In its QEC released today, the ESRI notes that the fall in the CPI has been driven in part by declining mortgage interest costs, from which those in the lowest income deciles benefit little, since they typically do not have mortgages (pg 39).
ESRI goes on to recommend (pg 43) that there should be no nominal cut in social welfare rates of payment. On RTE’s Morning Ireland, ESRI’s Alan Barrett reiterated this recommendation, adding that the Special Group’s suggestion of a 5% cut relied on the CPI fall, 6.5% in the year to September, and that this fall was driven substantially by mortgage cost reductions.
In its report, the Special Group based its recommendations regarding Social Welfare rates of payment solely on the HICP, which is down 3% in the year to September, precisely because it was aware of the mortgage cost issue. We did not rely on the larger fall in the CPI, whose shortcomings in this regard I pointed out in a QEC article (editor: Alan Barrett) as far back as September 2007.
The Special Group wrote
Rates of payment in the Social Welfare system were increased across the board by approximately 3% in the budget of October 2008. Since that time, the Consumer Price Index (CPI) has fallen by 5.3% (up to May 2009), while the HICP measure of inflation has fallen by 1.6%. The principal difference between the two is mortgage interest on owner-occupied housing, which up to May 09 had been falling quickly in line with ECB interest rates decreases. It is known from the Household Budget Survey that this item is a minor component in living expenses for those income groups most reliant on social transfers, for whom the HICP, which has declined less than the CPI, is more relevant. Nonetheless, and relying only on the HICP, the real value of weekly and monthly Social Welfare payment rates would have risen in real terms since October even if no increase had been granted in the budget. (pg 186, Vol 2).
The intention behind the Group’s recommendation was to bring the real value of rates of payment back to their level of about Summer 2008, in part on the basis that the 3 to 3.3% increase implemented in January 2009 was based on expectations of continuing consumer price inflation which have not materialised. It was emphatically not based on ignoring the effects on redistribution of complexities in the construction and application of price index numbers. Developments in prices since the report was released in July have not altered the situation – prices have fallen a little further.
If someone can show that HICP, with weights from the lowest one or two deciles, is down less than 2% since Summer 2008, they have a case against the Special Group. Otherwise they are arguing for the maintenance of a real increase in rates. This is a legitimate political position, of course.
38 replies on “ESRI against Welfare Cuts – but What’s a ‘Cut’?”
I know HICP is better than CPI but is it sufficiently representative for those on basic social welfare. For instance, the price of many “luxury” versions of groceries and household goods may be dropping but were social welfare receipients buying those goods anyway? Also, whereas fuel has come down slightly it is still way up on a few years ago. I am sure countless other examples exist. I don’t have a view on this – just throwing it out there in case there is a simple answer.
And don’t forget to factor in the cancellation of the Christmas bonus. This will essentially be a 2% cut on last year.
@zhou, as someone who does the family grocery shop, with a determined lack of loyalty to any retailer, I can say confidently from first hand experience that the prices of food and household goods have fallen. I have cut my spend by considerably more than the fall in prices reflected in whatever CSO/Eurostat price measure you choose, by taking advantage of lower regular prices, but also by changing the composition of my shopping trolley, and by taking advantage of both special offers and differences in pricing between retailers. I’m saving a bit more by buying a lot of my family’s meat, fruit and veg semi-wholesale (Smithfield Fruit Market and a catering supplier that does a little retail).
The price cuts I see are on both “luxury” and very definitely non-luxury products. I would be very surprised, based on what I see across all the main retail chains, if a family even on a much lower income than mine could not at least make savings in proportion to the fall in the relevant price indices without loss of utility.
So long as they don’t cut corporate welfare…
Didn’t Richard Tol address Zhou’s question in this post, back in August?
And doesn’t Richard work in the ESRI?
Based on purely economic criteria, there is an overwhelming case for cancelling the 3 per cent increase in social welfare paymenrs granted this year. However, it will be difficult politically as, notwithstanding the fact that social welfare benefits would still be higher in real terms than in 2008, RTE and the Irish Times will go to town on it, presenting Fianna Fail and the Greens as wicked evil Scrooges, who delight in taking the bread out of the mouths of children.
