Budget 2010: Welfare Cuts

The idea that social welfare recipients should take cuts is normally considered politically unacceptable. I have mixed feelings about the measures taken today.

On the one hand, when one looks at measures not taken (whatever legal reasons there may be) such as the failure to cut pensions for retired public sector workers (traditionally linked to pay levels which have now been cut) and the failure to freeze public sector increments, as well as measures taken such as the VAT and excise cuts (costing €257 million on a full year basis) and the range of dubious so-called stimulus measures (vouchers for cheap rail travel for senior citizens visiting Ireland from abroad?) one could conclude that these cuts were avoidable.

On the other hand, against a background of significant deflation and with wage rates falling and the potential for serious poverty traps (where people are better off unemployed than in low-paid jobs), one can argue that cuts in unemployment benefits may unfortunately be a necessary part of any policy mix aimed at limiting unemployment over the next few years. (This particular argument does not apply, however, to disability or carer’s allowances). Moreover, with social welfare spending taking up such a large share of total expenditure, it was not realistic to draw a line in the sand and declare it to be off limits.

As an economist, I can manage to hold both sets of opinions at once.

34 thoughts on “Budget 2010: Welfare Cuts”

  1. @Karl

    If ‘capital’ in one hand and ‘labour’ in the other hand of both opinions – which hand is empirically heavier?

  2. @Karl Whelan
    It would be interesting to see if this budget has a particular effect on consumption. Reversing the half point vat increase may not be enough to compensate. Perhaps cutting the alcohol cost is just to help the retailers over Christmas. Dermot Ahern is not going to do anything on leases until the NAMA valuations are finished – what a surprise.

  3. @Karl Whelan
    On the subject of the equity of the spending cuts:
    Social and Family Affairs -760
    Health and Children -400

    Environment and Local Government -78
    Energy and Communications -13

    And people say FF bought them with beads. Au contraire.

  4. @Karl Whelan
    “There will be a change in social housing investment programme away from acquisition and construction towards less costly, more market based delivery mechanisms, including leasing.”
    It will be interesting to see how Glassbottle Gormley manages this.

  5. @ David O’Donnell
    Capital, as it will be very scarce whereas labour is not in short supply except in the colonies, as we used to say. Also labour has voting power. Capital does not.

  6. The idea of encouraging work seeking is fine, except that there is a shortage of work ……. So it really is just politically more palatable with this crowd than to raise taxes, which will only discourage a few from over working.

    Illogical, Captain!

    Also hardhearted but in line with history as the great patriot CJH did the same thing ….

  7. The message seems very clear to me. Young people, get out of Ireland – there are no jobs for you, there won’t be in the forseeable future and we can’t afford to keep you on the dole and it will make the unemployment figures look better if you bug*er off. But having said that, there is no serious attempt to create a stimulus/jobs whatsoever in this budget.

    FF need to drive down wages as they can’t devalue the currency so by default, unemployment benefit has to come down. Anyone out there want to deny that this is the government’s agenda?

    Cynical to cut (further – remember they had a cut in the last budget too) the welfare payments of carers, the blind, the disabled etc. for so little return.

    What’s really interesting is what he didn’t cut – tax breaks that the unemployed don’t get – to the well off. I suspect we could raise billions if we stopped giving out tax breaks. Unfortunately, as the row will focus on welfare payment cuts and ps pay cuts, this fact will slip quietly away without being noticed. I maintain that tax breaks and reliefs (company and personal) e.g. such as on private pension contributions are fair game in times of economic crisis and cutting them won’t have the detrimental effect that the vested interests shout so loudly about.

  8. I meant to add, that once again, I don’t see the opposition being very effective and coming up with more creative ways of saving 4 billion that have less impact on the vulnerable (and I don’t think anyone is denying we need to save that amount).

    How about a retrospective wealth/CGT/even inheritance tax, going back over the celtic tiger years. All those who gained from it will surely not mind passing some of it back? It could raise billions.

    But then, I’m just a pinko leftie so I would suggest something like that wouldn’t I? I’m one of those sad people who want to live in a society where the strong are given opportunity and the truly vulnerable are protected. Sadly, I seem to live in one where the strong can ride roughshod over the vulnerable/weak as and when they see fit to. If what we have in Ireland today passes for a functioning democracy with some trace of equality in it………… then maybe it’s time I left.

    Unfortunately, to have the cojones to take the kind of measures that could do something more equitable, you would need Hugo Chavez running the country, not Brian Lenihan (well, Brian Cowen doesn’t appear to be running it any more anyway).

