European Trade Union Institute, ETUI.

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25 September 2018

Ireland: the welfare state, market income shocks and inequality

An in-depth assessment of the welfare system in Ireland has led to the conclusion that a progressive tax and unemployment support system can contribute to positive outcomes in the area of income inequality and household incomes. During Ireland’s crisis, the system appears to have cushioned the labour market against income shocks.

Several interesting reports have been published on the effects of austerity policies that shed light on the role of the welfare state in Ireland. In a comparative IZA-study, it is argued that automatic stabilisers, such as progressive tax systems and unemployment benefits, will cushion market income shocks so that the resulting disposable income shock is less severe than the original market income shock. Unemployment supports represented a significantly higher proportion of total social protection expenditure in Ireland (and Spain) than in the other countries analysed  in the study (Greece, Italy and Portugal), particularly during the recession. With a pre-crisis unemployment rate of 4.5%, Ireland spent 8 to 9% of its social expenditure budget on unemployment support. The country also devoted a significantly higher proportion of its social protection budget to support for Families and Children than the other countries, a pattern that remained consistent throughout the recession.

Interestingly, and against international trends, income inequality in Ireland has been broadly stable. Over the past 30 years the disposable incomes of households have grown strongly, even in periods of boom and bust. As a result, low, middle and high-income households in Ireland have all seen substantial growth in their incomes – unlike the slow and unequal growth seen in the UK and the US. Ireland is now close to the OECD average for income inequality. According to a paper of the Economic and Social Research Institute published in July 2018, the welfare and tax systems have played a key role in shaping these outcomes. Welfare payment rates have risen at least in line with wage growth over the 1987 to 2014 period, ensuring that growth in low incomes keeps pace with broader income growth. Changes to tax and welfare over and above wage indexation have led to gains which were greatest for those with the lowest incomes. Much of this impact arose from the implementation of the recommendations of the Commission on Social Welfare (1986), which raised the payment rates for the schemes with the lowest payment levels. The study concludes that in a long-run perspective, adjustment of tax and welfare parameters has been in line with, or slightly ahead of, growth in wages. This has helped to ensure that ‘fiscal drag’ has not reduced the incomes of those in employment, and has helped to provide a floor to incomes for those dependent on welfare which has at least kept pace with general income growth.

Already in the 2017 report, the Institute noted that, while income inequality had been rising in many OECD countries, Ireland’s experience was quite different, although the deep and prolonged recession had led to substantial falls in household income across the board. The analysis revealed that the tax and welfare systems had played a key role in ensuring that increased inequality in earnings did not lead to increased inequality in household disposable income. Progressive tax/transfer systems provided some ‘automatic stabilisation’ in the face of increased inequality and welfare payments helped to cushion the blow of unemployment. Moreover, if inequality in earnings increases, the progressive tax system lessened the impact of increased earnings inequality on take-home pay. The role played by the pre-existing progressive tax and welfare system appears to have therefore been critical in helping Ireland to avoid the increase in income inequality seen in many other countries.

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