The basic problem is that the quality of economic forecasting in Ireland is very poor. I just looked up ESRI’s Quarterly Bulletin for this time last year, October 2008. In it, ESRI forecast that the CPI would average +2.0% in 2009 and the HICP +2.4%. In their latest Quarterly Bulletin, published today, ESRI estimate that the CPI averaged -4.3% and the HICP -1.5% in 2009. So, they over-estimated the CPI by 6.3% and the HICP by 3.5%. The Central Bank and the Department of Finance did likewise. In contrast, some of the stockbroking firms got their inflation forecasts for 2009 much more accurate. The error can’t be explained by unforeseen factors. The factors causing the negative inflation in 2009, the fall in sterling, the fall in oil prices, the fall in interest rates, had allready largely occurred or were heavily signposted by Oct 2008.
The bottom line is that, if there had been accurate forecasting, this time last year, of the likely inflation rate in 2009 (whether CPI or HICP), Lenihan could have frozen social welfare benefits in his Oct 2008 budget and still seen them rise in real terms. A very expensive error for the taxpayer.
To change the subject a little, I’m surprised that the media are leading with ESRI’s comments on social welfare. When ESRI Quarterly Bulletins are published, the media normally lead with their forecasts for economic growth. The cynic in me says that this is to distract attention from the fact that, in common with all other forecasters, ESRI are rowing back on their extremely pessimistics forecasts of early 2009. In today’s Quarterly Bulletin, ESRI have revised down their forecasts for the fall in GDP in 2009 from -7.9% to -7.2%, and in 2010 from -2.3% to -1.1%. Their forecast for the total fall in GDP between 2008 and 2010 is thus reduced from -10.0% to -8.2%. One-fifth of it wiped out a stroke. This is the second Quarterly Bulletin in a row that they have done this. Without wishing to gloat, I predicted here six months ago that they would do that, and that the forecasts being published in April (not just by ESRI) were far too pessimistic.
Back in April, the period of Peak Pessimism in Ireland, the consensus forecast was that GDP would fall by 15% between 2007 and 2010, of which 12% would be between 2008 and 2010. At the time, this was hailed triumphantly by the doom pornographers in the media as ‘the greatest fall in GDP ever recorded’. I was one of the few to ridicule such claims. Alas for the doom pornographers, its not turning out like that. On ESRI’s latest forecasts the fall in GDP will now be just 11% between 2007 and 2010 and 8.2% between 2008 and 2010. Still no cause for celebration, but I’m very confident ESRI will reduce them further in future Quarterly Bulletins. Indeed, Davy’s and NCB’s forecasts are allready for much lower falls in GDP in 2009 and 2010 than the ESRI ones quotes above. No wonder the media want to lead with ESRI’s social welfare comments.
Maybe there should be a new Nobel category.
The reason why the forecasts were not headline news is that the marginal change was not significant.
-7% or -8% is not here nor there.
I would prefer forecast ranges but the key aspect is the direction and the extent of change rather than specific figures.
People who brag when their forecasts burnish their claimed powers of prescience, usually lie low when the data doesn’t come up trumps.
Remember the mantra from every chancer in the game about a “soft landing”?
The impact of the stimulus measures in Germany and France were better than expected; the US owned chemical sector in Ireland has ramped up output (how much do we know about that?) ; China’s stimulus has helped but the main factor – – the unprecedented aggressive action by central banks – – has had a huge benefit.
Shouldn’t caution be praised rather than what preceded it?
I guess you knew too what the impact of measures such as interest rates at 1694 lows and so on, would have and the time scale!
I think there are two issues here – both of which, in fairness, Colm has pointed out. The first is an empirical question about the impact of price deflation on the lowest income deciles and how a reversal of the latest increase in SW rates might actually leave these recipients better off in real terms. Given the level of commodity and service aggregation in the Household Budget Surveys and the corresponding price data issued by the CSO it is possible to infer that Colm’s contention stands up. A post by David Madden in August:
provides some evidence.
However, a more detailed look, as I suggested, may not encourage such certainty.