  9. Joseph
    “How about a retrospective wealth/CGT/even inheritance tax, going back over the celtic tiger years. All those who gained from it will surely not mind passing some of it back? It could raise billions.”

    so, someone bought shares in 1997 at 17c, they rose to 5.76, then they are now at, say, 1.04. What is the tax liability they face?

    or a farmer sold land, for 4m, 3m of which they invested in a variety of bank shares and pensions, which are now down to, say , 250k. The other 1m was split thre ways to build two houses for the kids and to extend their own/buy the wife a mini, go to oz to see the uncle etc. Whats their tax liability?

    I spoke to a person over the weekend, they invested 80k in a “savings” product, its now worth…..11c. Can they claim a tax writeoff?

  10. @ Joseph,

    “But then, I’m just a pinko leftie so I would suggest something like that wouldn’t I?”

    I have a cunning plan. Tax all pinko lefties at a rate of €1,000 per annum.

    🙂

    Joseph, retrospection seems attractive but it is fundamental to the Republic (if that is what we have) that it is never applied. If a person or corporation makes a decision based on extant law they must be able to rely on the fact that that law will not be changed retrospectively. If one cannot rely on the law one would simply not make decisions. Retrospection is akin to confiscation. How would PAYE employees feel if the government retrospectively changed income tax rates for 2008 & 2009 and deducted same in 2010? Retrospection is a recipe for stagnation followed by anarchy.

  11. @ Karl,

    “such as the failure to cut pensions for retired public sector workers”

    I don’t think FF & the Greens see this as a failure. They seem intent, with the suggestion that PS pensions will be linked to CPI, to embed the pension “super” gains of former PS employees. All of these unfunded. There is no reason why PS pensions should not have been reduced.

    It is another example of FF & the Greens targeting the young to maintain the gains and profits of a generation that benefited from an unsustainable boom.

    Along with targeting the under 23s on benefit they seem intent on turning the young against the old.

    One thing is clear to me. No politician should be entitled to a pension until they reach pensionable age. If that requires a Constitutional amendment then so be it. If hardship is an issue they can queue up at the office of there nearest Social Welfare Officer like everyone else.

  12. If you are unemployed then you and your family should be in poverty.
    This acts as an incentive for you to do something about it and take responsibility for your situation.

    That means either working for yourself or taking the limited offers around.

    Somebody working on minimum wage should be considerably better off than an unemployed person (that is why the minimum wage should be left alone). Currently you are better off on the dole grabbing a few nixers here and there. This encourages long-term unemployment, which is bad for self-esteem and enables people to blame everyone else for their situation.

    I know many of the minimum wage jobs are not attractive but if more people are incentivised to work – the faster the economy will benefit improving job prospects for everyone.

    Tough medicine…

  13. Personally, I think this is a pretty good budget overall.

    The focus on spending cuts is right; the cuts in welfare have to be seen in the context of an unwarranted increase above inflation last year.

    The Taoiseach did the right thing by leading by example – his 20% pay cut is above what he is asking anyone else to take. And whatever about the politics, few will deny he has a hard job and works long hours at it.

    My concerns with Nama notwithstanding, this budget was a very good step for Ireland. It is only to be hoped that the vested interest groups react in the spirit of solidarity that is required to implement this plan.

  14. @ Joesph,

    Stimulus for jobs? I think we have the cart before the horse here. Jobs will only exist when work is required to be done. No work = no jobs. The emphasis should be on “What work is required to be done”? not jobs. We have lots of people willing to work and with all the flooding recently there is lots of work to be done. The emphasis should be on linking the two.

    As for cutting benefits for younger people looking for jobs, I think there is benefit in doing that. There is no point in paying people to find something that cannot be found. It’s a waste of taxpayers money.

    In addition with the increasing complexity of todays living we should be encouraging teenagers to stay in school and progress to 3rd level. A lot of young people left school after the Junior cert to work on building sites. The money was good and nobody shouted out against it. These young people who thought they knew best, they could not be told or shown the errors of their ways threw away the chance of third level education. Now they are paying the price as they are effectively unemployable with a dead construction environment around us.

    It’s not just these young people who are guilty of a gross error, the rest of us in society did not object to this carry on. We were quiet happy to witness them building our shiney new house or public road etc.

    I accept not everybody is suitable to 3rd level education and as such there will always be people working in lower skilled jobs. However we need to encourage more people into the higher valued areas and when they get there reward them.

  15. A deliberately divisive budget.

    Let the peasants fight over the scraps and borrow €85bn to “invest” in a bankrupt financial sector.

    Anglo Irish = €4.0bn
    Allied Irish & BofI = €7bn

    EBS = €0.4bn
    Nationwide = €2bn
    Anglo = €6bn
    Allied Irish & BofI = €7.2bn

    NAMA (at least) €60bn.

