Price Inflation and Social Welfare Rates

Today’s inflation numbers show further falls in July for both the CPI and HICP. The falls sa are not as big as the raw nsa figs. The CPI is now (sa) 6.4% below the October 2008 peak. The HICP, which excludes mortgage interest and some other small items and which I prefer, is 2.6% off its November 2008 peak (sa).

There has been, understandably, considerable reaction to the Bord Snip proposals for cuts in Social Welfare rates. These were increased in last October’s budget by 3.1 to 3.3%, the increases effective from January. In the budget speech, the Minister predicted a positive inflation rate in 2009 of 2.5%. If he had instead predicted a zero rate, it is a fair guess that there would have been no change. It now looks as if the 2009 price level will work out perhaps 5% below what was assumed in the budget. 

If the proposal to cut rates by 5% were to be implemented from January next, the resultant rates in real terms, using the HICP rather than the CPI, would still be ahead of the October 2008 level, even if there are no further falls in the HICP. If the alternative 3% cut were implemented, the resultant rates would leave recipients better off in real terms than they were prior to the October 2008 increase. Of course, the big losers from the recession to date have been those laid off and newly reliant on Social Welfare (apart from ex-billionaires), and not the (far larger) group of long-term recipients.  

Richard Tol and David Madden have posted notes here drawing attention to the distributional impact of relative price changes which deserve a more extended response when time permits. For now, I would just like to make two comments:

(i) David notes that the lowest income deciles smoke cigarettes, and it has long intrigued me that the regressive impact of sharp recent increases in cigarette taxes attracted no negative comment from the political left. They should’nt smoke, you see.

(ii) Even the 5% reduction would still keep real HICP values at about pre-budget levels, if I understand Tol et al correctly. 

Finally, if all the €21 billion gross spend on social transfers were directed at the very lowest income groups, some of the more hysterical reactions would be reasonable (‘destruction of the welfare state’, no less). As a glance at the Household Budget Survey will confirm, significant entitlements reach well up the income distribution, reflecting the presence of substantial universal, as distinct from means-tested, expenditures.

25 replies on “Price Inflation and Social Welfare Rates”

The Irish are lucky to get Bord Snip, when Iceland gets Bord Slash!

Iceland’s prime minister Jóhanna Sigurðardóttir, says in an article published in the Financial Times today, that her government plans a 30 per cent cut in public spending over the next 3 years, with extensive contractions in infrastructure spending and wages.

She terms it “a heavy burden for our population of 300,000.” In the article, she also slams the UK and the Netherlands for demanding compensation for payments to UK and Dutch depositers in respect of a failed Icelandic online bank – – the gross amount to be shouldered by Iceland is about 50 per cent of Iceland’s gross domestic product. The then private bank offered the highest rates in the UK and the Netherlands


I expect you are familiar with the anecdote retailed by Roy Geary, who, not very long after his appointment as the first CSO director, was confronted by his wife demanding an increase in her house-keeping allowance “because prices are rising”. He gently explained that, since he was responsible for the prepartion of statistics on prices in the State, he could see no evidence of this. His wife’s response allowed no debate: “My dear man, I deal in facts, not statistics.”

What I take from this is that, before venturing into this minefield, one need to be well-armed, as I know you are, with both facts and statistics.

I doubt you will encounter any rational or evidence-based opposition to your contention that the social welfare budget both has to be reduced and can be reduced without harming recipents in real terms, but, as always, the devil is the detail.

A look at the CPI detailed sub-indices shows that, underneath the general downward trend, there is a pattern of large price falls accompanied by signifcant price increases for some services and commodities. Falling prices of FMCGs and of white goods and other durables are certainly benefitting social welfare recipients and those in work, but on low pay, but it is possible the latter benefits are not being captured as there is considerable discretion in the timing and scale of purchases. In addition, there have been increases in the prices of services the provision of which is directed ultimately by the State – for example, health, medical, education and utilities – where consumers have limited discretion.

In response to the previous post by David Madden, I have pointed out that the 10% price decline in the Fuel/Light category reflects a precipitous decline in the prices of liquid fuels masking increases in the prices of all other household fuels. And it is here, at the risk of being accused of mounting my old hobby horse, that the Government could direct significant price reductions.

This area provides a perfect example of Roy Geary’s conflict between facts and statistics. Richard Tol’s analysis leads him to assert that electricity prices are only slightly too high in Ireland – mainly arising from high pay in the ESB. John FitzGerald, however, accepts that the margin between wholesale and final prices appears high, but neither seems prepared to find out why.

