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VILLAGEAugust/September
Increase the
minimum wage
in our low-
labour-cost
economy to
incentivise work
Tax cuts in low-tax Ireland
won’t benefit the needy
T
HE preparations for Budget are under way.
As with previous budgets, the Government has
choices it can make in meeting the requirement to
reduce the deficit in the public finances to less than %
of GDP in . Unfortunately, there are no such self-
imposed or externally imposed requirements to reduce
inequality and poverty, or to provide a reasonable stand-
ard of living for all families through the creation of good
jobs with decent pay and the provision of high quality
public services. Such a requirement would result in a very
different budget.
The Government indicated in the April
Stability Programme Update that it is planning a €
billion fiscal consolidation in the October budget to
achieve the % goal based on a range of tax increases
and cuts in public spending. The mood music from
Government now suggests that the adjustment may be
somewhat less than € billion. The tax take is running
ahead of target and spending is down. Both indicators
have been helped by an expansion in economic output,
a modest reduction in unemployment and growth in
employment. This means more people are working
and paying tax and fewer people are claiming social
welfare.
Growth in the economy is the key driver of economic
recovery and deficit-reduction. The Department of
Finance has forecast the growth rate for and
to be .% and .%. The Nevin Economic
Research Institute (NERI) growth estimates are .%
and .% for and , respectively. The ESRI
is more optimistic and puts growth for the same
periods at .% and .%. Growth in the economy
appears to be taking hold.
On the basis of positive trends in key economic
indicators, we are approaching the territory for a
(near) neutral budget to take us over the line of
achieving the deficit-reduction target of less than %.
However, the European Commission, the IMF and the
Irish Fiscal Advisory Council have all called on the
Government to stick to an adjustment of € billion to
meet the deficit-reduction target and to accelerate a
reduction in overall debt to a more sustainable level.
However, these calls fail to take account of the impact
of imposing further austerity on equality, poverty and
living standards.
Whatever the size of the adjustment, it will be made
up of a combination of tax/charge increases and cuts to
public spending, with the emphasis being placed on
cutting spending. To date, over € billion has been
taken out of the Irish economy, two thirds of which has
been achieved through cuts in public spending and one
third through taxation measures.
Successive austerity budgets have had a negative
impact on the vast majority of household incomes and
living standards. Charts and show the ESRI
research measuring the impact of tax and welfare
changes across the income deciles (or groups) for
Budget and cumulatively over the last four years.
In Budget the lowest income group lost propor-
tionately more income than any other group. Over the
last four years the two income groups worst affected
were the very highest earners whose income fell by
over % and the very lowest earners whose income
fell by over %.
It is important to remember that the lowest income
group has the least capacity to absorb a reduction in
income compared to the highest income group. The
ESRI analysis looks only at income, and does not
quantify the impact of decreases in public services, on
which lower income groups are more likely to depend,
which have a further regressive impact on the lowest
income group.
Income inequality is measured by the Gini coeffi-
cient and the income quintile share ratio. Ireland is
close to the European average for both measures.
However, at EU level, the overall trend is towards
growing income inequality. In Ireland income
inequality has remained relatively unchanged
between and but this has to be understood
in terms of the critical role of social welfare in
addressing poverty and protecting incomes.
Income data alone do not tell the whole story
concerning living standards. Poverty and deprivation
levels have been rising consistently since and
the latest figures show that .% of the population
(, people) is considered to be ‘at risk of poverty’
(income below €. per week per adult). The level
of deprivation now stands at .% (,,
people) and has almost doubled since .
Households experience deprivation when they are
excluded from consuming goods and services which
are considered the norm for other people in society
e.g. keeping a home adequately heated or having a
roast-meat dinner once a week.
What budget options exist that will allow us to meet
the % deficit reduction target next year, promote
growth in the economy, reduce inequality and poverty
and improve living standards?