    To suggest that there is no connection between the fiscal deficit and the bank bailout is disingenuous at best.

  16. @Dr Spock
    “If you are unemployed then you and your family should be in poverty.”
    You have, i take it, never been on the dole? And do you mean relative or absolute poverty?

  17. @Dr Spock: ever heard of ‘involuntary unemployment’? The bubble is over and we are in a deep recession.

  18. @ Dr Spock,

    Rather harsh opening words in your post, however I get the general gist of what you are saying. But life is not really as easy as that.

    Even when the economy was booming, did we not approach full employment?

    For us to regain competitivness, costs in all areas have to come down. I have no problem in slashing unemployment benefit, provided of course the cost of living is slashed as well. Cost of living has come down a few %, but it has not been slashed.

    Yes there has to be an inventive to work, paying people to do nothing is not an option. The wrong message can be sent out by overgenerous welfare payments.

    But a balance has to exist for those people who cannot work to be able to survive.

  19. @ Dr Spock: You have got it in the crotch!!! Hope you enjoyed it!!!

    I have two un-employed adult children. One has some benefits (an electronic engineer), the other has none (was self-employed). I, and their mother are now supporting both. What was 4 incomes is now 2.5! Multiply me by 1000s. Bye-bye recovery, etc., for a long time. Its the maths, silly!

    I will not tolerate any ill-considered, inadequate or plain stupid comments from anyone anymore. The fault for our desperate economic predicament lies solely with those politicians, financiers and civil servants who deliberately chose to ignore the warnings of those of us who saw this economic disaster in the making (about 5 years ago!). I cannot accuse them of anything other than heroic levels of arrogance, self-delusion and skilled incompetence.

    This is merely the end of the beginning of the Great Economic Collapse. Virtual wealth will dissipate like fog before a warm sun – the debris that will be (is being!) revealed is real debt. So how will this toxic effusion be got rid of? That’s the next phase – and it will make the current predicament look like a picnic. If you cannot (nor will not) understand this, then you will surely encounter a very disagreeable surprise in the not too distant future.

    B Peter

  20. @B P Woods – The two adult children you are taking care of are very lucky to have you, a lot of people don’t even have that safety net.

    But I do think @ Dr Spock was on to something – there has to be a clear difference between being on the dole and working.

    Here’s my idea – call it the Sky Sports Means Test. You go round to everyone on the dole and if they do two of the following:smoke, drink, or have sky/ntl then they have too much money – take some back. Easy 🙂

  21. I agree that the decision not to cut the pensions of existing public sector pensioners is unfair. According to the Irish times public sector pensions are now approx 70% of the salaries of the workers now doing their jobs. The lack of attention to pensions necessitated further cuts in the wages of public sector workers.

    Mary Hannifan’s explaination for this on the RTE news last night made me laugh. She said that pensioners aren’t enjoying the reduction in the CPI becuase this is driven by a fall in housing costs. Of course they aren’t – becuase the vast majority of them own their homes outright and therefore have no housing costs!

    In relation to the pay cuts, I notice that the government aren’t too concerned about the incentive to work of public sector workers with incomes of €30k and lower. The impact of the pay cut and the income plevy (don’t think the pension levy applied to this income group) a public sector worker on €30k is now coming home with less than a single people recieving job seekers allowance + rent supplement.

    Although I recognise why large cuts had to be applied to lower earning public sector workers (including me incidentally) to make up the target, as most PS workers are in this category, I don’t think the media have cottoned on to how modest the cuts were at the top. In my field for instance, university professors were granted a pay rise of 7% earlier this year by the Higher Level Review Body so their cut is in fact far less than that applied to lower grades.

  22. @Brian
    Correct never on dole; I did start a small business in smart economy selling into international marketplace yadayada… due to market conditions and (some) mistakes on my part the business went down.. My employees got redundancy and sailed off… I was left to tidy up with personal debts and creditors but no dole. Iasked the bank to forgive my debts but they declined even though they were making great profits at the time – I must not know the right people.

    I got on the phone took whatever I could (work 10 years below my exp/quals), and am only now getting head above water after 4 very hard years (Heating turned off, threatening letters from ESB, staycations etc). Not sure if that qualifies as relative or absolute poverty. Of course at the time my business went down the economy was apparently booming (we now know how) so nobody cared. I now work for a MNC where I would say that the chances of being “terminated” are 25% in any year.

    @BP Woods – I sympathize and have a child in secondary myself. Each person is different but I would rather my children emigrated to a place where they can get work rather than sit at home on dole. My advice – do not rely or wait on the government to help you but use your contacts and resources to get something going with your kids…whether in Ireland or abroad.