The second issue relates to income distribution and equity. Richard Tol’s post (link provided by Aedin Doris) highlighted the redistributive impact of recent increases in social welfare rates. It is likely that most citizens not in receipt of SW or on the minimum wage are now worse off in nominal terms (and many, probably, in real terms) than they were a year ago. It is possible that SW rates could be cut in nominal terms without reversing these redistributive changes.
In the light of this inconclusive evidence I would suggest that cuts in the costs and prices of services whose prices are directly or indirectly controlled by the state should precede and/or accompany any proposed cuts in SW rates – or, indeed, public sector pay.
Given that the largest reductions in prices have been in food and non-alcoholic beverages, fuel, and clothing and footwaear, and price increases have occurred in health and education, where the less well off are on medical cards or grants, I was surprised to hear Alan suggest this morning that the bottom decile of the income distribution may not be feeling the advantages of the price falls.
With more landlords prepared to accept Health Board tenants, and falling rents meaning the rent allowance thresholds looking more than adequate, those on Social Welfare get a second advantage from the downturn.
I’m still against cuts in the OAP, however, on two grounds. The first is that I believe money illusion exists, and that particularly those on low incomes make plans based on nominal rather than real prices. The second is that in a climate where departing bankers and FAS executives still get big payoffs and politicans expenses are headline news, reversing a €7 a week extra payment to the elderly looks mean!
It might just have been possible last April, for Minister Lenihan to admit a mistake and reverse it before individuals had adjusted to the new payment – but that is useless hindsight.
The bigger change in costs to the Exchequer has come from the dole payments and I worry a bit more about the JA of €204.30, up from €148.80 as recently as 2005. It may also affect the incentive to work – someone coming off JA would have to do 24 hours minimum wage work before being any better off.
Two and a half times the equivalent payment in the only country with which we have a land border seems excessive as well – though I think UK payments are low by international standards.
Anyone know if there has been any increase on those on minimum wage?
George Lee asked the same question this morning. Does the ESRI speak with a double tongue, advocating and opposing cuts in child benefits?
In truth, the ESRI has no tongue. ESRI researchers do. While we generally have one spokesperson per area, and thus seem consistent, none of us ever speak for all of us.
The consumer price index for the year to September per income decile is
It is misleading, so, to use the average HCIP, but prices are falling for everyone.
Changing the forecast from -8% in July to -7% in October might not seem that big a deal. But, in April it was -9%. And, in the same period, the consensus forecast for 2010 has been revised from -3% to -1%. So, the total change between 2008 and 2010 has been revised from -12% to -8%, which is quite significant. And, I predict that the process of revision of earlier gloomy forecasts has a lot further to run.
and you go on to say, Michael:
“People who brag when their forecasts burnish their claimed powers of prescience, usually lie low when the data doesn’t come up trumps.”
I really think we can do without this sort of personal attack on Morgan Kelly. Moderators, please!
Colm MCCarthy says “solely on the HICP, which is down 3% in the year to September”. Your table shows that CPI for the lowest decile is at -3.95%.
Can you reconcile these figures and advise what you think HICP is down for the lowest decile if such a figure is readily available to you?
Is it a fair assumption that you have access to a car which enables you to shop around?
Thanks for the link.
I’m not sure about the exact relationship between HICP and CPI. I would suspect that the HICP would not be uniform across the income distribution either.
Surely, high earning civil and public servants should be the first to take a cut in income ( if such cuts are too occur) rather than those who have least?
It might solve little in the overall scheme of things but if its all hands to the pump time the sequencing matters.
@zhou, absolutely. A car helps in shopping around. And a freezer allows me to buy a lot of frozen/freezable foods when they are on special offer.
But my main point is that prices are down significantly even if you can’t shop around, and don’t have a freezer.
I think that those on low income should pay some tax even if not a whole lot. At least then they could be part of the “all hands” at the pump and could not be accused of free-loading. This would stop them being scape-goated. It would also allow them to make a contribution towards the common weal.
@R.Tol / Con
Noted and noted. Thanks.
I agree that the 3% given in January should be cut and perhaps even another 2% taken off as the special group advised.
However I have a real problem with a cut in child benifit for all.
People should be given 2 months to apply for child benifit based on a progressive sliding scale means test. I genuinely believe the savings would be quite large but would also protect those on low incomes/soial welfare.