SINÉAD PENTONY
August/September VILLAGE
Source: Callan T., Keane C., Savage M. and Walsh J. (2014) Distributional Impact of Tax,
Welfare and Public Service Pay Policies: Budget 2014 and Budgets 2009 - 2014
2 3 4 5 6 7 8 9 Top
Bottom
-0.5
0.0
-1.0
-2.0
-3.0
-4.0
-1.5
-2.5
-3.5
CHART 1: Impact of Budget 2014 – Percentage change in
disposable income by income decile
Source: Callan T., Keane C., Savage M. and Walsh J. (2014) ‘Distributional Impact of Tax,
Welfare and Public Service Pay Policies: Budget 2014 and Budgets 2009 - 2014’
2 3 4 5 6 7 8 9 Top
Bottom
-2%
0%
-4%
-8%
-12%
-16%
-6%
-10%
-14%
CHART 2: Impact of Budgetary Policy 2009-14 –Percentage
change in disposable income by income decile
Over the last four years
the two income groups
worst affected were the
very highest earners
whose income fell by over
15% and the very lowest
earners whose income
fell by over 12%
“
Various lobby groups, and a large proportion of
mainstream commentators, are saying ‘it’s time for a
cut in income tax’. This does not bode well for equality
and poverty reduction.
While a cut in income tax would bring some relief to
average income earners, it is unlikely to benefit those
in the lowest income groups, as the vast majority do
not earn sufficient income to benefit. A cut in income
tax would put further pressure on our public services,
which are funded through taxation. Lower income
groups are more dependent on public services and
further cuts would have a disproportionate effect on
these groups. Finally, a cut in income tax is likely to be
offset by increases in taxes or charges in other areas
such as VAT which have a disproportionate effect on
lower income groups.
It is important to remember that Ireland’s total tax
take, including social security contributions was
.% of GDP in , which was well below the EU average of
.%. Public expenditure was .% in , which is also well
below the EU average of almost %. It is the high tax and spending
countries of Europe that are the most competitive economies.
In terms of putting more money in people’s pockets, the focus
should be on increasing wages (especially the minimum wage). This
would have the effect of increasing the tax take, stimulating some
much needed demand in the domestic economy, improving the living
standards of very low earners and starting the process of reversing
the trend of growing poverty and deprivation.
The mainstream narrative on increasing wages is accompanied by
concerns relating to ‘a loss of competitiveness’, ‘the need for wage
restraint’, and ‘it’s too soon to be talking about wage increases’. But
the facts speak for themselves. Ireland’s labour costs are well below
our Euro Area partners and there is plenty of scope to increase wages
without damaging competiveness. Wage increases should be used to
accelerate economic recovery, reduce poverty levels and increase
living standards.
The adjustment in the forthcoming budget should focus exclusively
on taxation measures that promote growth, advance equality and
reduce poverty. Further cuts to public spending are likely to result in
long-term damage to education, health and social protection services
and should be avoided. Such cuts will impede growth through a lack
of investment in physical and human capital and exacerbate poverty
and inequality.
The taxation measures that should be considered as part of the
next budget include:
l Reform tax reliefs, e.g. pension tax reliefs are regressive and
disproportionately benefit high earners;
l Increase the effective rate of corporation tax paid by multina-
tionals. While the very low level of tax paid by multinationals
is now on the global agenda, Ireland could tighten up on the
reliefs that facilitate significant reductions in the amount of
corporation tax that is actually paid;
l Broaden the tax base by introducing a Net Wealth Tax, which
could have a threshold of € million and be set at a low rate of,
for example, .%. NERI has undertaken detailed work on the
design features of a Net Wealth Tax and how it could be
introduced;
l Start the process of increasing PRSI from being one of the
lowest in the EU to the European average over the next years.
This should be used to strengthen the social safety net;
l Further reform Capital Acquisitions Tax (Inheritance tax) by
reducing the various reliefs and thresholds (i.e. tax free
allowances) that apply.
Taxation measures need to be accompanied by an
increase in wages, especially for those on low wages,
and an investment strategy. While the Irish Strategic
Investment Fund (ISIF) will play a central role in
directing investment, there is still little information on
how it will operate. Ireland has under-invested for a
number of years in areas such as housing, energy,
transport and telecommunications. This will have a
long-term impact on the capacity of the economy to
grow and be competitive globally. In the immediate
term, the current crisis in social housing has brought
this dearth of investment into sharp focus and there is
an urgent need for this issue to be addressed.
Budget presents Government with an opportu-
nity to not only meet the deficit reduction target but
also start the process of undoing the damage done by
years of austerity. This should involve setting quantifi-
able and measurable targets in relation to income equality; poverty
and deprivation reduction; and improved living standards. •