  23. @ Dr Spock,

    Very refined and diplomatic answer if I am allowed to say so.

    “do not rely or wait on the government to help you but use your contacts and resources to get something going with your kids…whether in Ireland or abroad.”

    I think we are going to be seeing a lot more of that in the near future.

  24. @Dr. Spock

    Dr. Ferengi Spock I presume!

    Looks like the vultures are in town!

    Now where did I put that number for 7 of 9?

  25. @ Dr Spock. Thanks for the replies. I knew what was coming down the track. Bought a small farm with plenty of trees on it. Put one of the ‘adults’ on it. So far so good. The second has gone back to college to study horticulture – he’s quite good with plants.

    Emigration is off the menu. All the English speaking countries have surplus labour supplies for a long time to come. The FIRE economies are dead. The PC economies have been given away. We’re left with the trash.

    The Permagrowth paradigm (credit, leverage + debt) is over. You will survive if you can produce a surplus of food and a constant supply of potable water. Make no mistake about this developing economic predicament – we are not going to exit in the manner that most assume.

    So far, oil has remained below $80/bl (in 2008 values). If it heads over $85/bl and remains there, watch out! The current reduced oil price is due entirely to the depressed global economic condition. But the domestic consumption (of oil) within in the oil-producing states is still increasing – we just don’t see this. These producer states have exponentially increasing populations to cater for.

    So, if by some great miracle of printing the money supply increases and Permagrowth gets a reprieve – oil prices will increase sharply and steamroller any ‘recovery’.

    B Peter

  26. ah….. poor ….mr cowen 20% off his pay now is that off his net pay or gross I think not!!!!!!!! what about his very wealthy allowances did’nt stop that did he NO!!!!!!!. they are out of touch with the irish people and are starting to belive their own bull….! nero played the fiddle while rome burned what will mr cowen play!!!!!!!!!!!!!!!!!!!

  27. @ kayla

    “nero played the fiddle while rome burned what will mr cowen play!!!!!!!!!!!!!!!!!!!”

    Your future.

  28. i am one of those who rely on state benefits to survive, and contry to dr spock’s belief, we dont live the high life, neither of us smoke, we dont have satalite tv, but we do enjoy a (cheap) bottle of wine between us on a saturday night, we cant afford the over priced drink in the pub’s, i recieve less than 1/4 of my income from when i was able to work,( i’m on disability benefit) i paid my prsi and taxes for 30 yrs, before being forced to stop work through illness, the swindlers at the bank/ insurance compony would not pay out on the health insurance on our home ,and the bank repossesed as we could no longer afford the mortgage payments, we only had 4 yrs left of a 25 yr mortgage , yet these vultures grabbed all they could and left us with nothing, now thanks to the “Brians” there being bailed out for billions by the tax payer, we now have to live in a private rented house,as our local council do not have suitable housing for couples with no children i.e.2 bedroom, we can’t get rent allowence becouse our rent is 25 euro above the ‘ceiling” set by central goverment. why was the bloodstock industry left off with huge subsidieswhen the majority of horse breeders are very rich men? why not put a 10% tax on betting, that would raise millions, also a tax on the lotto(say 5%) and a windfall tax on the compony that runs the lotto, how much does camalot make each week in profit?. how many td’s will stand up and vote against these cut’s in the dail today, there all on the radio and t.v. saying how unjust it is, but will they veto it, no chance because that may bring down the goverment and they may lose there position if an election was called, there a bunch of spineless money grabbing cowards, i will certainly not vote f.f ever again.

  29. I wonder how people can think that cutting SW while not getting extra in taxation from people earning more than say € 100k can be justified at all.
    Research shows that economists are less generous than others. It shows.

  30. @ Zeno

    havent heard of the income levy, or the increased medical levy, both brought in in the previous budget? Or the fact that SW was increased last year on account of inflation forecasts which turned out to be completely wrong? Cutting SW is always a horrible decision to make, but sometimes its also the right one.

  31. @Eoin
    Agreed that cutting SW is always horrible and that it might be right sometime but context is crucial. Getting the public to accept drastic measures is imperative if the nation is to get over this emergency. Despite the levies and the rate of marginal tax now being applied the point remains, someone earning over €100k should be asked to contribute more, if only for a couple of years, before another person close to poverty has their income reduced. The point you make implies that enough was done last year. To say the least that is contestable. What is not contestable is that a person on €100k can afford to make more of a contribution than someone on SW given present rates of tax. More tax could certaily be paid for the next couple of years and this would be a small price to pay to ensure the sucess of the struggle to get over the mistakes of the past.

