Brendan Keenan

Thursday 10 July 2014

Ditch the rough-and-ready policies to bring some relief

Brendan Keenan

Published 10/10/2013|04:00

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A rare evening visit to Dublin last weekend confirmed the difficulty of explaining to a visiting Martian, never mind a visiting Greek, that this is the capital of a country coming through the worst crash and banking collapse ever recorded in an advanced economy.

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The city centre was choc-a-bloc. Every emporium for the serving of food and drink seemed full. There may even be signs of a pick-up, but there have never really been scenes of desolation. Some recent figures help show why, and may also shed some light on the coalition's political difficulties.

Research from accountants Grant Thornton found that a two-income family earning €80,000 a year, with two children and a €200,000 mortgage, is 7.5pc worse off than in 2008. The figure chimes in with the updated analysis of income distribution from the ESRI, which finds an average loss of 8pc in real income since the crash.

They point to the fact that, within an average fall of 8pc, who you are makes all the difference to how you are getting on. Young, working and free of debt is ideal. Dublin is full of such folk.

It also means that some households have bigger losses than the typical Grant Thornton one. The ESRI report, which incorporates the really serious drop in income caused by a lost job, points to who they are. The most damaging impact has been the jump in the proportion of households with no one working from 17pc to 25pc.

The popular rhetoric is that the poor have suffered more from the crash and the rich less. The evidence presented here is for something more peculiar. Over the full 2008-2013 period, the largest percentage losses of disposable income were in the richest 20pc (the top two deciles), at 11pc and 12pc.

The peculiar bit is that the next biggest drop – over 8pc – was in the poorest decile. This finding is not new, and neither is the lack of any action to do something about it. The question is whether politicians want to do anything about it.

The question is especially pertinent for the Labour Party. There is much discussion over why Labour seems to be suffering more than Fine Gael from the reaction against austerity.

For me, the most convincing explanation was that Labour got an even bigger proportion of votes from people who cared nothing for the party, but believed it was most likely to save them from the troika.

It did not help that Labour promised to do precisely that. It is reaping what it sowed, one might say, but that leaves the question, what should it have sowed? Indeed, is there anything even now that it might scatter upon the ground in the hope of harvesting something by election time?

Its policy advisers might want to pore over the ESRI paper, but time is short. To be fair, I have no doubt they have already pored. It could present the opportunity for Labour to construct a tax and welfare policy explicitly aimed at reversing the strange fate of the poorest section of society. It might not be an election winner, but what could be? At least it would be rational, even honourable.

The two central planks of the coalition parties were no increases in income tax, from the senior partner; and no cuts to core welfare rates, from the junior. In neither case was there any detailed explanation of what the effect of these two policies would be.

We are meant to assume that it is obvious that the former would encourage employment and the latter alleviate poverty.

There is international evidence that high marginal tax rates and big wedges between gross and net pay damage enterprise and employment, but Fine Gael was unable to keep its promise. We have now got both again, because of the failure to reform the income tax system in good times and the political impossibility of doing it in bad ones.

The ostensible purpose of not cutting core welfare payments was to protect the less well-off. The ESRI findings suggest Labour was unable to keep this promise either. This one was not impossible, but it might not be politically popular. There is little evidence that the actual cuts in welfare transfers had any such theoretical pinning behind them.

Despite the magnitude of the crash, the pattern of income distribution remains much as it has always been. This can hardly be an accident. Political imperatives maintained the status quo, as rough-and-ready policies responded to pressure, rather than to any intellectual or ideological view on what should be done.

Demands for more equality concentrate on calls for the rich to pay more. But they always refer to the really rich, who do not make up even one decile; more like just 1pc or 2pc of households.

The rich do require policies all of their own, but there would be fierce debate as to whether the remaining 18pc of people in the top two deciles (well-off, but not exactly rich) should have been hit by income losses of more than 12pc.

If one takes the view that that was penal enough (or even allows for the limits to how much more could be extracted), removing the anomaly of the poorest being hit so hard requires shuffling of income between groups. As it happens, this is a key issue – what to do about State pensions?

The fact that they have been left untouched is the main reason that there is any progressive pattern at all in the general loss of income.

The second and third lowest deciles, where the income of most pensioners would fit, had the second and third lowest reductions. But there is another jump in the fourth decile, whose 9pc drop in income is worse than that of the third richest.

Any significant reduction in State pensions will create an unambiguous picture of the poorer half of the community taking almost the same income reduction as the richer.

A genuine "progressive" policy would leave pensions alone, transfer significant resources to the lowest decile, and provide some relief to the fourth.

Such decisions do make a difference, the researchers find. They suggest that the impact of the transfer system – mainly welfare and child benefit – is about three times larger than that of the tax system.

One might disagree with such a policy, and it might mean more spats between Fine Gael and Labour. Unlike the others, though, it would actually be about something that matters, and could be understood. And if that is all a bit idealistic for Labour advisers, it is a fact that pensioners tend to vote.

Irish Independent

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