Tackling Economic Inequality
Posted on January 20, 2016 by Micheál Collins
One could write a book, indeed volumes, on the topic of economic inequality and its possible causes, implications and remedies. In a blog (based on a short input to a recent conference) it is only possible to point towards a number of key issues; specifically six core areas relevant to our thinking on how we might more comprehensively tackle economic inequality. The list is not intended to be either ordered or all-encompassing, rather it offers a number of policy pointers – particularly relevant to the evolving policy positions and thinking of various political parties in advance of Election 2016.
1. Jobs and Long-term Unemployment
The current and ongoing recovery in jobs is an important contribution to addressing recent, recession induced, levels of economic inequality. However, it is not the be-all-and-end-all of the labour market contribution to the issue. Without doubt the key labour market (and perhaps key public policy) issue for the next decade will be long-term unemployment and the need for resourced and strategic interventions to assist large numbers of people getting back to work. The boom proved that most of these people will happily work; however without active support, little of which is currently being provided, these workers are likely to be trapped in long-term unemployment.
2. Fair Pay
We tend to think about fair pay as a low pay issue; however there are fair pay problems at both ends of the earnings distribution. With one in five workers living on less than the living wage, the challenge for many workers to make ends meet remains a daily difficultly. At the other end of the labour market it is clear that high pay has become more and more disconnected from the reality of decent pay, average earnings, living costs and the appropriate rewards employees should get for their service. Policy aimed at addressing, and reducing, economic inequality will need to focus on pay at both ends of this distribution and pursue strategies to narrow the overall distribution.
As a society we should not overlook the fact that the welfare system is the core component of fairness and equality in Irish society. Social protection payments provide a safety net for almost all families and directly support the living standards of a large proportion of our society. Via child benefit, illness and disability payments, unemployment supports and old age pensions, among others, the system dramatically alters the shape of Ireland’s income distribution and enhances equality.
As recovery unfolds, there is a danger that welfare will slip as a priority as the policy focus shifts elsewhere. The experience of the last Irish recovery, in the late 1990s is telling – in a few short years the poverty rates of welfare dependent households sky rocketed with, for example, pensioner poverty increasing from 5.9% in 1994 to 44.1% in 2001. Simply, earnings increases and income tax reductions flowed to others and those dependent on welfare slipped further and further behind. It took some significant welfare increases in the early 2000s to address the legacy of these decisions and restore the relative standing of this group.
The lesson for economic inequality is on the importance of maintaining the relative value of welfare payments and increasing them in line with living costs and changes in earnings elsewhere in society.
Two issues are of particular note when thinking about taxation in the context of addressing economic inequality. First, there is a clear issue regarding the appropriateness and adequateness of the current plans by Government for the scale of the overall tax take – as set out in the Spring Statement and Budget 2016. While one can argue about how much or how little tax needs to be collected to run the country, and it is a good thing that we do so, the realistic range sits somewhere between 31% and 35% of GDP. Above this is occasionally suggested, but is not realistic outside of a dramatic change in the structure of the state and public services. Similarly, below this range is occasionally suggested but is similarly unrealistic without dramatic structural change. However, current plans are for a tax take of around 29% of GDP; a figure that is unrealistic and puts unnecessary pressure on the appropriate provision of public services across the state. Where these services are under-delivered, it is those who are most disadvantaged in society who suffer most.
Second, there are clear equality issues related to the nature of public spending and taxation changes that are planned for the period immediately ahead. Taxation changes focused on income, whether through USC changes/abolition or changes to bands, rates and credits, will by definition benefit those with taxable income; people who are predominantly located in the top half of the income distribution. Many such changes will also benefit those who have most the most. From the perspective of tackling, rather than enhancing, economic inequality, the importance of fairness in any structural reform of the taxation system, or offsetting accompanying measures, cannot be underestimated.
All the evidence shows that on average women are better educated, brighter, live longer but yet are paid less and are more disadvantaged than men. This points towards a structural problem, or series of problems, in Irish society (we are not alone on this) – problems we need to aggressively address. The gender specific nature of these inequalities is further reflected in the fact that they spread right across the income distribution.
One in five children live in a household with an income below the poverty line. Long-term the implications and costs of childhood disadvantage are very high; multiples of the costs associated with addressing this and related issues now. Conversely the return on investing in addressing these issues now is a multiple of any return available elsewhere; or indeed any benefit-cost ratio threshold. ECCE schemes, school meals in disadvantaged areas, adequate and affordable childcare facilities and targeted library services for children are just some of the worthy options available. In the words of a well know sports brand, we should Just do it!
Dr Micheál Collins is Senior Research Officer at the Nevin Economic Research Institute (NERI) and an adjunct Professor of Economics at Trinity College Dublin. This blog reflects a contribution to a seminar on Tackling Economic Inequality held by the Social Democrats in Dublin on November 28th 2015.