Budgets can be powerful tools to tackle inequality

Is Ireland a particularly unequal country to live in? Well, it depends who you ask, what you measure, and relative to what.

Many developing and emerging economies are vastly more unequal than Ireland, with a narrow oligarchy controlling the bulk of many countries’ wealth and power. For reasons of historical and colonial legacy, Latin America remains particularly unequal. A better point of comparison for Ireland is countries at a similar stage of economic development. The OECD, a group of 34 mainly advanced economies, distinguishes between market income and disposable income, then uses a range of measures for income inequality.

So, how does Ireland compare?

When you look at the distribution of market income, before taxes and benefits are taken into account, using what policy wonks commonly refer to as the GINI index, only Chile is more unequal than Ireland among OECD countries. However, even after years of austerity, taxes and benefits reduce inequality in Ireland by more than in any other OECD country. This means that when you look at disposable income – what people really care about – Ireland is actually less unequal than the OECD average. Not quite Scandanavia, but far from Latin America.

So, did the crisis make Ireland more equal?

There’s a difference, of course, between being more equal and being better off in absolute terms. Almost everyone in Ireland took a financial hit during the crisis. It seems plausible that those who had the most to lose took the biggest hit. Many property developers lost their metaphorical shirts, for instance. For the most vulnerable people in society, however, loss of a job or even a small drop in income, can put you the wrong side of the breadline. So, even if statistical measures suggest a decrease in inequality, as seems to have been the case in Ireland since the crisis, this may not be the best indicator of hardship. Indeed, measures of relative poverty and deprivation tell a very different story.

And then there’s the impact of government policy.

Since 2008, the ESRI estimates that government-imposed austerity has been broadly progressive, meaning budgets over this period, when looked at overall, have taken most from those that had the most to give. This is largely thanks to the reliance by the Fianna Fáil-led government on much–derided tax hikes and public sector wage cuts. Painful? Certainly. But, at least they were designed to impose the biggest burden on those with the broadest shoulders.

The same ESRI analysis notes that budgets since 2011 have taken a more regressive approach, relying more heavily on spending cuts that have a bigger impact on the poorest. Similarly, the first post-austerity budget for 2015 prioritised the middle-income floating voter, rather than those on the lowest incomes.

What about budget 2016?

The ESRI jury is still out on the full distributional impact of last month’s pre-election budget, but the Fine Gael-Labour government may well have broken their duck by bringing in their first progressive budget, particularly when account is taken of the €1.5bn supplementary spending for 2015, which enters into the baseline from which 2016 budget measures are calculated. Having said that, initial analysis suggests that the overall impact of those 2016 budget measures will not significantly benefit those on the lowest fifth of incomes, despite restoration of the Christmas bonus.

Looking to the future, how should we prioritise tax and welfare reform?

Interactions between the tax and welfare system for those on low incomes need to be examined closely so as to eliminate unemployment and poverty traps. Boosting take-up of the Family Income Supplement, and reducing the rate at which it is withdrawn as income increases, would be a good place to start. On the tax side, capital gains and inheritance taxes have increased significantly since the crisis, while a progressive property tax was introduced. While there will be clamours to reduce them, these should be resisted, both on the grounds that they are progressive wealth taxes, and because they allow for the income tax burden to be kept lower than would otherwise be the case.

Increasingly, there is a realisation that inequality is about more than income. Thomas Piketty and others have helped highlight the importance of wealth inequalities, while inequalities in well-being outcomes – like health, education and job quality – are also coming more sharply into focus. What this means is that what has been termed pre-distribution is at least as important as re-distribution. This means investment in more and better infrastructure to improve connectivity with isolated areas, as well as high-quality healthcare, childcare and eldercare. In short, it means investment in – as well as improved efficiency of – public services to reduce the need for tax and welfare to redistribute incomes. It means giving people real equality of opportunity.