes. The main conclusion of the study is that many of the poorest people in Irish society gain little or nothing from tax reductions, however structured, and that relative poverty can be tackled only by allocating more resources to increasing social welfare rates in line with, or ahead of, the growth in average earnings. The social partners are in disagreement over this issue, which is closely linked to the continuation of Ireland's national social partnership agreements.
The issue of "fairness" in recent Budgets has become the subject of much debate amongst the social partners and various commentators. Tax reductions in these Budgets have tended to favour middle- and high-income earners, much to the annoyance of trade unions, particularly those representing low-income earners (IE9710104F). In connection with this, there has been a certain degree of controversy surrounding the interface between social welfare reform and tax reform. This controversy intensified in autumn 1998, following the publication in October of Budget perspectives, a study by the independent research body, the Economic and Social Research Institute (ESRI).
It now seems probable that the government will place an emphasis on reducing taxes for the lower paid in the 1999 Budget, to be announced in December 1998. The Budget looks likely to include an increase in the personal income tax allowance, a widening of the standard-rate income tax band and a reduction of at least one point in the standard 24% income tax rate.
Winners and losers
The ESRI study states that although Budgets between 1994 and 1998 have generally favoured high earners, reducing taxes for the lower paid in the future is not enough in itself to improve the position of the poorer members of Irish society. The study suggests that this is because many of the poorest people in society gain little or nothing from tax reductions and, indeed, have become relatively poorer as welfare provisions in recent Budgets have failed to keep pace with the growth in average earnings. In fact, the data show that the richer members of society have benefited disproportionately from the last four Budgets, because average incomes have increased by 22% over the past four years while social welfare rates have risen by only 16%. As a result, the disposable income of the richest 10% of families increased by about 4% under recent Budgets, while the disposable income of the poorest 30% of the population decreased by 2%. The study findings are based on calculating gains and losses from the 1994-8 Budgets relative to a simple benchmark whereby social welfare rates, tax bands and tax allowances are linked to the growth in average earnings.
If the benefits of economic growth are to be more equally distributed, the study recommends that the government should place less emphasis on cutting income tax rates and more on increasing social welfare payments in line with increases in average earnings. It suggests that low- and middle-income earners would benefit most if tax-cutting funds were wholly devoted to increasing personal income tax allowances and income tax levels remained the same. In addition, it is advocated that increases in personal allowances should be combined with large increases in social welfare payments in order to target resources at the poorest sections of society, who stand to gain little or nothing from tax reforms.
It is argued that the proposed direction of tax and welfare policies, as indicated in the current administration's programme for government (IE9706218F), whereby the government could spend IEP 750 million on tax reductions over the next three years and IEP 250 million on welfare increases, would further accentuate the gap between rich and poor. Instead, it is suggested that the Government should devote IEP 500 million to each area. This would entail spending IEP 500 million exclusively on increasing personal tax free allowances and IEP 500 million on increasing social welfare payments (which would represent a 19% increase). Significantly, this would not involve any additional resources, but it could have an important effect on alleviating poverty and contribute to a more equitable distribution of existing resources. Therefore, the key issue according to the study is "the possible impact on rates of poverty from an alternative tax/welfare package with the same total resources". What is important is the "balance between social welfare increases and tax cuts, rather than the size of the overall tax/welfare package". The study warns that if welfare payments are not increased in line with, or ahead of, the average growth in earnings, there will be further increases in relative poverty as the gap between rich and poor increases further. The definition of relative poverty used in the study is the proportion of persons in households falling below 40%-60% of average income.
Tax, welfare and partnership
The study underlines the importance of combining employment growth and increased social welfare provision with broader policy measures in order to reduce relative poverty. It is suggested that the best way to reduce poverty is to move people from welfare to work at an acceptable wage. Accordingly, the incentive effects of policies to promote this, such as a national minimum wage (IE9804246F) and a reduction in the tax burden on the low paid, are very important. The study also stresses the importance of complementary policies, such as reforms in child income support.
The study also emphasises the dynamic effect of alternative tax/welfare strategies on the continuation of national social partnership agreements. Tax reductions have played a key role in recent national wage agreements and taxation policy is likely to be a significant factor in the context of future national partnership agreements. Social inclusion has figured prominently in the current national agreement, Partnership 2000 (IE9702103F) and the issue of the appropriate relationship between social welfare rates and earnings is likely to come increasingly important in the future.
In addition, the study highlights a broader issue concerning the overall strategic direction of taxation and public expenditure. Policy-makers in Ireland are faced with a choice of whether they want the ratios of "tax and public expenditure to GDP to remain relatively low - what one might see as the USA/UK model - or to increase it towards the level seen in, for example, Denmark".
Perceptions amongst the social partners
The study has contributed to the debate amongst trade unions and employer organisations over what they see as the priorities for the 1999 Budget. For instance, the Irish Business and Employers Confederation (IBEC) believes that it would be wrong to increase social welfare provisions across the board, and that a better approach would be to direct increases towards certain groups, such as older people. It suggests that increasing social welfare payments across the board may further reduce the incentive of people to work. In contrast, trade unions representing low-paid workers, such as the Amalgamated Transport and General Workers Union (ATGWU), argue that the interests of marginalised population groups such as unemployed people, pensioners, single parents and disabled people should be a priority in the Budget. It believes that policies such as increasing social welfare payments and investing in area-based educational initiatives should be adopted to help those most susceptible to poverty.
In connection with the fairness debate, the recent ESRI study argues that although recent Budgets have generally favoured high earners, reducing taxes on the lower paid in the forthcoming Budget will not be enough in itself to improve the position of the poorer members of society. This is because the poor gain little or nothing from tax reductions, and indeed, have become relatively poorer as welfare rates in recent Budgets have failed to keep pace with the growth in average earnings. In order to avoid further increases in relative poverty, the study concludes that in future Budgets the Government should place less emphasis on cutting income tax rates and, instead, should place more emphasis on increasing social welfare provisions in line with, or ahead of, the growth in average earnings. Significantly, this would not involve any additional resources, but it could certainly have an important effect on alleviating poverty and contributing to a more equitable distribution of existing resources. This is especially important at a time when marginalised groups such as single parents are perhaps not benefiting as much as they should in the context of rapid economic growth. Finally, policy initiatives to tackle relative poverty should not focus exclusively on either achieving employment growth or increasing social welfare rates; rather, there should be a focus on combining both, alongside other measures such as improving childcare provisions. These issues are increasingly being debated and are likely to feature prominently in negotiations on future national partnership agreements. (Tony Dobbins, UCD)