Since the introduction of energy regulation the ESB has invested in excess of €5 billion in the networks. This has been financed approx. 25% by borrowings and there has been no direct Exchequer financing. The remaining 75% financing has been extracted from consumers and this has helped to push Irish electricity prices towards the top of the EU league. The situation is similar for gas and has allowed BGE to subsidise its foray into the electricity market – penalising all gas consumers to subsidise lower prices to its new electricity customers.

The jury is out on the surcharge the creation of the all-island electricity market imposes on consumers, but the counterfactual is difficult to establish. And gas consumers are paying for a second gas interconnector to Scotland which is little used and will be used even less when Corrib and LNG come on stream.

The Government, as majority owner of the ESB and BGE, could reduce prices immediately and take steps to bring them down more over time:
1. Separate and ring-fence ESB Distribution and BGN as distinct business units;
2. Direct ESB, Eirgrid and BGE to increase borrowings up to 70% of the book value of the assets (similar to regulated separate networks elsewhere) and reduce their revenue requirements and network tariffs accordingly;
3. Direct BGE to write-down the book value of the second gas interconnector and reduce network tariffs; and
4. Direct BGE and ESB to remove prepayment meter consumers from the whole “market opening” cost structure and renove the extra charges imposed on prepayment consumers.

These changes could be made prior to the new pricing arrangements beginning on 1 October. It is understood that the Government is also contemplating a carbon tax. These price reductions would ameliorate the impact on social welfare recipients and the Government could alos consider reducing the VAT rate on electricity and gas.

In the medium term the energy networks should be prepared for privatisation and steps should be taken to integrate the gas markets, intitially, and the electricity markets, eventually, on the islands of Ireland and Britain.

If these steps were taken (and similar implicit taxes on other utilities removed) – as well as serious steps to tackle the other rent-gouging going on – I believe that there would be much wider acceptance of a reduction in the social welfare budget.

It’s worth pointing out what the doomsday scenario actually is should the Bord Snip proposals not be implemented as a first step to restoring the state’s finances. If the media highlighted what might happen should the current budget deficit continue to widen there might be more widespread support or at least understanding for the cuts. I wonder to people realise what happens if Ireland ever needed a bailout from the IMF. Latvia is the perfect example, their recent budget cut proposals included :

– Social Welfare to be cut by 10%
– Public sector salary cuts of 20-30%
– Pensions to be cut by 10%, Pensions for those currently employed to be cut by 70%
– Decrease of tax-free allowance
– 30% reduction in government administration expenses
– 50% reduction in state agency expenses with the elimination of their boards of directors
– Increased excise taxes on alcohol and gambling
– State enterprises to distribute 80% of profits to the government

And don’t forget the Latvians have already improved competitiveness thanks to their rapidly decreasing currency.
Highlighting what could happen should we not act now might help to focus the minds.

I note from today’s Irish Independent Brendan Keenan referring to news from German and France as a glimmer of hope ‘Two good signs in one day but we’ve a long way to go’. He writes: ‘The second bit of pleasantry comes from the signs that Ireland seems to be following a similar trend’…and then adds ‘Indeed, as Prof Kevin O’Rourke, of Trinity College, Dublin, has shown, this is just when one would expect a turning point.’ Philip Lane has also helpfully posted that story from the FT suggesting that Ireland is fundamentally sound but that NAMA seems very unfair to the banks.

My bes response to all of the above is with a question.


1. The ECB has cut interest rates to historically low levels in order to stimulate consumer demand / or at least ease some of the pain of the recession.

And if…

2. The Irish government has nationalised / expropriated all of this gains as a calculated (calculated in the sense that they have worked out what householders have saved on mortgages and decided to capture that benefit plus a bit more) policy decision through tax increases.

And if…

3. Irish consumers are (amongst?) the most indebted in the OECD.


4. What happens when this German / French good news translates into early ECB interest rate increases?

Are we not in harms way?


Regarding, ‘substantial universal, as distinct from means-tested, expenditures’, for those concerned that we are not ‘targeting’ enough, they might take heart in Eurostat’s Social Protection Statistics which shows Ireland leading the league in means-testing. The EU-15 average is that 10% of all social protection expenditure is means-tested; in Ireland it’s over 23%.

And it might be worth taking a second glance at the Household Budget Survey. Excluding Child Benefit (which makes up less than 12% of all social welfare expenditure, including social insurance), 85% of state transfer payments go to the bottom half of individuals, while only 6% goes to the top 25%. Even when including the universal Child Benefit, the figures are 76% and 11%. Whether this constitutes ‘significant’ depends on one’s perspective, but clearly state transfers are highly progressive.

