Selected Issues

Abstract

Selected Issues

Income Inequality and the Welfare System in Ireland: An Overview1

1. This paper provides a brief overview of income distribution and the welfare system in Ireland, with a focus on the crisis and post-crisis period. Ireland’s flexible economy and strong social safety net helped mitigate the adverse effects of the property-driven crisis. While economic conditions are improving rapidly, lifting employment, ongoing efforts are needed to address the lingering impact on those hardest hit, including the long-term unemployed and unemployed youth. More broadly, the tax-benefit system has been effective in redistributing income and mitigating poverty, but the long-recognized challenges of market-income inequality, i.e. before taxes and transfers, and regional disparities continue to be relevant. In this context, consistent efforts will be needed to support sustainable and inclusive growth and meet ambitious social targets, including the reduction of consistent poverty to 2 percent by 2020.2

2. Important caveats apply to this analysis. Given data limitations, the quantitative analysis in this paper focuses on basic aspects of income distribution. However, economic inequality is a holistic concept that goes beyond narrow measures of income distribution and comprises the capacity and ability of people to attain goods and services to satisfy their diverse needs and to thrive as individuals. In addition, household living standards are also affected by the provision of public services, such as health and education, with an impact on inequality that is hard to quantify (Lawless and Reilley, 2016). Ireland performs relatively well in studies of broader well-being, where these factors are relevant (Box 1). In addition, the latest available data on social conditions and income distribution does not reflect more recent improvements in the Irish economy.

Ireland: Broader Measures of Well-Being

A better understanding of people’s well‑being is central to developing better policies for better lives. To this end, the OECD has developed a well‑being index (Better Life Index), a multidimensional metric covering aspects of life ranging from civic engagement to housing, from household income to work‑life balance, and from skills to health status.1/

uA01fig01

Current Well-Being in Ireland

(Ranking of OECD countries; Longer lines show areas of strength, shorter lines show areas of weakness)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

Source: OECD Better Life Initiative.

Ireland performs well in many measures of well-being relative to most other countries, particularly regarding housing (despite the current supply shortfall), personal security, health status, education and skills, social connections, subjective well-being, work-life balance, and environmental quality. However, Ireland ranks below average in income and wealth, and civic engagement.

1/ See, http://www.oecdbetterlifeindex.org/

3. The paper is structured as follows. Section A provides an overview of economic and social developments from crisis to recovery. Section B discusses the main causes of the relatively high market-income inequality that characterizes Ireland. Section C summarizes Ireland’s tax-benefit system, focusing on issues regarding personal income taxation, labor market policies, and the impact of social benefits in mitigating income disparities and poverty. Section D concludes.

4. The main findings can be summarized as follows:

  • Ireland is characterized by one of highest dispersions of market income among EU (and OECD) countries. Specific features of the Irish economy, as well as specific structural gaps, contribute to explaining this situation.

  • Ireland’s tax-benefit system is one of the most effective in the EU in redistributing income, thereby mitigating income disparities across a range of factors (including regions). A relatively progressive tax system funds a robust system of social benefits, a significant share of which is means-tested.

  • Despite the severe financial crisis and substantial budget cuts, the government succeeded in preserving most welfare expenditure, which provided an important cushion against the worst effects of the crisis. This helped safeguard social solidarity and cohesion.

  • During the crisis, the elderly were shielded more than younger generations, who also face more uncertain job opportunities than before the crisis. With the economic recovery and the associated decline in unemployment, including youth joblessness, the intergenerational distribution has shown some improvement. Nonetheless, it would be useful to consider potential steps to reinforce the current welfare system to address future challenges.

  • Although efficient, the welfare system is complex, covers a relatively high number of individuals and families, and represents a sizable portion of public expenditures. Efforts should continue to get more people into jobs, and specifically more secure and better paying jobs, thus mitigating market-income, as well as regional, inequality. To this end, the authorities recognize that upskilling and reskilling the labor force requires enhancing the effectiveness of active labor-market policies and, more broadly, better aligning educational path with enterprise needs. They are also working to address gaps in childcare provision, a crucial drag on female labor market participation.

