Budget 2004 – Small Change for the Poor

on Thursday, 18 December 2003. Posted in Issue 47 Budget 2004: Preserving a Divided Society?, 2003

Robin Hanan

December 2003

 

The day after Budget 2004, the Taoiseach, Bertie Ahern TD, was on the defensive. The Budget, he declared, would dispel the myth that this was a right-wing Government which cared only for its rich friends. He talked about the increase in social welfare payments and the concentration of income tax cuts on the incomes of the lowest paid, particularly those at the minimum wage.

In spite of the unpopularity of the Government, he might just get away with it. The media found so little that was contentious that it was the announcement in the Budget speech of the decentralisation of government departments that became the focus of attention.


The Year of Dampening Expectations

For several months prior to the Budget, we were treated to dire warnings of economic crisis and of the need for a \'tough\' Budget to maintain competitiveness. From bitter experience, we knew that \'tough\' meant \'tough on the poor\'. This lesson was learned in the 1980s, when the poor were the main victims of \'tough measures\' adopted to address the budgetary crisis that was largely created by earlier give-aways, such as the abolition of capital taxes, rates and car tax, which were of greatest benefit to the better-off, as well as by widespread evasion of tax.

This year\'s predictions of disaster turned out to be unfounded. As time went on, the predicted budget deficit of 2.4 billion euro evolved into a likely surplus of one billion euro.

In any case, in July the ESRI had argued that the economic slow-down was temporary and that after 2005 Ireland would return to a significant growth in GNP. It predicted growth above 5% each year between 2006 and 2010, with a commensurate increase in revenue so that in the second half of this decade there would be a small budget surplus.1 It argued for continued investment to "address the pressing need for an improvement in the infrastructure of the economy." 2

The assumption that public services and welfare would have suffered if the budget crisis had deepened is symptomatic of the Government\'s ideology and that of many media commentators. Ireland\'s extremely low tax rates for property-owners, businesses, and the higher paid, leave room for tax increases in these areas. A wide range of schemes which privilege the rich, from mortgage relief to SSIAs, could have been reduced to plug any gaps.

In early 2003, the Government negotiators of what became the national partnership agreement, Sustaining Progress, made it clear that there would be no specific commitment of resources to social inclusion or equality or even to deliver what had been promised in the previous agreement or in the revised National Anti-Poverty Strategy (NAPS). As a result, most anti-poverty groups either could not sign the agreement or signed it very reluctantly.

Horses for Courses

The Estimates published in November included sixteen cuts in the area of social welfare. The thinking behind these now infamous measures seems to have been influenced more by ideology than by financial considerations. The cuts will have a devastating impact on the people affected but will save only 55 million euro. As the Community Platform has pointed out, this is less than the subsidy to the horse industry, which receives 67 million.

The Minister for Social and Family Affairs, Mary Coughlan TD, represented the welfare changes as part of a process of tidying up and reform. After the Budget, and in response to public outcry, she hinted that all or some could be reconsidered.

Most of the cuts did not involve abolition of particular benefits but were rule changes which would make claiming entitlement more difficult. The four changes in rent allowance, for example, would all either curtail eligibility or reduce the amount paid.

Since the cuts did not save much money, there was a definite suspicion that they were designed to make a political point which the Government felt would be popular. The emphasis at EU level on \'making work pay\' can be achieved either by improving rewards for work and, more importantly, providing supports, such as childcare and flexibility in working hours, to facilitate participation in employment - or by making life on welfare even more onerous than it is already. The latter solution has the political value in some circles of being seen to be \'tough\' on minorities such as lone parents. Frances Byrne of OPEN (One Parent Exchange and Network) said that the cuts would "further marginalize one parent families".

Patched-up Solutions

The Minister for Social and Family Affairs made a particular point that the rent allowance is, in effect, being used as a type of housing scheme, rather than as a last-resort safety net, as it was designed to be. Anti-poverty groups argued in return that it was nevertheless the only thing standing between many people and financial destitution or homelessness.

This discussion echoed concerns that had already emerged in the debate about another of the issues which provided the back-drop to the Budget, and one that reportedly provoked a revolt by some members of the Fianna Fail parliamentary party. This was the year-long run-down of the Community Employment and Jobs Initiative schemes. The Government argued that these schemes were never meant to become either a mainstream employment substitute or a form of support for community organisations. In fact, there would be general agreement in the community and voluntary sector that the schemes were often not the ideal mechanism for providing job training or for delivering community services. However, abolishing them without providing an adequate replacement would undermine both an important avenue of return to work and much-needed services.

In the case of both rent allowance and employment schemes, then, anti-poverty groups found themselves defending existing imperfect systems because of the damage that would be caused by removing them without introducing better, but more expensive, solutions.

