Distribution of Pain

In a comment on another post, Declan Fallon raises some interesting issues about the distribution of forthcoming pain. I thought it might be interesting to tease this out a bit more.

Most of the debate about the incidence of the fiscal adjustment has focussed on the public/private sector divide and, to a (regrettably) lesser extent on the insider/outsider (i.e. employed vs. unemployed) divide. However, there is certainly a demographic aspect to this. For example, after the medical card debacle, pensioners seem to be guaranteed immunity from the adjustment – one of the reasons for implementing the public sector pay cut as a pension levy rather than a pay cut was to protect the pensions of current pensioners; and, as Philip Lane mentioned at Monday’s conference, this protection is likely to extend to the budget. But it seems certain that child benefits will be further cut. Does this make sense?

As Declan emphasizes, children are not pure consumption goods; if they were, then the only argument against cutting payments in respect of children would be the particular necessity of keeping children out of poverty, in which case cutting child benefit – at least to the middle classes – would make perfect sense. But children are effectively investments too; they have long term economic value. It is in the public interest for citizens to produce children. So if putting the burden of the adjustment on parents has the effect of reducing fertility, the long-run negative effects may cause us to regret it.

Child Benefit

Tim Callan and Brian Nolan argue here that taxing child benefit has superior distributive properties to a cut in the level of child benefit payment.