A. From Crisis to Recovery

5. The bust of the real estate bubble, together with the Great Recession, had a striking impact on Ireland’s economy. The consequences for the labor market were rapid and deep, particularly for younger generations. Total unemployment soared to almost 15 percent in 2011–12 from less than 5 percent in 2007, while youth joblessness peaked at 30 percent from less than 10 percent over the same period.3 Per-capita market income declined by about 17 percent on average, with the burden disproportionally borne by those in lower-income deciles, reflecting in part the heavy toll of the construction bust (OECD, 2015). Moreover, the wage entry of new hires collapsed by 20–25 percent compared to existing workers or job changers (Lydon, 2017). Consequently, the worsening of market-income distribution, as measured by the Gini coefficient, was among the steepest in EU countries. This was also associated with an increase in the dispersion of per-capita market income across regions, with the Border, Midland, and the South-East regions falling further from the national average.

uA01fig02

Total Unemployment

(in percent of active population)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

Sources: Eurostat; and IMF staff.1/ Simple average of Italy, Spain, and Portugal.
uA01fig03

Youth Unemployment

(in percent of active population)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

Sources: Eurostat; and IMF staff.1/ Simple average of Italy, Spain, and Portugal.
uA01fig04
Sources: Central Statistics Office; OECD; and IMF staff.1/ The Gini coefficient assumes values comprised between 0 (perfect equality) and 100 (perfect inequality).

6. The crisis period also saw significant reforms of the tax-benefit system. Mainly reflecting the increase in unemployment, the number of recipients of welfare social payments peaked in 2012 at 1.47 million, or 32 percent of the total population, compared to 24 percent in 2007. This put the welfare system under pressure, while fiscal consolidation also became necessary to bring public finances and debt on a sustainable path.4 Consequently, with a view to protect the most disadvantaged while keeping adequate incentives to work, the system of social benefits was significantly recalibrated: eligibility criteria were tightened, means-testing was strengthened, the duration of some benefits was shortened, and allowances were reduced in some cases.5 At the same time, incentives for education and training were strengthened to facilitate the return to work of the unemployed, especially young people with low skills who, before the crisis, were able to find jobs in the booming construction sector. On the revenue sides, the introduction of the Universal Social Charge (USC), which replaced two flat contribution-rate levies (the health and income levies), increased the progressivity of the income tax system (Kennedy and others, 2015).

uA01fig05

Recipients of Social Benefits; 2006-15

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

Sources: Department of Social Protection; Eurostat; and IMF staff.

7. Overall, social transfers performed strongly throughout the crisis in reducing the at-risk-of-poverty rate. At the apex of the crisis (2010–12), social transfers (including pensions) reduced the share of total population at risk of poverty to around 15 percent, broadly in line with the EU (simple) average, from over 50 percent. In 2010–11, the improvement due to social transfers was about 25 percentage points in absolute terms, the largest in EU countries, which corresponded to poverty reduction of about 50 percent. This is a particularly striking result compared to the experience of other EU countries that experienced sharp debt and/or property-driven corrections (e.g. Italy, Spain, and Portugal).6 A similar picture emerges when income-distribution indicators, such as the Gini coefficient, are considered. The Irish tax-benefit system has performed strongly, reducing relatively high market-income inequality (i.e. before taxes and transfers) to the EU average in terms of disposable income (i.e. after taxes and transfers). Bargain and others (2015) note that disposable-income inequality remained relatively unchanged during the first part of the crisis (2008–10), increasing in the subsequent period, (2010–13). Notwithstanding this increase, Ireland also compares favorably to other crisis-hit countries in this dimension. In addition, the welfare system mitigated the impact of the crisis on regional disposable-income dispersion.

uA01fig06
Sources: Eurostat; OECD; and IMF staff.1/ The Gini coefficient assumes values comprised between 0 (perfect equality) and 100 (perfect inequality).

