D OUBLE TAKE: JIM POWERand SINÉAD PENTONYhave their say
We have little option other than to continue to proceed with fiscal correction. Unfortunately, there is no easy or painless path to fiscal redemption, writes
JIM POWER
IT IS no exaggeration to suggest that the Irish economy is in a situation of unprecedented and very deep crisis. The crisis is most visibly manifested in a malfunctioning labour market, a dysfunctional banking system and a structurally unsustainable public finance situation.
The Government has just published a plan full of aspirational rhetoric to tackle the labour market crisis and the banking bailout is under way, for better or for worse.
The structurally unsustainable public finance situation is fundamentally due to the fact that it quite simply costs too much to run the country, and we take in too little in tax revenues. Not least because of the attitude of bond markets to whom we are beholden due to our unsustainably large annual borrowing requirement – but also because of the deadweight cost of debt servicing and the commitment we have given to our EU masters to whom we have effectively surrendered our economic sovereignty – it is incumbent on Government to reduce borrowing as quickly as possible.
A number of years of severe fiscal austerity are now ahead of us, whether we like it or not. Such fiscal austerity in the midst of a deep economic crisis does represent a dangerous social and economic experiment, but we do not have too many options.
I don’t believe that widespread fiscal stimulus would be effective in lifting the economy at this juncture due to the serious structural problems in the economy. I do believe that we have little option other than to continue to proceed with fiscal correction. Unfortunately, there is no easy or painless path to fiscal redemption, so it is incumbent on our policy makers to identify and implement the relatively less painful options from a social and economic perspective.
In my view, universal child benefit is a structure that we simply cannot afford. My son was recently seeking some assistance from me for a transition year economics assignment, and I suggested that he should look at the issue of child benefit.
When he asked me how much we receive in child benefit, I had no idea because it goes straight into an account that will eventually be used to fund third-level education or marriage or whatever.
Indeed, I just conducted a straw poll of a few people I know with children on the level of child benefit, and none could tell me how much it is worth to them.
While I recognise that this is not a significantly robust statistical sample, it does strike me that if somebody does not know how much they receive then they probably should not be getting it in the first place. Figures in last year’s Commission on Taxation report showed that 65 per cent of families who benefit have an income between € 40,000 and € 100,000 and 15 per cent have an income in excess of € 100,000. On grounds of equity and efficiency, universal child benefit does not score very highly.
If expenditure cuts are focused on people with a high marginal propensity to consume, as is the case with many recipients of social welfare, then such cuts are more damaging to the economy.
On the other hand if cuts are focused on those with a lower marginal propensity to consume, the economic impact of such cuts are less severe.
The marginal propensity to consume is lower on average for recipients of child benefit than for most other forms of social welfare, so it would be a less damaging way to proceed.
I go back to my point that there is no easy or painless way out of the current fiscal crisis, we just have to go for the relatively less painful and economically damaging options. Reducing universal child benefit through either means testing or taxation is in my view a less bad option than many others that might be considered. I do not accept the argument that this would be logistically difficult or impossible to implement.
The cost of child benefit this year is estimated at €2.26 billion. Savings of at least €800 million could be achieved here. This of course would not be enough to bridge the gaping gap, but it would represent a start. Whatever way one looks at it, we will all end up paying more tax and getting less from government over the coming years, but we must have no sacred cows in this debate. Every tax and spending option should be given due consideration to identify the relatively better options.
Unfortunately, universal child benefit is one luxury that we cannot afford.
Jim Power is chief economist with Friends First, a life insurance, pensions and investments company
Any moves to limit child benefit would reduce what are already minimal supports available to children and families, writes
SINÉAD PENTONY
IN TIMES of economic crisis, a universal payment like child benefit, which goes to the wealthy as well as the poor, may seem like a luxury and thus an obvious target for governments attempting to balance their books.
We can all rehearse the arguments: why should a high earner receive the same benefit as someone living on the minimum wage or social welfare? We heard variations of this argument in 2008, when medical cards for the over-70s were targeted, and we’re hearing it again – this time with regard to child benefit – in the run-up to December’s budget.
If only because of the administrative difficulties, it is unlikely that moves will be made in Ireland to either means-test or tax child benefit. Therefore, in December, we may simply be facing another flat-rate cut in child benefit, following last year’s cut that saw the rate for the first two children fall from €166 to €150 – a cut that disproportionately affected lower income groups.
There are thus two issues at stake: the importance of universality itself, and the value of child benefit to families – in particular low- and middle-income families.
The universality debate is about intangible, as well as tangible, outcomes. It’s about creating trust and a sense of social solidarity. The fact that higher earners are beneficiaries of universality makes it easier for low-income groups to retain a sense of dignity when accepting welfare benefits.
By the same token, universality gives middle- and higher-income groups a sense of real benefit from the taxes they pay – spurring them on to defend public services when they come under threat.
For all these reasons, universal provision – whether of public services or of other benefits – is fundamental to bridging Ireland’s equality divide.
Tasc contends that the fundamental principle of universality should be maintained and enhanced, and that the associated costs should be addressed through general taxation. The Irish debate on child benefit has been reignited by UK proposals to means-test child benefit – proposals that have been seized upon by those in Ireland who see universal child benefit as an overpriced luxury during a recession.
Irish children do not enjoy the supports, ranging from free healthcare to schoolbooks, available to children in many European countries. Therefore, any moves to limit child benefit, through whatever means, would reduce what are already minimal supports available to children and families.
That brings us to the nub of the current debate: the role played by child benefit in keeping many families – especially the working poor who do not qualify for child dependant allowance – out of poverty.
To be a child in Ireland is to be at greater risk of poverty than any other age group. According to the most recent figures, 18 per cent of children – almost 190,000 – were regarded as “at risk of poverty”.
Cutting, or directly taxing child benefit would be regressive and would disproportionately affect low and middle-income earners, who are already bearing the brunt of the recession.
And any savings made would be largely illusory: reducing child benefit would simply take more money out of the pockets of low- and middle-income earners, thus depressing demand at a time when we should be stimulating it. The impact would be quickly felt locally, by businesses, and centrally by the exchequer.
Policy-making is about choices. Undermining child benefit – and with it the principle of universality – is a choice we cannot afford to make.
Sinéad Pentony is head of policy at Tasc, the left of centre policy think tank