Wasted chance for strategic reform of public finances

The budget’s failure to either cut or reform child benefit was politically cowardly

IN SEEKING to assess how budgets impact on ordinary citizens this and other newspapers have taken to designing sample families and, presumably with the help of accountancy and tax advisers, setting out how each household has been affected by the budget changes.

For a decade from 1997 to 2007 these post- budget graphics showed that almost all, if not all, of the households were better off.

The graphics after the budgets and supplementary budgets of the last 2½ years have presented an entirely different story. All households have been badly hit.

What was interesting about last Wednesday’s newspapers, however, is how the situation of many households following the two-part budget looked unchanged. With the exception of people on social welfare schemes where entitlements have changed, households appeared to be left largely untouched.

I say “appeared” untouched because these household models focus primarily on the changes to welfare receipts and income tax. They do not factor in various indirect taxes and charges which were the primary means used by the Government to raise additional revenue in this budget.

All households are likely to be worse off after this budget, although most will not feel that as starkly in their pay packets or pension books as after the previous two budgets.

The budget was, therefore, politically astute, at least in the short term. It is quite an achievement to take so much out of the economy and leave most feeling as if, at least for the moment, they are not worse off.

In the long term, however, this budget may be seen as a wasted opportunity. There are a number of strategic defects in our tax and welfare system which were exacerbated during the good times and are now dramatically exposed in the lean years. The Government has failed to address many of these in its first budget. The following are two examples.

The first is that this country can no longer support the extent of current social welfare provision and, even if it could, it should be better targeted at those who need it most.

This Government’s failure to either cut or reform child benefit was politically cowardly and structurally damaging to our welfare system.

While its efforts to preserve basic rates for other types of welfare payments are admirable, the refusal to address the cost and regressive nature of child benefit was wrong.

It was wrong that the payment remained universal during the boom years; it is even more wrong that this Government is compounding the situation by leaving child benefit untouched while shaking out other savings from more deserving areas.

Most of the experts are of the view that child benefit is not only a useful weapon against child poverty but is also the most effective means of subsidising the rising costs of rearing children (including, but not confined to, the formal costs of childcare). It would, even in the boom years, have been more socially progressive, and a more useful instrument in tackling relative poverty, to dramatically increase child benefit for those who needed it most by targeting resources only at parents in lower income groups. This could have been done by means testing or by at least taxing the payment.

From 1997 to 2006 child benefit increased for the first two children from €38.10 to €150.00 per month, while the rate for third and subsequent children rose from €49.10 to €195.00. The last government did cut the rate after the public finance crisis hit. When doing so it expressed a preference for reducing the number of households entitled to the payment or for taxing it, but argued these options were impractical, at least without further consideration or review.

This week the Government has given confused reasons for continuing to pay child benefit at the same rate to every household irrespective of need or means. Some Ministers say the Revenue Commissioners tell them they still don’t have the systems to tax it and point to yet another review group examining how it could be better targeted. Others still argue the need for the universal provision of child benefit equally to all children, irrespective of how wealthy their parents are.

If child benefit cannot be reformed then it would be both prudent and progressive to scrap it altogether and instead use about 80 per cent of what we currently spend on universal child benefit on targeted additional reliefs for those on other State payments and on income support for lower-paid workers.

The Government also failed to address the structural problems with the financing of third-level education in this country. The boom years saw a massive and welcome surge in participation in education at this level. However, despite the abolition of third-level fees the overwhelming majority of that participation has come from middle to upper-income households. Now student numbers and the crisis in the public finances make the cost prohibitive, especially if it has to be provided free to all who qualify, irrespective of their parents’ means or their own future earning capacity.

Instead of confronting this crisis in third-level funding and designing and implementing a comprehensive overhaul, including either the reintroduction of third-level fees or a student loan system, the Government seems to have embarked on the less imaginative approach of incrementally increasing the student charge. While this may be politically safer it does nothing to address the deeper third-level funding crisis.

One would have hoped that a new Government, with a massive majority and eight months to frame its first budget, would have tackled some of these structural problems in public expenditure head on.

It may have a greater mandate but it seems the Government has no more courage on these sensitive issues than its predecessor.