8. As in other EU countries, intergenerational differences worsened during the crisis period.7 The welfare system in Ireland protected the elderly more than the young from the consequences of the crisis. Pensioners were mainly affected by reductions in supplementary entitlements, as pension benefits were increased in the 2009 and 2016 budgets. Nonetheless, the scale of rate reductions (including child benefits) and reductions in supplementary payments (where entitled) experienced by working-age individuals were larger.

uA01fig07

At Risk of Poverty After Social Transfers

(percent of population, cut-off 60% median equivalized income)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

Sources: Eurostat; and IMF staff.

9. Traditional metrics based on income may not fully capture the severity of the crisis, which was amplified by household over-indebtedness. Many households were caught between the rock of servicing their mortgages in face of declining incomes and the hard place of negative wealth, reflecting the collapse of real-estate prices, which resulted in a sharp surge in wealth inequality (Lydon, 2017). Whelan and others (2015, 2016), focusing on measures of economic stress, find that the gap between the elderly and remaining age groups widened significantly during the crisis.8 Material deprivation and financial stress for young and working-age groups, although starting below the EU average, deteriorated substantially until 2012–13. 9 10 The trend for the elderly, albeit still adverse, was smoother. This also reflects the fact that debt distribution by group ages is skewed towards the young.11

uA01fig08
Sources: Eurostat; and IMF staff.1/ Material deprivation rate for the ‘Economic strain’ and ‘Durables’ dimensions; 4 items or more.
uA01fig09

10. With the economic recovery firmly underway, social conditions have improved, but the young and long-term unemployed are still facing a challenging environment. Reflecting the steady implementation of sound macroeconomic policies and reforms, the Irish economy has returned rapidly to a sustained growth path. Unemployment and youth joblessness have declined steadily since 2012, to about 6½ percent and 14½ percent in early 2017, respectively, both well below EU averages and projected to continue to decline. Nonetheless, labor market participation has not recovered to pre-crisis levels and part-time employment has increased, particularly for workers aged 15–24 years. Long-term unemployment has also declined from 9 percent in 2012 to 4.2 percent in 2016, broadly in line with the EU average. In terms of material deprivation and financial stress, the relative position of younger groups, while showing signs of improvement, remained, as of 2015, disadvantaged compared to the EU average.

uA01fig10

Ireland: Employment Growth (15-24) by Contract; 2004-16

(contribution to growth; percent)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

Sources: Eurostat; and IMF staff.

B. Why is Ireland’s Market-Income Inequality High?

11. High market-income inequality in Ireland is mainly driven by the lower end of income distribution. Earnings dispersion in Ireland has widened over time and is among the largest in the EU.

  • The share of market income accruing to the top decile is high (about 37 percent), partly driven by the growing role of multinational enterprises (MNEs) in Ireland, which offer high-paid jobs to those with high skills. However, the high-end share is not excessive by international comparison.

  • On the other hand, the income share of the bottom 20 percent of households is the lowest in the OECD (OECD, 2015), with the share of low-wage earners in Ireland (about 22 percent of total employees) higher than the EU average (about 17 percent).12

uA01fig11

Earnings Dispersion Ratios; 20141/

(units)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

Sources: Eurostat; and IMF staff.1/ D1 = first decile; D9 = ninth decile.

12. High, albeit improving, long-term unemployment and low labor market participation add to inequality. Unemployment is rapidly declining but long-term unemployment remains relatively high. As of end-2016, the long-term unemployed stood at just over 83 thousand (3.8 percent of the labor force); almost three times higher than in 2007 (for the EU, the increase was 1½ times over the same period). Long spells of unemployment deplete labor skills, thus making return to work harder. In addition, the labor market participation rate is low compared to EU peers, especially for women. In this regard, the availability and cost of childcare remain a crucial barrier, forcing parents into labor market inactivity or part-time work.13 The combination of these factors translate into a relatively high portion of Irish people living in households with low work intensity: 18.8 percent in 2015—the highest in Europe.14 Moreover, the share of children living in jobless households is second only to that of Bulgaria. The Irish authorities have taken steps to address the issue of access and affordability of childcare. In this context, the 2017 budget introduced a new Single Affordable Childcare Scheme, replacing all existing schemes with mostly means-tested subsidies focused on low-income, disadvantaged families. Steps are also underway to improve the quality of childcare provision.

uA01fig12
uA01fig13

Population Structure; 2015

(percent)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

Sources: Eurostat; and IMF staff.