For individuals in the lowest 25% income group, state transfers make up over half (57%) of their disposable income. That gives some idea of the impact of cuts in general social welfare payments.

While the discussion on past social welfare increases and current movements in the CPI/HICP are very useful – it would also be useful to obtain an economic impact assessment of social welfare cuts (of the type that the ESRI has done with other public expenditure cuts). No doubt, this would show that ‘savings’ of €850 million from cutting social welfare rates by 5% would actually be, in net terms, considerably less and that this would be accompanied by economic harm in terms of reduced GNP, private consumption and unemployment. It would be hazardous to even consider such cuts until such impact assessments were conducted as we would be ‘cutting in the dark’ and risking perverse outcomes.

Please note that the paper is by Jennings et al, rather than by Tol et al.

Between Oct 08 and Jul 09, prices have fallen by 2.8-2.9% in the lower half of the income distribution. In the top half, prices have fallen between 3.0% and 5.1% with deflation rising with income

It is a tad ironic, but, perhaps, not surprising, that those most vociferously opposed to reductions in transfer payments are least disposed to contemplate reductions in the regulated/state-directed costs and prices that provide some justification for the current levels of transfer payments. But the silence of the economics fraternity is difficult to explain.

@ Michael Taft:

You are quite right that the overall thrust of Irish social transfers is progressive, but the regular media shorthand that identifies the full €21 billion with spending on ‘those in need’ or ‘the poor’ is misleading. The gross spend includes contributory pensions, to which all are compelled to be entitled, so to speak, as well as free TV licenses, public transport, telephone and electricity allowances for all over 70. Child benefit now costs €2.5 billion and is universal. What is striking for me about the HBS figures is not just the presence of transfers in the top income decile but their significance in the middle deciles.

The macro impact of the full budgetary package will of course need to be assessed before December. It was not part of our remit, and it is pointless anyway to do partial impact assessments in the absence of the full set of tax/spending measures. It is also far from an exact science, as we all know.

The govt has a set of medium-term fiscal targets. Those who express reservations about specific spending cuts need to be clear on whether they feel these targets should be relaxed, or whether they feel the cuts they don’t like should be replaced with tax increases or alternative cuts. To relax the targets without factoring in, for example, induced debt-serice costs, presumes an elastic supply of sovereign credit to Ireland, implicitly at current spreads. This is an assumption that I am not willing to make.

@ Paul Hunt:

We could certainly do with a tightening up of price caps for regulated industries. Paul, could you let me have your email address?

@ Richard Tol:

Ooops on the mis-reference. The fall you compute from October implies, as we argued, that the 5% option would not bring real rates below pre-October-budget level.

The following are the pervcentage increases in key social welfare rates between 2005 and 2009:
Jobseeker’s Benefit: + 37%, OAP + 28%.
Over the same four-year interval the CPI rose 8% and the HICP 7%.

I suppose I shouldn’t be surprised that examination of the entrails of price indices to justify reductions in social welfare rates (that may be effected at the stroke of a pen) receives more attention than cuts in state-controlled costs and prices (that also may be effected at the stroke of a pen), even though these costs and prices fuel, perhaps, legitimate opposition to cuts in social welfare rates.

@Paul Hunt
I think your point is off topic. I would prefer to remove price controls, end state ownership, and break monopolies — but in the short term, state-controlled prices and costs can and should be cut where possible.


Apologies for provoking you into being so dismissive. My point is motivated by my doubt that the analyses being advanced do not present sufficiently strong evidence to justify the cuts in social welfare rates being considered. The HBS does not seem to exhibit sufficient granularity, particularly with regard to household energy consumption. For those relying on social welfare payments as the sole or principal source of income – these are likely to comprise many of the “fuel poor” – it is not clear that the suggested cut in social welfare rates would leave them better off in real terms than they were prior to October last year.

Leaving aside the possibility of inequitable outcomes, this runs the risk of failing a Paretian optimality test. In addition, even if these social welfare recipients were to be no worse off in real terms, I think the margins are too fine in aggregate terms.

Therefore, rather than suggesting administratively complex fine-tuning (e.g., additional means-testing, etc.), I am proposing reductions in the costs of energy supply that will leave the “fuel poor” better off in real terms going forward and provide a margin of comfort to absorb cuts in social welfare rates. And these cuts in the cost of energy supply may be fully justified objectively and would generate much wider economics benefits. That is why I believe that electricity and gas prices should be reduced below the levels currently being proposed to apply from 1 October.