Mostly Harmless

In this climate, many anti-poverty groups approached the Budget cautiously, anxious to defend existing social provisions and services and to make progress on some of the commitments in NAPS and national partnership agreements.

On first sight, the Budget was almost a relief. A fairly neutral Budget with some increases in social welfare in real terms was a lot better than expected a few months ago. Taken in isolation, one could apply to it the true but misleading description of the Earth in the Hitchhiker\'s Guide to the Galaxy: \'mostly harmless\'.

The Minister for Finance, Charlie Mc Creevy TD, made much play of the nominal 7% increase in social welfare spending overall. This increase is welcome, but after inflation it represents a very small step towards the Government\'s own NAPS social welfare targets for 2005 and 2007. The one billion euro promised for school buildings over five years is also welcome, but spending generally does not recognise the scale of the challenge of educational disadvantage.

The Children\'s Rights Alliance, the Community Platform and the Combat Poverty Agency all responded particularly strongly to the Budget measures as they affect children. Once again there was no increase in Child Dependant Allowances, which have been static since 1994. Neither was there any response to the calls from many groups for an examination of how to provide a new second-tier child support mechanism, to replace Child Dependant Allowances and Family Income Supplement with a payment which would be directed at the lowest income families and be neutral in regard to the employment status of parents.3 Similarly, failure to increase the Back to School Clothing Allowance and small increases in Child Benefit do not fit with the Government\'s stated commitment to end child poverty.

The concentration of income tax cuts on the very lowest paid means that 90% of those on minimum wages are expected to move outside the tax net. On the other hand, the fact that people on the average industrial wage will now pay tax at the same rate as people on the very highest incomes shows how far we have moved from the aspiration that income tax can be a measure for redistribution of income and for fair \'burden-sharing\'. With the maintenance of a wide range of exemptions, allowances and loopholes which disproportionately benefit the well-off, many of the rich will continue to pay very little tax. 

Goff\'s
Welfare State for the Rich: Subsidies to the Horse Industry exceed savings from the \'Savage Sixteen\' welfare cuts

Second Richest Country in the EU

The Budget does not look nearly so harmless when we see it in its broadest context. In spite of the economic slow-down, Ireland continues to be the fastest growing economy in the EU and is now the second richest country after Luxemburg.

Ireland has the lowest overall tax rates, the lowest spending on social provision and the highest poverty rates in the EU. This is not a coincidence. It is the result of conscious political decisions which long pre-date the present Government or the \'Celtic Tiger\'.

The historic under-investment in public services has led to well-recognised crises in the health and education systems, which are comprehensive and free only in name and do not serve well the needs of the poorer sections of society. John Kenneth Galbraith\'s classic description of the United States in the late 1950s, when he referred to private affluence existing alongside \'public squalor\', could have been coined for Ireland today.

This is the real scandal of successive Governments. Despite statements to the contrary in national agreements and anti-poverty plans, we have not used our new wealth to eradicate poverty or inequality. In fact, relative poverty has grown and inequalities have deepened while the rich contribute relatively little to the Exchequer.

Targets Need Resources

It should be clear from the years of EU Poverty Programmes and NAPS that good ideas and community structures are not enough, in themselves, to eradicate poverty. We need also to commit resources on a scale which we have not seen to date. This can be achieved only through a higher level of overall taxation or through re-allocating resources away from middle and upper income groups within the existing budget.

In spite of nice language and ambitious but not very specific commitments in successive partnership agreements and anti-poverty plans, there is not much prospect of either option being taken up by the present Government.

The current Minster for Finance sees himself as a radical reforming minister. He would like to be remembered as the Minister for tax cuts, particularly cuts in income tax. Like his PD colleagues, he would like this Administration to be remembered as the Government of low taxation.

This is a popular position, reflecting the fact that Irish PAYE taxpayers contribute a vastly disproportionate share of public revenue. While PAYE rates have reduced dramatically since the days of the tax marches of the late 1970s, low-income earners still pay tax above the EU average.

The problem with the tax cutting policy being pursued is that the Minister and his colleagues want to achieve income tax cuts without addressing the inequities in the tax system.

The battle for the hearts, minds, wallets and purses of PAYE tax-payers is fought between those who argue for low taxation, and therefore poor services and a more unequal society, and those who argue for a more equitable tax system and greater social solidarity. In the old days, this would have been called \'right\' and \'left\'; nowadays, most commentators are happier to pick up the Tanaiste\'s phrase, \'Boston or Berlin\'.