13. High market-income inequality is associated with low intergenerational mobility in Ireland. The two phenomena are closely intertwined. Higher income inequality skews opportunity and lowers intergenerational mobility, thus perpetuating disparities. Low mobility in turn perpetuates inequality. Empirical evidence indicates that income mobility in Ireland has indeed been low at both ends of income distribution. However, the distribution moved towards the low end once the crisis began, reflecting the sharp deterioration of the labor market (Kennedy and others, 2015). Ireland does not compare favorably with peers in cross-country analyses of intergenerational earnings and education mobility as well as broad measures of inequality of opportunity (Hertz and others, 2007, Checchi and others, 2016, Brzezinski, 2015).15

uA01fig14

Intergenerational Education Elasticity

(Higher values indicate lower intergenerational mobility in education)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

Sources: Hertz, Jayasundera, and Piraino (2007).
uA01fig15

Absolute Inequality of Opportunities in Europe

(Higher values indicate higher inequality)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

Sources: Brzezinski (2015).

14. Educational attainment also has a bearing. Ireland performs generally well in terms of educational attainment, and the share of students leaving school early is relatively low. However, Ireland continues to lag EU peers in terms of young adults who are not in education, employment, or training (NEET). Unemployment among those with low educational achievement remains elevated (13½ percent as of 2016Q3). Although the provision of basic skills has improved, skill shortages in sectors such as information and communication technology (ICT)—which has an impact on ICT occupations across all sectors—have emerged, and there is a need to further upskill and reskill the adult population through increased participation in further education and training (European Commission, 2017). To guide investment in education over the 2016–2019 period, the government launched a comprehensive Action Plan for Education (2016), which focuses on disadvantaged students and continuous improvement within the education sector.16 In addition, the National Skills Strategy aims to provide skill development opportunities and foster lifelong learning. Prioritization of skills needs will be overseen by the new National Skills Council. New Regional Skills Fora will facilitate ongoing employer-educator dialogue to match identified needs with sustainable provision in each region, with a view to optimize the return on investment in education and training (see also next Section).

uA01fig16

Young People Not in Employment, Education, or Training; 2015

(in percent of all young people, 15-29 years)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

Source: OECD.

15. Despite these reforms, some aspects of the tax-benefit system may create disincentives to transition from welfare to work. Although Ireland provides relatively generous social family-income support by international standards, the tax and welfare system maintains a strong incentive to shift from welfare to work. However, some groups, particularly those with a non-working partner and children, had high replacement rates or face steep increases in marginal tax rates that might reduce the incentives to enter the job market (Savage and others, 2015, Callan and other 2016). To address work disincentives, the 2015 budget introduced the “Back to Work Family Dividend” (BTWFD), which allows families who move from welfare into work to retain 100 percent of the Qualified Child Increase for one year, and 50 percent of the payment for an additional year. The rollout of the “Housing Assistance Payment,” designed to enable people to take up full-time employment and keep their housing support, is also continuing. However, concerns regarding loss of eligibility for the medical card, which entitles the bearer to a range of free health services and to important additional benefits for the family, is reportedly a powerful disincentive.17

C. Can Ireland’s Social Protection System Be More Effective?

16. Compared to EU peers, Ireland’s tax-benefit system is one of the most effective in redistributing income, with variations in the contribution of the system’s components. About 60 percent of the average 25-percentage point difference in Ireland’s market- and disposable-income Gini coefficient during the 2007–15 period was driven by social benefits, one of the highest among EU countries and largely means-tested. Another one-fourth of the improvement was due to direct taxes (broadly in line with the EU average), and 12 percent through pensions, the lowest in the EU (Box 2).

