Open Policy Discussion on Distributional Aspects of Public Policy

Open Policy Discussion on Distributional Aspects of Public Policy

On May 28, 2015, the Irish Government Economic and Evaluation Service co-hosted a seminar with Public Policy.ie on the distributional aspects of public policy.  The guest speakers were:  Donal De Buitleir (PublicPolicy.ie); Terence Hynes and Kevin Meaney (IGEES); Cormac O’Dea (Institute for Fiscal Studies); and Seamus Coffey (UCC).

Policy Context for Seminar

The distribution and re-distribution of wealth and income in Ireland is an important public policy topic. There are a myriad of considerations, including:

  • the measurement of poverty
  • the importance of the welfare system in reducing inequality
  • poverty across the income deciles
  • the determinants of income inequality
  • the impact of fiscal policy on inequality
  • the relationship between childcare provision, income inequality and low work intensity households
  • the notion of inclusive growth.

Many of these topics were explored in the joint IGEES/Public Policy.ie Open Policy Discussion  on Distributional Aspects of Public Policy. A brief overview of the presentations and panel session are detailed below.

Overview of Presentations

  • The Distribution of Market Income in Ireland and The Distribution of Income Post-Tax and Transfers, by Donal De Buitleir (PublicPolicy.ie); Terence Hynes and Kevin Meaney (IGEES)

Analysis was presented on the nature and scale of income variance in the Irish economy and the role of the tax and welfare system in addressing income inequality.  Before State intervention – in the form of income tax, welfare-based transfers, public services such as free education – Ireland has a relatively high level of inequality in market income.    The reasons behind these were identified as including the prevalence of large low pay sectors – such as hospitality and agriculture – a large, high paying multinational sector, and a relatively large number of low work intensity households. In terms of policy responses, the discussion centred on the provision of childcare for low work intensity households, in addition to education and training.

The impact of the tax and welfare system on this market income inequality was examined. Analysis showed that Ireland’s tax and welfare systems have been effective in reducing inequality as measured by the GINI coefficient. The welfare transfer system was highlighted as particularly effective, in that it was shown to be responsible for three quarters of the reduction in the GINI coefficient, post taxes and welfare.

Other main points included:

  • Given Ireland’s relatively young population (in comparison to some other EU countries), the largest impact of the transfer system can be seen in transfers to those of working age, and families.
  • Core social welfare rates were largely protected throughout the fiscal consolidation and offered a strong minimum income floor in Ireland, redistributing income and reducing inequality.
  • Measuring living standards at the bottom of the income distribution , by Cormac O’Dea (Institute for Fiscal Studies)

This analysis was based on UK data sets and proposed that policy should consider household outgoings as well as household income when addressing or comprehending the concept of living standards.  The following two points were made, based on UK data:

  • some relatively high income households have low living standards – high debt; income only temporarily high; and
  • some low income households are not poor – high levels of assets; income only temporarily low (e.g. self-employment income)

It was highlighted that those on the lowest incomes do not always have the lowest expenditures and that there may also be underreporting of income in some circumstances. In response to this, the model underlying the presentation supported the idea that outgoings (or expenditures) should be considered when policymakers think of the effects of indirect taxes. The presentation suggested using this approach may assist in the providing policy makers with more information upon which to base taxation policy decisions.

  • Resources available for public services: How does Ireland compare?, by and Seamus Coffey (UCC)

The question posed in this presentation was: Is Ireland a low tax, low spend economy? Ireland was examined in comparison the EU in terms of the amount of revenue raised and the amount of expenditure committed.  Whilst noting that national accounting measures/procedures can effect expenditure and revenue comparisons across the EU, the main conclusions indicated that, at first glance, Ireland is a low tax, low spend economy.  However, important factors in this were also noted:

  • Ratios using GDP as the denominator understates public spending in Ireland.
  • Ireland has a relatively young population in EU terms and so Ireland has a lower social protection spend per person aged 65 and over.
  • Expenditure on family and children is higher than the EU average.
  • As Ireland’s population continues to age this will have implications for revenue raising and expenditure policies.

Panel Session: Tom McMahon (CSO), Brendan Keenan (Irish Independent)

Dan O’Brien (IIEA), Michael Collins (NERI), Jim Walsh (Department of Social Protection)

The panel discussed a number of issues raised by the presentations:

  • The impact of a proportionately large number of low work intensity households on income inequality was discussed. The number of low work intensity households in Ireland varies depending on the dataset used to measure it, highlighting the importance of having reliable data. Ireland has a relatively high percentage of low work intensity households with children and a relatively high percentage of lone parent households. It is not clear why this is the case.  However, given that there is a statistically higher unemployment rate among lone parents, this may at least explain the proportionately large number of low work intensity households in Ireland compared to the EU average.
  • The various ways in which poverty may be measured were discussed, specifically the best way to measure poverty, to capture poverty across the income distribution and to avoid under or overstating the level of poverty in Ireland. The strength and weaknesses of the three main methods of measurement were raised: (i) measuring household income, (ii) measuring the amount of expenditure within a household, and (iii) measuring material deprivation.
  • Income measurements do not take into account household outgoings or debt servicing, which can have a large impact on the disposable income of a household.
  • Measuring household expenditure overcomes some of these issues, and sometimes more accurately reflects standards of living in the lowest income decile.
  • Using deprivation measures captures instances where households may have moderate incomes but a low standard of living in terms of affordability of basic goods.
  • The determinants of income inequality in Ireland were explored. There is a need for more analysis in this area, as detailed studies do not appear to have been carried out since the 1990’s. Studies on the descriptive factors of individuals in different income deciles, such as levels of education, parents’ income, and other relevant factors, should examine the causal relationship between these relevant factors and income inequality. One of the reasons for the pre-transfer levels of income inequality in Ireland is the composition of Irish employment. Ireland has a large proportion of people working in relatively low-paid sectors such as tourism, hospitality, and farming and a relatively high proportion of employees in the highly paid multinational sector.
  • The role of social transfers in reducing income inequality was discussed. A number of key questions were posed:
    • Is the welfare system sustainable in the long term?
    • In light of the recent modest economic recovery, what is likely to happen to the social welfare system in the near future?
    • What is needed to ensure lower income households earn more market income?
  • The potential in Ireland for poverty across a number of income deciles was discussed. Following the recession and the collapse of the property market, it was noted that there were a large number of individuals in the second and third income deciles who were experiencing a decrease in standards of living because of large amounts of debts to service. The potential of long term deprivation for those in the middle deciles was also discussed.
  • The impact of the indirect taxation system on income inequality was discussed. Discussions focused on the regressivity of VAT and indirect taxes. The majority of households contribute to the Exchequer to a large degree via indirect taxes and these taxes represent a large percentage of Exchequer revenue. Given this fact, there could be a large regressive effect of so-called “hidden” indirect taxes such as stamp duty on insurance schemes. The distribution of the burden of indirect taxes also plays a large part in determining these taxes’ regressivity. For example, indirect taxes on cigarettes often increase, but as low income groups are more likely to smoke, these taxes are likely to place a greater burden on those in lower income groups, potentially leading to increased inequality.
  • The level of provision of childcare in Ireland and how this might impact the income distribution was discussed. A key question posed was whether a lack of access to adequate and affordable childcare was prohibiting those in low work intensity households with children, especially those in low work intensity households with lone parents, from re-entering the labour market.