As regards the logistics of going through all the applications?
Well the government have acquired the services of hundreds of administrators with very little to do when they nationalised Anglo.
How about giving them some admin to do?
I recon this would be both a very profitable and progressive cut.
Eamonn Moran Says:
October 13th, 2009 at 5:19 pm
“People should be given 2 months to apply for child benefit”
The Revenue already have details of the income of everybody in the State.
Start there and work forward.
If someone has income of €100k +, they lose child benefit immediately.
If there is some social injustice they or their spouse can reapply.
@John – “The bottom line is that, if ….”.
@Margaret Hurley – “someone coming off JA would have to do 24 hours minimum wage work before being any better off.”.
Er, I think the bottom line is that it is incredibly difficult to have lost your job – through no fault of your own – and now, several months or a year down the line, the savings and redundancy money have run out and it ain’t just food you’ve got to pay for. Think of all the usual bills on top of that and the increased costs we all see in the winter (extra heating etc.). Believe me, there is not a lot of ‘dignity’ in trying to live on welfare with a couple of children and spending all day, every day, looking for a job.
I’m all for hitting anyone who is a long term/career welfare scrounger but I can’t abide these blanket calls for cuts in welfare that I keep seeing – and they are usually coming from people who are well off and likely to continue being so even in these difficult times – the NDI’s (not directly impacted).
There’s a lot of great brainpower out there. Maybe it could be used to find a better way to balance the books. Or would that be hurting the ‘vested interests’ a little too much?
These are real people you are talking about. It is not just a ‘numbers game’. Did you know that it’s the car that gets sold first when the money runs out? Then, as time goes on and still no job (or even a whiff of a job) appears, it’s “what can we sell on Ebay that we no longer need?” and so it goes on….
Can I suggest you take a reality check?
I think you’ll find that social welfare benefits in Ireland are extremely good. I’m from Northern Ireland. I know a few people there who are unemployed and are receiving the princely sum of 65 pounds sterling (about 75 euros) a week. Child benefit and old age pensions are also much higher in Ireland than in the U. Kingdom, even allowing for the higher cost of living.
October 13th, 2009 at 9:19 pm
“Er, I think the bottom line is that it is incredibly difficult to have lost your job – through no fault of your own – and now, several months or a year down the line, the savings and redundancy money have run out and it ain’t just food you’ve got to pay for. Think of all the usual bills on top of that and the increased costs we all see in the winter (extra heating etc.). Believe me, there is not a lot of ‘dignity’ in trying to live on welfare with a couple of children and spending all day, every day, looking for a job.”
Can you think of anyone who would not empathise with your analysis? I think not.
“I’m all for hitting anyone who is a long term/career welfare scrounger…”
Identify them Joseph, are they the 150,000 who were unemployed throughout the “boom”?
“but I can’t abide these blanket calls for cuts in welfare that I keep seeing”
What if the State has run out of money?
“- and they are usually coming from people who are well off and likely to continue being so even in these difficult times”
Would they be the ones protected by the Green Party and NAMA?
“There’s a lot of great brainpower out there. Maybe it could be used to find a better way to balance the books.”
Don’t underestimate the power of your own brain.
“Or would that be hurting the ‘vested interests’ a little too much?”
Don’t underestimate the power of your own brain. Do something about it.
“These are real people you are talking about. It is not just a ‘numbers game’.”
Tell that to Fianna Fail and the Green Party and don’t underestimate the power of your own brain. Do something about it.
“Can I suggest you take a reality check?”
Can I suggest that you stay exactly where you and your family are? If someone tries to evict you, stay put. Put your life on the line. Stop taking this sht.
If the directors of Anglo Irish Bank are allowed to avoid the law you and your family can do the same.
Stop paying your debts. That’s reality.
On the issue of welfare cuts, in particular the payments to the unemployed – Do we have any idea how much of the unemployment payment eventually returns to the state coffers. In other words if we knock 30 euro off the payments, how much do we ‘really’ save? Since most of the recipients can expected to be spending most of this money, I would imagine that the actual amount saved is not so great as an initial figure may suggest…
If we reduce social welfare payments by X, allowing us to reduce total tax take by X, are we sure that the economy actually benefits? If not, then whats the justification for such a cut?