There is a genuine fear that any increased spending will fall on the shoulders of the PAYE tax-payers who already pay more than their share of tax. This accounts, to some extent, for the contradiction between opinion poll results about social solidarity and about taxation. Large majorities in the annual \'Eurobarometer\' polls prioritise social inclusion and action against poverty as political issues. On the other hand, an Irish Times opinion poll, published in September 2003, showed that when asked to choose between increasing taxes, borrowing more, or cutting spending, as ways of paying for existing public services and capital projects, only 9% choose tax increases and 48% favoured spending cuts.4

Of course, the relationship between public social spending and social equality is not exact. The way money is targeted is important. Subsidies for investment schemes or private healthcare cannot be seen as helping social inclusion. In addition, the overall level of social spending is clearly influenced by factors such as demographic structure and levels of unemployment.

Nevertheless, a recent study for the Combat Poverty Agency underlines the fact that countries which spend the most on social provision have the lowest poverty rates and those, like Ireland, which spend the least have the highest rates.5 This is hardly surprising but is not much debated in Ireland.

Our extremely low rate of tax and social spending do, at the very least, show that we have scope to raise the resources to begin to tackle the massive gaps in services and social provision inherited from decades of under-investment.

Stealth Taxes

To avoid income tax increases, the Government has opted to continue massive tax breaks for the rich and try to balance the budget through a combination of restraints in public spending and increases in what are becoming known as \'stealth taxes\'.

The term \'stealth tax\' is useful in highlighting the range of important changes in taxes and charges which do not appear in the headlines about cuts or PAYE increases. The problem with the phrase is that it can be misleading because it covers such a range of taxes. Some politicians use it to refer to the increase in PAYE or other tax receipts from not adjusting bands in line with inflation and this year IBEC is using it to attack service charges on business development land.

For people on low incomes, the most damaging \'stealth taxes\' are increases in VAT on essential items and increased charges for utility services, both of which absorb a much higher proportion of their income than is the case for better-off households. A recent Combat Poverty Agency Policy Statement on charges for waste collection notes that these vary considerably across the country, ranging between 150 and 500 euro per annum.6 A waiver of waste charges for low income households in granted in most but not all local authority areas; no national guidelines have been set down regarding the operation of waiver schemes so there is no automatic entitlement and individual local authorities decide their own regulations on this matter. In contrast, tax relief on charges is available to all income tax payers and once approved is provided automatically in future years.7

Tax and Taboo

The question of Ireland\'s low corporation tax levels has been something of a taboo in public debate for quite a while. The media and public have largely bought the argument that the \'Celtic Tiger\' is a very fragile creature which could panic and run if faced with higher corporation taxes.

Ireland\'s policy on corporation tax is seen as predatory by some other EU governments because it undercuts countries with higher rates and threatens to start a \'race to the bottom\' which can only benefit multinational investors at the expense of countries and their people. Perhaps the strongest campaign fought by Irish government ministers at EU level is to keep tax harmonisation, particularly in relation to corporation tax, off the EU agenda.

Minister Mc Creevy specifically took time in his Budget speech to attack "those who mistakenly call for us to increase our tax burden towards the level of some other countries in Europe," arguing that low tax levels are the basis of our competitiveness and, therefore, underpin our jobs. This was a reference to groups such as the Community Platform and CORI who argue that Ireland needs to move towards the EU average level of taxation if we are to become a more equal society.

We also need to think about where we want to place ourselves, competitively, in the global market. The crux for the \'Tiger\' economies in South-East Asia, from whom our own Celtic Cub got its name, came when they could no longer compete in the low-cost end of the market. Economic growth is only useful if it raises incomes and this means higher labour costs. In addition, tigers breed competition, and soon there are leaner, meaner animals in the jungle.

The week before the Budget, David Begg, General Secretary of ICTU, questioned the Government\'s policy of low corporation taxes and its total resistance to any moves in the direction of EU tax harmonisation. A few years ago, this would have been seen as heresy or treason, but in the new Europe it makes sense.

We cannot hope to undercut the new accession countries, much less lower-cost economies with fairly open access in the globalised market. We need to build on new strengths in the higher value-added sectors, using the technical and professional know-how built up in recent years to find a more sustainable niche.

The low-tax model in some ways carries the seeds of its own destruction as the gaps and inadequacies in public services ultimately make life difficult for everyone.

These arguments need to be faced head-on. There has been relatively little discussion, outside academic circles, about what kind of economic model is feasible and desirable for Ireland in the near future and where Ireland wants to position itself in the global economy.

©D.Speirs

Public spending biased towards the rich diverts resources from where they are needed

Welfare State Welfare State for the Rich

The low rate of taxation and spending is only part of the story. In addition, much public spending is itself biased towards the rich, and to a lesser extent, towards those on middle incomes. This can be seen in health and education, where spending heavily subsidises private provision which adds insult to injury by asset-stripping the public sector. It can be seen in many other areas of public spending - in, for example, grants to private arts and sports clubs which, because of cost, are inaccessible to most people.