uA01fig17

Income Redistribution; 2007-15

(average difference between market and disposable income Gini)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

Sources: Euromod; and IMF staff.NMT = non means-tested; MT = means-tested.
uA01fig18

Contributions to Income Redistribution; 2007-15

(average; percent)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

Ireland: Pensions and Social Insurance

Pensions

The Irish pension system consists of:1/ a pay-as-you-go public pension pillar supplemented by a voluntary second pillar scheme and private pension plans. The public pension pillar comprises both contributory and non-contributory elements. The latter is means-tested and paid to individuals without adequate means at the age of 66. The old-age contributory pension system is financed on a pay-as-you-go basis and provides flat-rate benefits depending on the contribution period without reference to pre-retirement earnings. The Irish system, like in the UK, puts more emphasis on occupational pension schemes, managed by (private) pension funds, and therefore do not affect income redistribution.2/

Social Insurance

The structure of social insurance charges is not progressive. Contributions to the Pay Related Social Insurance (PRSI) fund pensions and a variety of other benefit payments, including disability, maternity, and illness. The PRSI is levied at a single rate of 4 percent on gross wage income.

Important revenue-enhancing and expenditure-reducing measures have been introduced in recent years to safeguard the financial viability of the social security system (Tax Strategy Group, 2016b). The main revenue measures comprise increases in rates of contribution, the broadening of the base,3/ the abolition of the employee ceiling for charging PRSI, the abolition of the PRSI relief for employee pension contributions, and the abolition of the employee PRSI-free allowance. Expenditure savings were achieved mainly through stricter conditions for entitlement and reductions in the level and duration of entitlement, most notably for jobseeker and illness benefits, as well as by increasing the pension age to 66 years.4/

1/ For more details, see OECD (2014).2/ In the Euromod model, the payment of pensions from private plans is included in market income.3/ Since 2014, the PRSI is payable also on unearned income, such as income from investments (including bank deposits) and rents.4/ The state pension age will further increase to 67 years in 2021 and 68 years from 2028.

17. To better understand the social protection system in Ireland, three policy areas are analyzed: direct taxation, active labor market policies, and social transfers.

Income Taxation

18. Personal income taxation is progressive. Those at the top decile of income earners pay about 59 percent of total income tax, although their share of market income is about 37 percent (Kennedy and others, 2015). The personal income tax (PIT) operates using a two-rate structure with different thresholds depending on family type.18 While the system of tax credits supports disposable income for low-earning households, a large share of tax allowances is enjoyed by top income groups, notwithstanding cuts in recent years (Kennedy and others, 2015). The USC, which was introduced in 2011, applied on a broad base, with limited relief and no credits.

uA01fig19
Sources: Central Statistics Office; Irish Tax and Customs Commission; Eurostat; and IMF staff.1/ Includes tax on income and social security contributions.2/ The 2011 increase was due to MNEs’ one-off transactions.

19. However, the current structure of direct taxation suffers some shortcomings. Despite measures to broadened it, the PIT base remains narrower and more complex than the USC base, which the government plans to gradually phase out, as conditions allow.19 Given different but, in both cases, relatively high entry points, some 36 percent of income earners are currently exempted from income tax and about 29 percent from the USC. In addition, the entry to the second bracket of the PIT occurs at a relatively low level (Tax Strategy Group, 2016a).20 This places a large tax burden on middle-income households, undermines female labor force participation, and creates inactivity traps for low-skilled workers.

20. A broadening of the tax base would protect public finances against adverse risks and support priority expenditures in a sustainable manner. To this end, consideration could be given to merging the USC into a more comprehensive PIT, with a review of the income brackets, including the possible introduction of a third bracket to spread the burden among income earners (OECD, 2015). Potential revenue losses could be compensated by decreasing the number of products with reduced and zero VAT rates and by aligning self-assessed property values, from which the local property tax is calculated, to market values. Regressivity from these changes could be addressed by means-tested transfers to low-income households.21 A thorough review of the system of tax expenditure would also support revenue enhancement.