The principal reason I am pushing this is that the period for public consultation on these prices allowed by the CER closes on 24 August. The CER will make its final decision after that date and prices will be set for the next year to 30 Sep. 2010. The public consultation process conducted by the CER rarely, if ever, encourages it to alter in any way the proposals it sets out at the beginning the consultation period. Irrespective of the quality of the submissions made and of the analysis submitted the CER tends simply to reject any submissions that dispute the basis for its proposals.

In my view the rationale for price reductions is compelling, but the CER has proved adept at rejecting any arguments made by unaffiliated, but interested, individuals. I believe the only chance of making this case convincingly – and to discourage the CER from pressing the “Instant Rejection” button – is to assemble some recognised and competent economic and energy sector expertise.

I know of no other Irish-based blog where this economic and energy sector expertise participates. The question is: is there any interest?

There is but a small window of opportunity.

The real value of SW rates as measured by changes in the CPI and HICP has increased (as have some other forms of income by the way as CSO earnings data series confirm).
So what?
Does that justify cuts in SW rates? If we can afford to squander billions on bailing out the unfortunately extremely well-off I reckon we can squander a billion or two on giving some comfort to those finding themselves on the dole. And let them smoke and eat cake with it if they will.

More to the point is how do we grow the economy out of this appalling mess brought on by tax-cutting and expenditure wasting (but not on SW). It is interesting that out of 15 comments, so far, on this thread, 14 are ‘for cuttin’. Economics has become proactively moralistic parsing HBS, CPI sub-indices to back up the cause?

As Ray Kinsella wrote yesterday in the Irish Times:
Someone has to speak up for individuals and especially families trying to survive on such pay. The budget cut the income of one-income families with two children by 6 per cent.

@Slí Eile

You tell ’em. Economic statistics, models, analysis — please yall, log out of Excel once in a while and go for some field research.

Which of yis could live on €800 a month? If you could find a place to live that didn’t eat most of that, have you any idea what kind of place that is? Then to heat it enough to keep what’s left of the wallpaper from moulding? And you would be lucky if this place was on a bus line, or close to any infrastructure. Can you keep a car as well? If you could, could you drive it legally (insurance, petrol, NCT, Mo’ Tax)? Could you afford internet access or a computer? How do you look for a job?

And if you are on Jobseekers Allowance, well, it’s taxed, so you would not even be seeing €800.

Anyone who has the power to set such policies should have to live under them for a year. Test their true efficacy, and stop trying to justify them with effin numbers games.

So stuff the statistics, the models, and the analysis. When cuts need to be made, why do we not look at what it takes to actually live here reasonably, and then leave alone those who are at or near that precipice. Enact the cuts, by gradation, upon the rest.


The IMF prescription is not an option. For one thing, it will only make things worse. Its austerity measures benefit the international creditors, not the country they are imposed on. Their track record is abysmal. Here is one of many articles on the subject written by Mark Weisbrot of CEPR:

Secondly: please help me to understand any implications of Ireland’s membership in the EU, as I am woefully ignorant in this regard: should any EU member have to go to the IMF? What good is it to be part of a monetary or economic union, if it only imposes rules on trade but washes its hands when things get tough? Keeping in mind that another Lisbon vote is coming up, and that EU membership was not necessarily a good thing vis-a-vis lack of ability to use monetary tools when inflation or recession hit, why should Ireland stay in the EU? What other advantages are there that trump this? Many thanks.

Marise, at the last count, the European Central Bank was providing c.€130 billion in liquidity support to the Irish banking system. Whether we should think about leaving the Eurozone, or the EU itself, would be a reasonable question to raise in about ten years’ time.

Has anyone seriously considered the practical, wider/macro implications of cutting sw rates (and/or minimum wage)?

My guess is most of it goes straight back into the economy every week (i.e. is spent). What would be the impact of losing say 3-5% of that spend in terms of more business going bust or more people losing their jobs etc. What might the other consequences be of cuts in benefit etc. to the poor?? I’m not suggesting it would be like Korea (huge spike in suicides) or Thailand (massive increase in child prostitution) etc. in their darker days but does anyone actually know?

Somehow I doubt it.

@Colm – I presume predicitng the potential social consequences of your report recommendations wasn’t part of your terms of reference?

