Income inequalities have been increasing in a number of industrialised countries over the last 20 years. Such a widening gap between the rich and the poor can be very damaging to society, given the high economic and social costs of alienating marginalised groups. It can also act as a constraint on economic growth in a number of ways. To what extent has Ireland shared in this trend?
A new research study, The Distribution of Income in Ireland, has found that overall income inequality in Ireland has increased during the 1990s and that Ireland is one of the most unequal countries in the EU. It is clear that our unprecedented economic growth is not lifting all boats in a similar manner, and that better-off households are gaining from the boom to a greater extent than those who are less well off.
The research found that income inequality increased between 1994 and 1998. In the mid-1990s, the bottom 10 per cent of households had about 2 per cent of total income whereas the top 10 per cent had about 27 per cent. However, between 1994 and 1998 there was a redistribution of over 1 per cent of total income away from the bottom 30 per cent of the income distribution. This represented a substantial shift in a short period.
Aligned to the increase in income inequality, earnings inequality has continued to increase in the 1990s. In the same period, larger families have become more concentrated at the bottom of the income ladder, with single-adult households concentrated right at the bottom.
The 1990s has been more beneficial to households headed by younger people (under 35) than it has been to those headed by older people (over 65).
Ireland is one of the most unequal countries in the EU, along with Spain, Portugal and the UK. These countries also demonstrate high levels of child poverty as well as income inequality.
Almost one in four Irish children lives on incomes below 50 per cent of average household income.
The report shows that social welfare payments have had less of an impact on income inequality over the 1990s, not only because of the decrease in the number of households dependent on such payments but also because the level of payments has lagged behind other incomes.
In addition, the report shows that increasing numbers of women at work did not significantly affect income inequality, largely because women's earnings still account for only a small percentage of total household income (e.g. 15 per cent in 1994).
Looking back over a longer period, from 1973 to 1987, inequality in the distribution of income fell markedly, reflecting the increasingly redistributive impact of income tax and a substantial increase in the average tax rate over this period. From 1987 to 1994, this continued at a much slower rate.
This growing gap between rich and poor during our economic turnaround is damaging to society in a number of ways.
First, given the broad acceptance that poverty in developed societies is a relative concept, it is likely that there is a link between the scale of income inequality and the levels of relative income poverty - greater inequality will result in greater poverty.
Secondly, from a social justice point of view, it is unfair that the benefits of economic growth are not shared more equitably. Thirdly, income inequality is damaging for social cohesion, leading to an alienation of marginalised groups, and the high social costs which this alienation can impose.
Fourthly, severe income inequality limits choice and diversity, and hinders the ability of those on low incomes to participate fully in political, social, economic and cultural life.
Fifthly, income inequality has been found to be bad for a nation's health and that the healthiest nations are not always the richest ones but the ones where there is the smallest gap between rich and poor. Some economists have also argued that income inequality itself can be bad for economic growth.
The findings of this report have implications for the forthcoming Budget. Recent budgets have been noteworthy for having worsened rather than ameliorated income inequality, despite the huge amounts of money available for redistribution. In Budget 2000, for example, better-off households gained by about four times more than poorer households.
Budget 2001 should seek to redress this imbalance through an integrated package of tax and welfare measures. This should include:
a more balanced budgetary allocation between tax cuts and welfare expenditure;
the allocation of tax reductions should be altered from a focus on cutting rates and widening bands to increasing personal and PAYE allowances;
the surplus in Government finances should be used to introduce structural reforms in the tax/ benefit system, notably in regard to child income support and individualisation of tax and welfare;
there should be an agreed benchmark for uprating tax and welfare changes. At a minimum, tax and welfare payments should be indexed in line with wages increases in 2000 - at 7.6 per cent;
an equitable system of support for the childcare costs of families should be put in place;
there should be a greater investment in public services.
Helen Johnston is head of research at the Combat Poverty Agency