Ruth Coppinger (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

2. To ask the Minister for Finance if his Department has estimated how much a 5% or 10% rise in wages for low and middle income workers would boost tax receipts and reduce welfare payments; and if he will make a statement on the matter. [28546/14]

Ruth Coppinger (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Has the Minister considered the impact on the economy of a 5% or 10% pay increase for low and middle income workers in terms of tax receipts and a lowering of social welfare? The reason I ask the question is that the Minister has touted the benefits of a tax cut over pay increases while calling for employers and, indeed, the Government to suppress wage increases.

Michael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

While it is possible to estimate the additional tax paid by an individual on a certain income, to do so on an aggregated basis would require a significant number of assumptions that would have to be made about incomes and specific circumstances, for example, the definition of low and middle income workers. More generally, on a static basis, I believe it is fair to say that an increase in wages would result in additional taxes to the Exchequer. These would include direct taxes such as income tax and universal social charge, but also indirect consumption taxes such as VAT and excise. Social contributions from employees and employers would also increase. The exact gain to the Exchequer from the taxes would require an assumption regarding an individual's marginal propensity to consume, that is, for every extra euro in their pocket, how much would be spent on goods and services.

The static picture outlined above is not realistic, however.  The wider economic impacts of a wage increase would have to be considered, most notably on competitiveness. An increase in wages and higher employer PRSI contributions would have to be paid directly by the employer. These additional costs would have to absorbed into the bottom line, thereby reducing operating profits available for reinvestment and additional employment, or be passed on to the final consumer, which undermines competitiveness. Research by the ESRI has shown that exporters are price-takers on international markets.  This means they cannot directly pass on higher labour costs to customers in global markets. Higher wages that are not supported by productivity improvements result in a loss in market share and, ultimately, fewer exports and jobs in Ireland.

Additional information not given on the floor of the House

This is a situation which Ireland experienced very recently. During the boom times, wage increases across the economy contributed very significantly to the loss in competitiveness, which resulted in Ireland's export sales beginning to decline. As a small open economy, continued export growth will be key in driving sustainable economic growth into the future. As such, any wage increases should also be viewed through this prism. Further, upward wage pressures in the private sector would also likely translate to calls for increased wages in the public sector. This would place pressures on previously announced agreements such as Haddington Road and place an additional call on the Exchequer.

The tax forecasts prepared by my Department are based on economy-wide levels of employment and income rather than focusing on specific cohorts. These forecasts take into account the most recent labour market data from the quarterly national household survey and the earnings, hours and employment costs survey, both of which are produced by the CSO.  The forecasts were most recently articulated in the stability programme update.

In order to provide additional clarity, I would inform the Deputy that all specific income tax measures undergo distributional analysis in advance of budgetary decisions being made. In addition, the distribution analysis of such tax measures announced in the budget is included in annex A of the budget book. The distributional analysis is based on tables demonstrating the effects of budget changes in respect of income tax, PRSI and USC on single, married with and without children, PAYE and self-employed income earners over a wide distribution of income levels. The tables in the budget book also demonstrate the effect of changes to some payments from the Department of Social Protection, such as family income supplement.

In addition, every distributional analysis contains a section which outlines the effect of budget changes on illustrative cases. These illustrative cases examine the effect of budget changes on various categories of income earners, including single, married, lone parents and elderly in a variety of different occupations and with varying income levels, and not only demonstrate the effects of the budget tax changes but also the effect on changes to a number of payments from the Department of Social Protection, such as family income supplement, child benefit, State pension and one-parent family payment, where relevant.

With regard to potential savings in welfare payments, these are a matter in the first instance for the Minister for Social Protection, Deputy Joan Burton. However, I understand that, in terms of the potential impact on welfare payments from an increase in wages, this cannot be easily estimated. For example, the answer may be different in the case of a single person versus someone who is married with children.

Ruth Coppinger (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

Competitiveness is the argument that is often used, but pay levels in Ireland are still far below the EU average. The Minister is underestimating how much they have fallen since the crash. They have increased by 12% for managers and professionals, but there has been a decrease of 5% for lower paid production, transport, craft and other manual workers.

Wage increases are superior to tax cuts because all low and middle income workers benefit, including those too badly paid to be sufficiently in the tax net. The Nevin Economic Research Institute, NERI, found that one third of households had gross incomes of less than €27,000 and would not benefit from income tax cuts. The Minister mentioned a second benefit of wage increases, that being, an increase in tax revenues, which could be used to pay for public services. Tax cuts could decrease what is available for those services.

Michael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

If we were to have an economic debate on this matter, there would be validity in the Deputy's points, but we must first distinguish between the private and public sectors. Whatever the economic benefits of increased pay levels in the public sector, the Exchequer cannot afford them at present. Pay reductions have been negotiated as late as last year through the Haddington Road agreement, not pay increases. On the other hand, parts of the private sector can afford pay increases. From the statistics I have seen, I understand that approximately 40% of private sector firms gave small pay increases last year. The test is whether the amount they pay is consistent with not disimproving their competitiveness, the measure of which is decreasing market share. If they can increase pay without losing market share, particularly on the export side, it is good for the economy for them to pay their workers extra.

Ruth Coppinger (Dublin West, Socialist Party)
Link to this: Individually | In context | Oireachtas source

I do not agree with the Minister about public sector workers. The economy would benefit considerably from the increase in consumer spending that would follow increases in public sector pay. Wealthy people who receive tax cuts tend not to spend in the economy to the same extent. Dr. Micheál Collins of NERI has estimated that an hourly increase of €1 for a low-income worker is equivalent to a gross increase of €1,956 per annum.

The Minister omitted to mention how the social welfare system subsidised part-time and low-paid work. These people could be given pay increases. JobBridge, the family income supplement, FIS, and so on are costly to the general taxpayer and are subsidising employers in taking on workers at low pay.

Michael Noonan (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

It is time that we commence the wider debate, and I welcome the Deputy's question for doing so. For the past five years, we have been dealing with the problems of a failed economy. It has just turned and we are beginning to deal with the problems of an economy that is growing and successful again. One such problem is wage demands and wage pressure, which are just beginning to start. We must re-examine what type of model best suits this country, small as it is, in delivering extra income to households. A part of that model involves wages, but all we can afford at this moment is the debate. We are not in a position to deliver with hard cash yet. I do not share some people's position that increased pay is bad. If a company or the State can afford it, increased pay is good and economic benefits run from it. The Deputy has commenced the debate and it is something to which we will return several times.