The public subsidisation of private services and the absence of universal social services serve to break down the feeling of solidarity. In countries with comprehensive services, almost everyone sees a benefit for their taxes and gains some identification with the welfare system. In Ireland, many people on middle incomes who pay for \'private services\' do not see themselves as welfare recipients, in spite of the level of state subsidy they are receiving. This leads to resentment of tax for welfare spending, which is seen as being directed to the poor only.

In a more blatant way, forms of spending which massively subsidise wealth, such as the SSIA savings subsidies and the range of tax incentive schemes, continue with minimal public debate at a time when we are told that the country is short of money for basic services.

The tradition of local clientalism makes it possible and even popular to divert large amounts of money to private, profit-making enterprises, such as hotels and golf courses, which may have only a small spin-off benefit for the rest of the community. Many people will be more interested in whether grants \'come to our town\' than in the question \'whom do they benefit\'?

The spending of the rich is also subsidised through the extraordinary mesh of tax reliefs. Some of these have been cut back and made more equitable in recent years, particularly since the introduction of tax credits: most reliefs are now set against the lower rate of tax. Nevertheless, these subsidies transfer more resources to the rich than to those on middle incomes and virtually nothing to the poor.

In Good Times and Bad

In trying to influence budget decisions, we in anti-poverty groups often find ourselves talking up the strength of the economy and the resources potentially available for our causes. This comes from a recognition that most of the country\'s resources are earmarked for the better-off and we can only hope to gather up some of the crumbs of growth. It also comes from anger at the fact that a country which is so rich, in overall terms, excludes so many of its people from the fruits of growth.

In the longer term, however, we cannot build a more inclusive society and eradicate poverty simply by spending when the economy is strong. There will always be cyclical down-turns in the economy and we can never absolutely rule out longer-term decline or even economic collapse. In such circumstances, it is essential that social inclusion is at the top of the agenda in bad times as well as good.

Community development, public services and welfare systems need consistent, long-term investment to be effective; they cannot be built in a stop-go way depending on the rate of economic growth. This approach is recognised in industry, but seldom in the area of social investment.

It is often forgotten that countries which have made serious efforts to create greater equality, such as Sweden in the 1930s and Britain, Germany and France after the second world war, did so in difficult economic times, and against warnings from economists and resistance from the rich.

We need also to reclaim the language of \'hard choices\' which has been taken over by monetarists. In a submission on the National Action Plan on Social Inclusion made to the Oireachtas Committee on Social and Family Affairs, the European Anti-Poverty Network (EAPN) Ireland and the Community Platform argued that harder economic times need tougher decisions. We cannot achieve the anti-poverty targets agreed by the Taoiseach and his colleagues at successive EU summits unless we take tough decisions to prioritise the interests of the poor.

What Type of Country?

The Budget debate is the highest-profile economic planning event of the year and the main opportunity to call the Minister for Finance to account. It gets much more public attention, and involves more detailed policy work, than longer-term planning exercises such as the National Development Plan which are arguably more important nowadays.

Unfortunately, this means an over-concentration on the here-and-now and little thought about bigger issues. There is virtually no debate about the constraints placed on the Budget by global forces or powerful pressure groups. There is even less on the value choices available to Ireland as a society and how to promote these through economic and fiscal policy.

Many people in Ireland would prefer to live in a less divided society and would be willing to sacrifice some economic growth for this. There is also strong support for developing better public services. Even the relatively well-off are aware that a good public transport system would be worth more than a second car, and that services such as health and education need serious investment if our quality of life is to be improved.

People concerned about poverty and inequality need to develop and sell coherent workable alternatives to the \'low-tax, low-spend\' policies which have left us with such a deeply divided and dysfunctional society.


Notes

1. A. Bergin et al (2003)Medium Term Review2003-2010, Dublin: Economic and Social Research Institute, p.55.

2.Ibid., p. 86.

3. See for example,National Economic and Social Council (2003) An Investment in Quality: Services, Inclusion and Enterprise,Dublin: National Economic and Social Council, pp. 329-333 and p. 340; End Child Poverty Coalition (2003) Budget 2004: Contributing to Social Inclusion, Dublin, p. 2.

4.The Irish Times, 29 September 2003.

5. V. Timonen (2003)Irish Social Expenditure in a Comparative International Context, Dublin: Institute of Public Administration and Combat Poverty Agency.

6. Combat Poverty Agency (2003)Waste Collection Charges and Low-Income Households:Policy Statement, Dublin: Combat Poverty Agency, p. 22.

7.Ibid.,p. 13.

As a society, Ireland puts effort into remembering. Orchestrated campaigns have been launched for the “decade of commemorations,” as we mark the centenary of the decisive events, from the 1913 Lock-out to the cessation of the Civil War in 1923, that established modern Ireland. Yet right in the middle of that period, in 2018, we reach the landmark ten years since the end of the Celtic Tiger.’ Read full editorial

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