Tuesday 16 October 2018

'We must ask if our system of redistribution has gone from helpful to harmful'

Irish average earnings of around €46,000 are on a par with those of German workers, and are 10pc higher than in the UK as the gap continues to widen. Photo: Bloomberg
Irish average earnings of around €46,000 are on a par with those of German workers, and are 10pc higher than in the UK as the gap continues to widen. Photo: Bloomberg
Brendan Keenan

Brendan Keenan

If you really want to get on these days, you need a catchy word or phrase. Something like 'pre-distribution' - a clever play on the more common redistribution. It was coined by Yale University economist Jacob Hacker back in 2011 and has become quite the thing among governments and social economists. This is not to decry the merits of Dr Hacker's insights - quite the reverse. Pre-distribution might have been invented with Ireland in mind.

The standard definition is that the state should try to prevent inequalities occurring in the first place, rather than ameliorating them through the tax and benefits system once they have occurred via redistribution. It has gradually dawned on people recently that Ireland is a world leader in exactly that.

It took a long time for clarity to emerge, but this is an area bedevilled by multiple meanings and definitions, leading to inevitable confusion. In Britain, for instance, pre-distribution is seen as a way of tackling the effects of a low-wage economy and has been taken up by various socialist groups.

In Ireland, it might be said to be exactly the opposite; tackling the effects of a high-wage economy. Not that much is being said at all, even though the Government has a pre-distribution agenda and a set of policies designed to implement it.

For a long time governments were berated by figures showing that Ireland was one of the most unequal pre-distribution economies in the rich world - except that the word 'pre-distribution' was not used.

Instead, it was portrayed as a gap between the very rich and the poor. But Ireland's rich are not especially rich by international standards. It is Ireland's higher paid workers, not its plutocrats, who do particularly well.

This is still an area where few dare tread, despite the incontrovertible evidence that, what ever about pre-distribution, Ireland's redistribution system is remarkably effective.

One of the widest gaps in the OECD before tax and social payments becomes one of the smallest after they kick in.

At first glance, this is something to be proud of, and it is certainly better than the alternative of cosseting the higher paid and leaving the lower to fend for themselves - even though a considerably number of lobbyists and commentators who insist that this is what actually happens.

But pride must be tempered by the existence of that huge pre-distribution gap in the first place, the reasons for it analysed and any ill-effects confronted. That does not happen to any extent.

As a result, most people would be astonished to learn that Irish average earnings of around €46,000 are on a par with those in Germany and 10pc higher than the UK. Right now, that gap is widening rapidly.

On the other hand, almost half the Irish workforce earns less than €30,000 and no less than a quarter have incomes below €10,000. What distinguishes this country from many others is the 20pc who earn more than €50,000 a year.

This is the pre-distribution issue which but politicians generally prefer to ignore, concentrating on the 3pc with incomes above €100,000.

Apparently, they will be able to solve all our redistribution problems on their own.

They won't, but that leaves the question as to who should be distributing to who, and by how much.

Politics, and a lot of lobbying, is based around the presumption that the narrowest international gap in disposable income is still not narrow enough.

The facts to the contrary are beginning to have an impact though, with attention shifting beyond income to areas like housing and - last week's big story - childcare costs.

Pre-distribution may be more relevant here than redistribution. Central Bank lending rules are based on gross earnings. But the cost of houses and childcare must be paid from after tax income.

In Dublin at any rate, the average house costs more to build than our average couple on €90,000 a year can prudently borrow, while the pattern of gross income means we should not be surprised that childcare is one of the most expensive in the OECD.

Surprised or not, the fact is that costs are hardly discussed, and even more rarely analysed.

Yet the idea that these problems can be dealt with by more redistribution looks increasingly threadbare.

If any group is entitled to feel hard done by, it is those below average earnings who face moving into the top rate income tax band and joining the distributors.

Their plight is the subject of promises before every Budget, including this year's, but in fact they have been royally ripped off in almost every budget during the last decade. In 2009, the top rate kicked in at €36,900. This year it is €34,550.

That was bad enough when earnings were stagnant after the crash but, with a 3pc rise expected this year, tax cuts will not start until that figure is increased to €35,580. Anything less represents a tax rise.

That is the original stealth tax. Avoiding it is expensive. If it is done, there will be little left for a reduction in the pre-distribution burden; even if that were government policy, which is unlikely. Not with the Redistributor-in-Chief around, in the shape of the Department of Social Protection.

This is the source of the most peculiar piece of pro-cyclical policy. Social spending rose during the credit bubble and fell in the recession. The same pattern is being repeated as unemployment tumbles from 15pc to 5pc.

Cash payments such as jobs benefit must be replaced by non-cash ones, so that the magic figure of €20bn in social spending remains intact.

It is politically convenient to ignore that and concentrate on pre-distribution income inequality. This requires no unpopular instant actions such as pay cuts on higher public salaries or reductions in untargeted benefits; just comforting ideas such as more pre-school places, lifelong learning and apprenticeships, wider access to third level and greater competition and consumer protection.

The idea is that more people will then be able to command higher-paid jobs, thereby reducing the need for redistribution.

Alas, these are mostly areas where Ireland historically is also an outlier in the OECD - near the bottom. They have been on the bucket list for every government in decades but with little to show for it but the ignominious dissolution collapse of the Fás training agency.

Even if the current programmes do better, results will take a long time coming through.

In the meantime, the question must be asked as to whether the present system, with its steeply rising income taxes and wide disbursements, where a typical family on average earnings is a net recipient from the State, has gone beyond what is helpful into what is harmful.

Of course, just because the question should be asked, does not mean it will be.

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