How we can protect the vulnerable in inflationary times

John FitzGerald: The latest shock to the economy requires different remedies

In most countries it is people on low incomes who suffer most in any economic crisis. In contrast, Ireland saw a reduction in inequality in the face of massive economic dislocation in the past two economic crises – after the 2008 banking and property crash, and in the Covid-19 recession.

In 2009, while there were dramatic cutbacks in services and a big rise in taxes, they were largely targeted at the better off: the result was a significant reduction in income inequality. In 2020-2021, as a result of the Government's measures to protect those affected by the pandemic lockdown, income inequality again fell.

Ireland's tax and welfare systems, taken together, form a very effective tool for redistributing income from the rich to the poor. Ireland's tax and welfare system needs to work particularly hard at this Robin Hood role because the distribution of market income, before taxes and transfers, is among the most unequal across the OECD area.

This probably reflects an economy where aircraft leasing and the multinational tech sector are characterised by exceptionally high incomes.

While Belgium, Finland, France and Greece also have effective systems for achieving redistribution to poorer households, such countries are in a minority within the OECD in this regard.

Levelling up

The Netherlands and Sweden have less strongly-redistributive tax and welfare systems, but much less inequality in market incomes, so their outcome for disposable incomes is broadly similar. In these countries, and the Nordics generally, universal public services play a strong role in levelling-up.

France, Greece, the US and the UK also have high levels of inequality in unadjusted incomes, but the UK and US lack effective measures to counteract this. Anglo-Saxon social models in the US, the UK, Canada and Australia have much less redistributive tax and welfare systems. When combined with high inequality of market incomes, such models result in societies with large gaps in the standard of living between rich and poor.

Although economic crises in Ireland have hit disposable incomes of the rich more than of the poor, nevertheless high unemployment in the 2008-2013 recession saw big increases in the numbers below the poverty line. However, the recent 2021 data suggest that the numbers in poverty in the Covid slump was at an all-time low.

Due to UK policies, in Northern Ireland an estimated 6% of households are likely to meet the definition of destitute

It is important to reflect on which groups are still experiencing real hardship – those out of work due to ill-health or disability, and lone parents with children under 18. More needs to be done to lift these individuals and families out of poverty.

Affordable childcare and access to work are key measures to lift lone parents out of poverty. Access to suitable work is also important for people with disabilities, but decent welfare payments are essential for those unable to work through ill health or other reasons.

Ukraine crisis

While government interventions have been very successful in insulating those on low incomes from the full effects of the pandemic-induced recession, the latest shock to the economy from a rapid rise in inflation, greatly aggravated by the Ukraine war, requires different remedies.

Because energy is essential for all households, the massive rise in fuel prices is wreaking havoc on the budgets of those on low incomes. Already the Government has taken action to provide some protection for the most vulnerable. The forthcoming budget will need to do much more.

Cutting taxes to reduce energy prices would be poorly-targeted and the wrong approach. Reducing the price of energy would also do little to wean us off high energy use and dependence on fossil fuels. It would be better to focus support on the most vulnerable via the welfare system, including broadening the fuel allowance to a wider group of beneficiaries, like low-paid workers.

Putting cash in people’s pockets allows them to make smarter choices around energy consumption.

We shouldn't look to Whitehall for answers to copy. Despite estimates from the National institute of Economic and Social Research in London that the number of households in the UK defined as destitute would rise by a third this year to one million, the recent UK budget in fact widened the gap between rich and poor.

Due to UK policies, in Northern Ireland an estimated 6 per cent of households are likely to meet the definition of destitute. This should be an immediate challenge for newly-elected MLAs to address, as Westminster isn't going to help.

If Stormont had a functioning Executive, it would have the power to implement its own supplementary welfare measures, if they are prepared to raise revenues to fund them through locally-levied charges on property or water.