ESRI says budgetary policy favoured high earners

Budgetary policy favoured higher earners in the years from 1994 to 1998, according to the latest research from the Economic and…

Budgetary policy favoured higher earners in the years from 1994 to 1998, according to the latest research from the Economic and Social Research Institute (ESRI).

The ESRI found that lower-income groups fell further behind higher earners in the four-year period as tax cuts favoured the better off.

In the latest edition of Tax and Welfare Changes, Poverty and Work Incentives in Ire- land, Prof Tim Callan and Mr Brian Nolan found that, in contrast to previous years, the income of the poorest in society rose more slowly than average wages between 1994 and 1998.

According to Prof Callan, the Government's method of comparing Budget-day changes with an "opening position" is misleading and is far from neutral.

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Instead the study, which looks at the impact of budgetary policy every year, compares the positions of people in different circumstances with what they would have received had the benefits or tax cuts been indexed to real prices or to wage rises.

Not unexpectedly, any payments indexed to wages rise more quickly than those simply indexed to prices. Generally, budgetary changes have been somewhere between the two.

But crucially, it found that in the years from 1994 to 1998 the benefits gained by the least well-off fell behind average wage rises. This was in marked contrast to the years from 1987 to 1994, where they received rises in excess of the rise in average wages.

"While those on welfare did better in real terms, they are worse off in relative terms," Prof Callan noted.

The study also found that individual groups fared very differently over the period. For example, retired people fared about as well as they would have using the indexed benchmark, while the unemployed, lone parents not in employment and disabled people fared less well. Families which had an earner fared better than under indexation.

In contrast, in the years from 1987 to 1994, which the study focuses on, the bottom 30 per cent fared better under actual 1994 policy than under wage-indexed 1987 policy.

This reflected special increases in social welfare rates for those on the lowest rates of payment.

In those years, people in the middle fared less well than the benchmark, as pensioners' and widows' increases grew less rapidly than wages.

Those at the top also fared well, with the greatest gains going to those at the very top. This was largely driven by tax cuts, with the pattern of cuts favouring higher earners.

The study does not include data from the 1999 Budget. But, according to Professor Callan, it should have benefited low-income employees more, as tax cuts were more targeted in that direction than in the past.

He added that there will now also be a distinction between the elderly and others, with the elderly more likely to be keeping in step this year.

However, over the 11 years from 1987 to 1998, the bottom 20 per cent did see gains relative to wages, with strong gains from 1987 to 1994 offsetting later losses.

The study also found that in the years to 1994, income support for the long-term unemployed in Ireland was a good deal more generous than in the UK relative to average earnings. However, data from the post-Blair period have not yet been analysed.