Another John M Says:
October 13th, 2009 at 1:01 pm
“So long as they don’t cut corporate welfare…”
After all ……. Can’t have FAS cutting its billion euro budget can we?
They train plumbers?
Let’s see if the Green Party can “create” 127,000 “windmill engineers”.
The Green Party can turn FAS into a destruction of capital that you have not yet dreamed of.
Still, they have found good company in the business of capital destruction.
Hug a hungry mink for the Greens and forget your family.
Is the spin that its impossible to tax child benefit actual spin or the truth? Surely that could be got round? That would be the fairest.
There should be a maximum amount from the public purse to any one individual, depending on their circumstance
If you work for the state, there should be a upper limit on what you can earn, same as there is a minimum wage………., no matter how many directorships or pensions you have.
If you depend on the state there is a limit to the level of support, e,g, unemployed or retired. In the vast majority of cases, the upper limit will not affect anyone.
Same if you work, and are getting any state benefits there are limits
All should be academic to the vast vast majority of people.
It should include salary, dole, children’s allowances, salary, farm payments, state pension, disability benefits, medical card payments, rent allowance, etc etc etc…. everything… with 100% tax on the surplus.
The limits for both should be set with regard to private sector wages and the state of the nations finances. and should be academic to the majority of people.
The limit on wages should apply to all state funded organizations, public servants, local authorities, registered charities, farmers, bailed out banks, recognized organizations (IBEC, trade unions) etc etc etc etc… if you are getting state funds or tax breaks, the message should be ….this money will cost the highest earners in your organization.
With a third tax band at the public sector wage limit so the private sector highest earners contribuite more starting at this level, to keep the PS unions happy..
And maybe the maximum public sector wage should be the maximum tax that a true private sector worker can save with tax allowances/schemes etc….
Theres all this focus on cuts on minimum wages, but there should be a focus on both extremes…. Something like the above provides an incentive to private enterprise to operate without state subsidy….. but both higher and lower earners are subject to limits.
“the spin that its impossible to tax child benefit actual spin or the truth? Surely that could be got round? That would be the fairest”
I disagree that taxing is the fairest way.
Giving it to those who genuinely need it would be more fair in my book.
Why should someone earning over €150,000 get 60% of child benifit?
Taxing would be a logistical nightmare but payment based on a sliding scale heading towards Zero once the family are earning 150,000 would be fairer.
One commenter above has pointed out that the state already knows the levels of peoples income.
I could see a back lash from the upeer middle classes but thats to be expected.
They dont want fair.
They want to protect their families. I dont blame them but it doesnt make it right.
I’m not so sure about that backlash. Almost everyone I come into contact with (outside of the protest groups ) thinks it is absolutely bizarre that they get this “free money” lodged into their bank accounts every month irrespective of their income. In the professional/executive classes (well up until their practices took a hammering in the last year) they put the money into long term savings accounts and shake their heads at the reality that they get to save for their children’s third level education courtesy of the state while others might leave school illiterate (23%?).
In fact, the loudest protests come, not from the “upper middle classes” but from those who claim to represent “working people” (which I always find to be a frustratingly difficult group to identify since we’re all working, or worse, not). But if it means workers on the average industrial wage (36k?) then surely they would get the payment in full. Even a double income family earning 70-80k could still retain a good part of the benefit. I haven’t heard anyone in the upper middle classes say anything except that it is crazy to have this universal payment. Have you?
Anyway, it’s probably one of those situations where the radio texters would be shrieking and the lobby groups whining, but most people would accept its only fair to direct this payment at lower income groups.
On the taxing vs means testing, I did call for a means test before but several expert contacted me and said means testing is much more expensive to administer and can lead to harsher traps for people. Taxing, (I was assured) is cheaper and leads to fewer hardship cases. Perhaps the more learned contributors on the site could confirm that.
oh one edit – that 23% figure must be national illiteracy rate – surely it couldn’t be the school leaving rate?
Since you are the ‘paper of record’, let me put the record straight.
