Monday, 9 November 2015

Unequal recovery shows the changing fortunes in Ireland

Cormac Staunton: If incomes are a reliable indicator of the health the Irish economy since the financial crisis, then there has been a significant turnaround in the last five years. However, to fully understand what’s happening in this recovery, we need to look at who has benefited.  This is particularly important in the context of the discussions around the impact of changes introduced in the Budget.

According to figures released by Revenue, the total income of those liable for income tax was €77 billion in 2011. By their calculations, this is expected to rise to €98 billion in 2016. This €21 billion in new income represents an increase of more than a quarter in just five years.  This includes 355,000 new tax cases (either couple or individuals), a rise of 17% from just over two million to 2.4 million.

These headline figures are very positive. But they are not the end of the story. The most startling thing about these figures is how unequal the gains have been.  Of the €21 billion in extra cash, about €12 billion, more than half, has gone to the top 10% of earners.  Two thirds of it - €14 billion - has gone to people who earn more than €70,000, despite the fact that they make up less than 15% of Revenue’s income tax cases.

On the other hand, less than a third (€6.5 billion) has gone to the middle 60% of earners, with only 6% of all the increase going to the bottom 50%.

Of course, people will argue that as the cake gets bigger those who had the biggest slice to begin with are naturally going to get more cake.  But it’s also instructive to see how the share of income - or the relative size of the slices – has changed.

From 2011 to 2016 the share of income going to middle income earners fell from 52% to 46% which is a loss of more than 10% of the share of all income. At the same time, the Top 1% went from having 9% of all income to having 11% of all income – a gain of more than 20%.

This is a fundamental shift in how the market distributes income in Ireland.  It is part of an upward trend in the concentration of income that has affected most developed economies over the last 30 years and is causing growing concern amongst economists and policy makers.

We know that more equal countries do better on a range of social indicators with better health and education outcomes and lower crime rates. But there is growing evidence that more equal societies also have stronger economies. A recent study by the IMF showed that when the top 20% increase their share of income, at the expense of those in the middle and at the bottom, this causes the rate of economic growth to fall.

This is because the wealthy spend a lower fraction of their incomes than middle- and lower-income groups, especially in the local economy. In addition, the IMF found that inequality dampens investment, and hence growth, by fuelling economic, financial, and political instability.

In Ireland, discussions of inequality tend to focus only on the situation after taxes and transfers are accounted for.  There is a problem here. Looking at the extent to which social welfare payments reduce inequality, or the share of taxes paid by higher earners,  doesn’t demonstrate that Ireland is a more equal society – if anything it shows how unequal we are to being with.

The real economic progress that was made in the decades prior to the crash masked a growth in underlying inequality.  While the top 1% and top 10% increased their share of income, overall inequality declined due to rising wages in the middle and at the bottom, and rising social welfare payments. The crash then reduced incomes at the top and in the middle, while those at the bottom were protected by unemployment benefits.

Since the crash, market inequality is again on the rise. We are now the most unequal country in the OECD when it comes to market incomes, but we are at the average when it comes to incomes after taxes and welfare.  What that means is that we have a system that works the hardest, and yet our outcomes are about the same as everyone else. We are effectively running to stand still.

What we are seeing since 2011 is that post-tax and welfare inequality is also rising. It is unlikely that we are going to repeat the huge expansion in real wages that happened from the mid 1970’s to the end of the century. We have also proven that it is unsustainable to have an expansion in employment and incomes based on the debt-fuelled bubble.

As market inequality continues to rise, it leaves policy makers with difficult choices. We either accept that income inequality will also rise, with all the attendant social and economic consequences, or else government needs to take steps to actively redistribute incomes. This will involve taxing more at the top and redistributing cash to those in the middle and at the bottom, including those in full time jobs.

The alternative is to find ways to address market inequality, taking steps to look at the root causes of rising inequality rather than just the symptoms. Ensuring that employers pay a Living Wage would be a good start, but it also requires new ways to address pay ratios in companies.  Investing in education, infrastructure and indigenous industry will help to create good quality, stable and secure jobs.

We have seen in that last five years that the economy is perfectly capable of creating more income, the trouble is how it’s distributed. The solutions won’t be straightforward, but as with many things, the first step is admitting you have a problem.

Cormac Staunton is Senior Policy Analyst at TASC. You can follow him on Twitter @Cormac_Staunton 

This article originally appeared in the Sunday Business Post on Sunday 8th November 2015

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