Mr. Cormac Staunton:

I thank the committee for the invitation to address it. A detailed paper was circulated and I will speak about some key points. I am happy to take questions about the details in the paper as well.

To understand the impact of social protection on the overall distribution of income, we need to understand the distribution of market incomes, that is principally incomes from paid employment but also income from investments and other sources. This baseline sets the context for how social protection affects the distribution of income. Immediately we see something striking. Ireland is the most unequal country in the OECD when it comes to market incomes. This is measured using a Gini coefficient of pre-tax, pre-social welfare incomes. The next most unequal countries are Greece, Portugal, Chile and the UK.

Inequality of market incomes has been growing since the 1970s. This is not unique to Ireland. It is part of a global trend that affected most industrial economies, highlighted by the work of Thomas Piketty and others. In the circulated paper, the distribution of income by tax cases is shown in chart 1 and by adults in chart 2. From Revenue statistics we know that the top 10% of tax cases in Ireland receive 34% of all income, despite representing only 12% of the adult population. That is up from 28% in the 1970s. In terms of the distribution of income, those in the top 1% of tax cases have an average income of €370,000. The top 10% have an average income of €130,000. Many of those tax cases relate to couples so the per adult income is lower. A single person or a married person as one tax case needs an income of €75,000 to be in the top 10% of tax cases. The incomes at the top compare with an average for the bottom 90% of €27,000. It is important to understand this underlying inequality because it provides the context in which social protection payments are made. Taxes and social protection payments mean the net income inequality in Ireland is much lower than gross market income inequality, but as gross income inequality rises over time, the tax and social welfare system has to work increasingly hard to reduce net inequality to the same extent. It is also important to note that the Gini coefficient is a measure of income inequality, not income distribution or income adequacy. The Gini coefficient is measured from 100 – the most unequal – to zero – the most equal.

Taxation alone has a marginal effect on the Gini coefficient, moving it from 56.8 to 53.5, meaning that tax reduces inequality only slightly. However, social protection payments move the Gini coefficient from 53.5 to 29.9, which is a much greater reduction in inequality. The reason net income inequality falls significantly in Ireland is because social protection payments provide an income floor. There are 1.4 million weekly recipients of a social protection payment which means that 40% of adults in Ireland are on low fixed weekly incomes. More than 900,000 adults of a working age receive a weekly welfare payment. Only a fifth of social protection spending is on those who are unemployed, with the majority going to those who are retired, to children or to those who cannot work due to disability or care duties.

Because social protection is paid at subsistence levels, its impact is to swell the numbers of people at the bottom of the income distribution. In terms of income adequacy, social protection rates are in effect between €8,000 and €12,000 per year per adult compared to an average annual income of approximately €18,000 on the minimum wage or €23,000 for an adult single living wage. As well as providing subsistence to many people who have had a far lower income without social protection, these payments are vital for the functioning of Ireland’s market economy. The spending by recipients becomes consumption in the market which pays wages and taxes. If we did not have an income floor, we would have a crisis in many local economies, but because social protection rates are not linked to market forces, such as changes in the cost of living or changes in market incomes, they do not continue to guarantee the same level of subsistence over time nor do they address the underlying root causes of economic inequality. That is shown by what happened to income inequality since the economic crash. The Gini coefficient shows that income inequality was lower in 2009. That was due to the decline in higher incomes after the crash while core social protection payments provided a floor that was largely unchanged. Since then, however, we have seen evidence that the income distribution is stretching again, leaving people on social protection payments further behind. Provisional figures from Revenue show that incomes above €100,000 have risen from 2009 to 2013.

That indicates a growth in income inequality both before and after welfare payments are accounted for.

The distribution of income is one indicator of economic inequality. There is strong evidence that more equal societies do better on a range of social indicators. There is also an increasing acceptance among mainstream economists and leading economic institutions such as the IMF and the OECD that more equal economies are more stable and have better long-term growth. However, understanding the depth of economic inequality in Ireland requires us to examine other factors, including taxes, wealth and public services. In the coming weeks TASC will be publishing a report that seeks to bring together all of these factors and more, which we hope will provide a fuller understanding of the nature of economic inequality in Ireland. I am happy to take questions.