Price inflation and income distribution
This post was written by Richard Tol
With the risk of being ridiculed for self-promotion, readers may want to have a look at some recent computations.
Earlier, Callan, Keane and Walsh had a look the impact of recent changes in taxes and benefits on nominal income. They found a sizeable redistribution from rich to poor.
An Bord Snip Nua argued that benefits should be indexed on the consumer price index, which would be tantamount to a 5% cut.
In the paper with Jennings and Lyons, we compute the consumer price index per income decile. The highest incomes have seen the fastest deflation, up to 5.1% for the period July 2008 to June 2009 for the top 10% earners. The three lowest income deciles have seen deflation in the range of 3.0 to 3.4%.
By the argument of An Bord Snip Nua, a 5% cut in benefits thus seems a bit harsh.
On the other hand, deflation has been slower for lower incomes because local authority rents have continued to go up even as the rest of the housing market collapsed. As local authority rents are indexed on renters’ incomes, a cuts in benefits would in fact induce deflation for this, particularly vulnerable group.
A 3% cut in nominal benefits would therefore mean that the poorest people in Ireland would see a rise in their real income.