The 23% figure (actually 22.6%) is for adult reading ‘illiteracy’. It derives from the International Adult Literacy Survey (IALS). This survey covered 18 countries and the figures for all of them (%age lacking functional reading literacy) were:
Czech Rep. 15.7%
New Zealand 18.4%
U. States 20.7%
U. Kingdom 21.8%
However, what is rarely mentioned when this figure is bandied about in the media is that the survey was carried out in 1994. So, it is totally out-of-date. It covered the population aged 16 to 65 (their ages in 1994). So, quite a lot who took part in the survey will now be dead. At that time, probably half those taking part in the survey in Ireland (those aged 40+) would have left school before universal secondary education was introduced in the late 1960s. But, even then, the Irish figure was not much different from the other English-speaking countries.
Since 1994, there have been no further surveys of adult literacy, either in Ireland or in any other country (with one or two exceptions). That is why the media keep bandying about the 1994 figure as if it was the current figure. However, we know the figure for Ireland will have dramatically improved since then. This is because, starting in 2000, the OECD began regular surveys of reading (and other) literacy among students aged 15. They call them the PISA (Program for International Student Assessment) surveys. In these, Irish students (aged 15) regularly come in the top three in the OECD. In the most recent PISA survey in 2006, Irish students (aged 15) came second only to Finland in the entire OECD for reading literacy.
So, with each passing year since the IALS in 1994, as the older among those taking part in the 1994 IALS survey start to pop their clogs, and their place is taken by the 15-year-old students entering adulthood, it is certain that the adult literacy rate for Ireland will now be much improved. In due course (ie in around 30 years time), when this flow of 15-year olds eventually form the entire adult population, then, if Ireland continues to do as well in the PISA surveys, we could expect to have the second lowest (after Finland) adult illiteracy rate in the OECD.
Thank you. Very informative.
Re: what is a cut?
It’s a cut when it happens to you, it’s a saving when it happens to someone else.
Like it’s redistribution when the rich pay more taxes, it’s oppressive when you are characterised as rich…
According to the revenue’s income statistics from 2006, Sarah’s couple both earning the average industrial wage are rich (in the top 10% of income earners). John, I am flying with lights on waiting to be shot down…
alternative rendition: one man’s waste is another man’s income.
Privatization of water supply is a connivance of crony capitalism. The public sector gets cash for current spending blowouts and the private sector get a part monopoly, like certain radio frequencies not auctioned off.
Meters mean charges can be increased, yet made to appear reasonable even in Ireland, where sourcing water is no problem.
Nama will need cash and the water system will be sold off to get it!
Australia has a generous system that is means tested. It is not a logistical nightmare. It has had it for years. A young family with average earnings gets enough from the state to cancel all tax liability. And it recently introduced a baby bonus of $5,000 per bub so that school age mums could buy their own 50inch plasma screen TV, as the socail commentators carp. All school kids over 16 get it paid to them, and it extends throughout Uni. It gets bigger if they rent away from home!
Come to Australia! 200,000 last year.
Do not expect fairness from a government that pays itself too much and still has crony capitalism.
1994! And that’s the last figure available? Madness. Thank you for the link.
“Programme for the International Assessment of Adult Competencies (PIAAC) will assess the level and distribution of adult skills in a coherent and consistent way across countries. It will focus on the key cognitive and workplace skills that are required for successful participation in the economy and society of the 21st century. It will be administered for the first time in 2011.
PIAAC will also gather a range of other information including the antecedents and outcomes of skills, as well as information on usage of information technology and literacy and numeracy practices generally.”
We’re all sorting through bins now…
@John – “I think you’ll find that social welfare benefits in Ireland are extremely good. I’m from Northern Ireland. I know a few people there who are unemployed and are receiving the princely sum of 65 pounds sterling (about 75 euros) a week”.
Er, surely you mean the SW benefits in Ireland are really bad (try living on it yourself) ….. when you’ve just lost your job through no fault of your own and were earning five times that amount ………………. and the benefits in the UK are even worse/quite shocking? Let’s get it all into some relative context.
I vaguely recall that in Luxembourg you received 80% of your previous salary for the first year (and then nothing) if you were made unemployed – which I thought was a reasonably good system. It discouraged career doleistas and gave you a reasonable cushion while you were trying to find another job.