The real welfare state, as Colm McCarthy well knows, is not the one that pays out Euro 204 a week (dole) to job seekers. It is the one that pays out fantasy salaries to the numerous governmental departments and quangos that have so far failed to put their hands up and take responsibility for their failures. By substantial I mean cuts of 40% or so benchmarked right back down to reality!

If they are too much in hock for the bank shares which are now worthless or in negative equity with half a dozen apartments then I think they should tell us. At least we will know that it is not statistics, quartiles or the national good that is driving their agendas but rather their own self interest which is something we have known for a long time.

It is easy to cut dole, when people turn up they are simply told “there is your money and that’s all the state can afford at the moment!” Cost of living has gone down 5% -7% sorry about that! Try that approach with the top two percentiles of the department of finance and you will get a different response. Yet it is their profligate, bizarre short term policies, which have led us to the very edge of national bankruptcy! What reports or commissions are we waiting for now? There is always just one more report preventing us from dealing with our self imposed problems. In truth, we would not need these reports if we as a people had a modicum of honesty! The reason we needed the McCarthy report was because of the level of dishonesty we as a people have sunk into.

Debt slavery or national bankruptcy seems to be the choice. I don’t mind the former as long as the pain is shared equally if not I will accept the latter because I cannot take any more of the corruption.

Talking about percentiles is useless when it comes to building any type of national consensus for dealing with the current crisis. There is a group of individuals who think they are exempt or immune from cuts, they think like this because this is what they have done all their lives. Perversely, these are the very people who believe they will dictate what the “cure” will be. That will be their own nemesis, but make no mistake, they are going to take the rest of us down with them.

It is the ordinary person at the end of the day that will decide the direction this state will go. I agree with the dole cuts, but lets start at the top with Barrister dole, Judges dole, Tribunal dole Banker dole Quango dole etc.

Although I have been accused of going “off-piste”, we seemed to have moved onto another mountain range in this thread. Colm McCarthy’s orginal post sought to explore the feasibility, in the light of new CSO data, of a BSN Report recommendation on social welfare rates. It seems I have gone off-piste because I had the temerity to make the point that the apparent justification – at a fairly high level of aggregation – for cutting social welfare rates is weakened considerably by the existence of unjustifiable implicit taxes in the high “point-of-use” charges levied for the State-directed provision of utlility services.

There seems to be, in principle, an acceptance that, if these “point of use” charges are unjustifiably high, it would be a “good thing” to reduce them, but, for reasons I find difficult to fathom, there seems to a general unwillingness to examine these charges and to see whether and how they might be reduced.


Thank you, that does help. I will check the ECB web site and see if I can noodle my way through the charter. I would hope that the ECB and theEU would see a huge downside to any member having to resort to IMF austerity, which has proved disastrous in the past. The implications of being under the eagis of a central bank with one hand tied behind its back seems also quite counter-productive. But I will take the time to do some study. Much appreciated.

@Paul Hunt, 16 August 10:01

I apologise for moving this thread beyond the exercise. Being not academic (okay, mostly uneducated), my pint of view is on the street as opposed to the policy meetings, or the modelling behind research for policy. I understand that this is important, and the work and study I see here I have found helpful, if often over my head. Mea culpa.

My point is that the models have trouble when applied to the reality of a life in poverty, from an (admittedly) anecdotal perspective. I can say from my own experience, as someone who has both been homeless in America and also has been an earner of a €50,000 p.a. salary, and much in between, I am familiar with the stages from doing very well, thanks, to budgeting more straitly, to Oh my God what am I going to do. I am fairly experienced, in a real world way, with where those cutoff points exist. And I’m telling folks here that social welfare payments, right here, right now, can’t be cut, unless you all want to be tripping over us on your way to work every morning.

Sorry about the “eagis” (aegis) and more humourusly, the “pint of view.” 🙂 That was a typo, not a Freudian slip. That’s me story an’ I’m sticking to it.

@ Colm

I believe all social welfare payements and benifits should be treated as income and therefore taxable accordingly. Could you please comment on this.
I also think that those who believe that think NAMA is a bad idea and support the nationalisation of the banks are ill advised. firstly the state has guarenteed bank deposits and therefore the banks. Secondly in the absence of NAMA the property developers who are generally limited companies will be liquidated and the assets sold in a fire sale. This will not impact the millions of private money the heads of these companies hold save where they have given personal guarentees. It is these same people who will buy the liquidated assets in the fire sale at dirt cheap prices. Who gains, “the developers”. Who looses, ” the state and hence the taxpayer” as they will be liable for the full write down with no upside.

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