  32. @ Zeno

    SW went up by what last year, 4%? In a 6% deflationary environment that means spending power is up 10%. Even after the budget SW is still higher in “real” terms.

    Pay rates are not up 10% at any other level in society, private or public. At a net level they are down probably close to 10% after levies and pay cuts/less hrs have been taken into account.

    So we have SW up and wages flat or down, and this doesn’t even take into account the huge increases in SW in recent years. By increasing taxes again, you’re essentially punishing the people in this society who are working to get the economy going again. The simple facts are SW rates were unsustainably high for our economy and were, like so much of our government expenditure, purely justified and funded by one off tax receipts resulting from the housing/construction boom. These receipts will not be returning anytime soon.

    Tax increases are not a pro-growth strategy, they are not a pro-investment strategy, they won’t create a single job and will more than likely lead to further job losses. We cant just turn to tax increases every time a part of our society wants to justify a spending item. They certainly won’t ‘fix’ any of the mistakes of the past. They’re more likely to create brand new ones.

  33. @ Zeno,

    I appreciate your concern, however how do you know that people on 100K can afford to pay more?

    Is 100K a lot of money? After all 100K Euro is only 79 old Irish pounds. Is 79K punts a lot of money? I don’t consider these sums a lot of money to be honest. But this is something that I do know…

    People with these sorts of incomes Euro 100K+ bought property at hugely inflated prices. For example buying a house for 500K at least 200K went to the Govt in the form of VAT, Corporation tax, Stamp duties etc. What did the GOvt do with this money, it wasted it of course, well not all of it but most of it.

    So these people have already paid this money to the Govt, and they are still paying with mortgages for the next 20+ years or so.

    Now that the bubble of credit has burst, people with 100k incomes are concentrating on debt reduction.

    For a private sector worker where would your 100K income go? A quick break down here,

    36K in income tax approx.
    33K in funding a pivate pension, if you want to have any standard of life in retirement, you should be looking at 1/3rd of your annual salary going into a private pension.
    24K on mortgage of 410K at 3.65% approx.

    That comes to 97K leaving 3K to live on

    Obviously 41% of pension contribution can be written against your tax bill at the moment, so that reduces your tax bill by about 13.5K. Of course there are fundamentalists out there who wish to reduce this tax break to Zero, but that is a different story.

    So you are looking at a person earning 100K living on 16.5K for a year.

    This is not possible, so the pension contribution has to fall somewhat.

    The people on 100K are the new poor.

    To come back to these people now looking for more money is not as easy as it seems. It is not always true that people on 100K can afford to pay more.

  34. I have read most of your comments and I think people that have employment and have security don’t have any idea how the other half of this country live. I would consider my husband and I were middle class of this country when both of us had jobs (never rich by any means always just got by!!) and are now definitely a lower income family now. My husband lost his job in April and is on unemployment benefit and cannot get work he goes around helping people for free in the hope that employment might come his way. His dignity is at an all time low but he is not the type to sit around and do nothing all day. I am on disability benefit due to illness (and by the way I was a hardworking employee for 20 years!!). We have two small children, we struggle to provide for in these times. We bought our house 7 years ago for 160 k, you could only buy a two bedroomed apartment at the time so moved out into a rural area so that our mortgage wouldn’t be massive. There were no choices for anyone buying at that time. The banks gave out 100% loans at the time, we didn’t do we had our 10% saved. All people who had thriving businesses and development companies bought all around them full of greed to be rich!! buying several properties and renting them all out when the bubble burst the people who just had ordinary lives and ordinary homes all took cuts and have been struggling for a couple of years not to mind these big cuts for the next 4 years. Why should normal people have to take cuts for mistakes made by the Government and the banks!! The Country will have more repossessions on homes what is it all going to achieve. Leave the Social Welfare payments alone every cent is important in my home we are just trying to survive. Why is it that there are so many opinions on people on social welfare maybe many years ago on long term employment when employment could be obtained but not in these times. There is high migration in this country it hasn’t seen since the 80’s why because people who want to work cannot get employment great future ahead for our children. Why are so many unemployed because due to lending massive amounts of money to developers who built developments and none of them sold which now is dead equity and worthless. This Country is in a mess far higher than the rest of Europe. Instead of people standing up and blaming all sorts of people in society it would be far more important for the people at fault to stand up and take accountability and get this Country back to some standard before it collapses. These cuts in the budget will crucify the lower income families in this Country and will put major strains on everyone. I think it is time for everyone to stand up and let the Goverment find other ways of making the monies they had full responsibility of flushing down the toilet especially the billions of euro bailing out the banks!! What about all that money????

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