Monday, 13 October 2014

Budget Rumours: An Equality Analysis

Nat O'Connor: Budget 2015 will be announced tomorrow, but there are enough rumours and unofficial announcements in this morning's headlines that some analysis can be made about the overall thrust of policy.

The main question for TASC is whether there is any coherent strategy to address the growth of inequality over the last four decades - never mind the last six years of austerity budgets. Since 1975, average incomes have doubled in real terms. In other words, there has been real economic development. However, that average is skewed by the fact that incomes for the Top 10% of people have tripled and incomes for the Top 1% are five times larger, in real terms, than they were previously.

Cause for concern? Some would say that inequality is the price of Ireland's adoption of a laissez faire economic model. But the OECD predicts inequality will grow across the developed world to such an extent that by 2060 even the most equal countries today will be as unequal as the least unequal today. That is likely to lead to breakdown of social cohesion. And countries closer to the UK and USA economic models - like Ireland - are likely to see inequality grow sooner rather than later.

The reasons for growing inequality are complex. It is not a conspiracy but rather it is the working through of the structure of our economies. There is a growth in high-skill high-pay jobs, in IT for example, but a loss of mid-pay jobs in manufacturing (replaced by robots or moved overseas). Service jobs are growing, but new sectors of employment (like personal care or hospitality) are characterised by low pay and lack of job security. Given that inequality is a likely consequence of our economic model, what is the Government doing to counter-act this?

The budget provides a wide set of tools to reverse some of the growing inequality, as well as an opportunity to make statements about the future direction of economic policy. So what do the rumours suggest?

The main suggestions I've seen across the Irish Examiner, Irish Independent and Irish Times are:
  • The higher rate of income tax to move from 41 to 40%
  • Some changes to USC
  • Changes to the tax bands, so the higher rate kicks in from €33,800
  • Tax relief of €100 towards paying for water regardless of income
  • Welfare bonus to pay towards water
  • Consideration of part-restoring the Christmas pension/welfare bonus
  • 20c to be put on cigarettes
  • 1000 new teachers to be hired
  • other spending, in health, justice, etc.
  • retention of the 9% VAT for hospitality
  • pension levy might be scrapped entirely
  • A 'patent box' scheme to attract MNC investment

Good quote from Christine Keily in the Irish Independent summarises this: "While economic prudence would demand that Ireland stay the fiscal course, reduce spending and increase taxes, political prudence will dictate that the Government do no such thing and completely ignore the economists' advice."

Naturally, there may be no real substance to some of these rumours, but on the whole the end-result looks like a very political budget, with an ad hoc approach to what economic model would best suit Ireland and no great concern with economic inequality:
  • Cutting the higher rate of income tax will benefit around 600,000 people - not the vast majority of Ireland's 1.9 million people at work (worsening inequality)
  • USC changes would probably benefit most workers, but it is likely that high earners will get the same benefit as low and middle (maintains inequality)
  • Changes to the upper tax band benefits surprisingly few workers (600,000 again) (worsening inequality)
  • The tax relief of €100 towards paying for water combined with a welfare bonus of €100 to pay towards water are purely political measures, and are technically bad policy (worsening inequality - see below)
  • Part-restoring the Christmas pension/welfare bonus (reduces inequality)
  • 20c on cigarettes (regressive, so worsens inequality, but probably justified to help stamp out smoking)
  • 1000 new teachers to be hired (reduces inequality)
  • other spending, in health, justice, etc. (mixed effects, but health spending reduces inequality)
  • 9% VAT for hospitality creates only low-paid jobs but reduces unemployment (reduces inequality slightly)
  • pension levy might be scrapped entirely (increases inequality slightly, as only those with a better class of job have pension savings)
The Government are giving either a welfare payment of €100 or a tax credit to all people in jobs worth €100 to help pay for water. In other words, they are reducing people's likely water bills by €100 through tax money, rather than simply lowering water charges. It remains to be seen if anyone gets left out of this new scheme, which is wasteful as not all workers will need a €100 tax break to pay for water. Maybe it will only apply to low paid workers (more equitable) but if it is widely available, the likely outcome is that tax revenue - paid by VAT, income tax, etc. - will be used to subsidise water for people who don't need a subsidy, but paid for by everyone. That will worsen inequality.

Meanwhile, the 'patent box' tax avoidance scheme for multi-national companies signals that Ireland is committed to prioritising foreign direct investment rather than building up an indigenous industrial base in Ireland. This is turn is likely to continue the skewed nature of Ireland's economy, with higher paying jobs in Dublin and other centres, but no direct job gain across the country. Likewise, high-paying jobs in finance or IT will contrast with low-paying domestic jobs in retail, healthcare, etc. Overall, a pretty clear continuation of the economic model that the OECD predicts will increase economic inequality steadily to 2060 and beyond.

And the lack of a coherent push towards something different suggests that the Government does not envisage any other economic model for Ireland. So, the OECD's prediction of growing inequality does not seem to have challenged official economic thinking to date.

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