Labor Market Policies

21. With long-term unemployment still higher than pre-crisis levels and the need to bring more people to better paying jobs, labor market policies (LMPs) are key. To reduce joblessness and get the long-term unemployed back to work, Ireland has introduced several labor market training and activation measures. Pathways to Work is the overarching strategy to increase the engagement of mainly long-term and young jobseekers. There have been changes in the organization of programs, particularly regarding the interaction among income support for the unemployed, education and training options, and employment support programs (OECD, 2016):

  • Intreo, a Department of Social Protection “one-stop-shop” service, provides an integrated system of social welfare income benefits, community welfare services, and employment supports through its local offices.

  • Sixteen Education and Training Boards resulted from consolidation of 33 Vocational Education Committees, with responsibility for education and training, youth work, and other functions.

  • A Local Development Committee has been established in each of the 31 local authority areas, with a view to improving the efficiency and integration in the delivery of local services.

22. Although Ireland devotes significant resources to LMPs, the results have been mixed. Reflecting the crisis-driven surge in unemployment, Ireland’s spending for LMPs rapidly increased to over 3 percent of GDP. With the start of the recovery, LMP expenditure scaled back but remains above the EU average. Nonetheless, the share of jobseekers (registered with Public Employment Services) participating in activation programs is low compared to the best performers in terms of LMPs (Denmark, Sweden, the Netherlands). Also in terms of spending per LMP participant, Ireland does not compare favorably. The number of jobseekers for each caseworker in the Public Employment Services, although declining from 800 in 2013 to 500 in 2015, remains relatively high and above what is considered best practices (OECD, 2015).

uA01fig20

Labor Market Policy Expenditure

(percent of GDP)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

Sources: Eurostat; and IMF staff.
uA01fig21

Participants to LMPs (Categories 2-7)

(in percent of registered jobseekers)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

23. Existing schemes continue to be evaluated to ensure that scarce resources are channeled to the most effective programs. As part of the Pathways to Work program, the Department of Social Protection is reviewing the current range of labor market programs. A first review of the Back to Education Allowance raised concerns about its effectiveness in assisting jobseekers to return to work (Lawless and Reilly, 2016). An evaluation of the Intreo “one-stop-shop” services for jobseekers is currently underway. A comprehensive assessment would also be useful to streamline the numerous initiatives with a view to using scarce resources more effectively. Reducing the number of jobseekers per caseworker may also help improve service effectiveness.

Social transfers

24. Ireland’s total spending on social protection benefits is in line with the EU average but still sizeable for public finances. Measured in purchasing powers standards, Ireland’s cash social benefit spending in per-capita terms is broadly in line with the simple average of EU countries.22 However, it absorbs a larger share of general government’s total revenue.23 If spending for pensions is excluded, Ireland’s per-capita spending results somewhat higher than the EU average.

uA01fig22

Social Portection Benefits - Cash

(in purchasing power standards per head)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

Sources: Eurostat; and IMF staff.
uA01fig23

Social Protection Benefits - Cash (excl. Pensions)

(in purchasing power standards per head)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

uA01fig24

Social Protection Benefits - Cash

(in percent of general government primary expenditure)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

Sources: Eurostat; and IMF staff.
uA01fig25

Social Protection Benefits - Cash

(in percent of general government revenue)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

uA01fig26

Social Transfers Incidence by Decile; 2015

(in percent of gross income)

Citation: IMF Staff Country Reports 2017, 172; 10.5089/9781484305546.002.A001

Sources: Central Statistics Office; and IMF staff.

25. Ireland stands out relative to comparators in targeting social spending on poor households. Almost a third of the social transfers in Ireland is means-tested, the second largest share in the EU. For the bottom two deciles, social transfers make up about three-quarters of total income, with more than half of these transfers related to unemployment benefits and family-children allowances. If all social benefits are considered, including pensions, Ireland’s welfare system is more focused on poverty reduction (as measured by the difference between the share of population at risk of poverty before and after transfers) than on income redistribution (as measured by the difference between market and disposable income). However, if pensions are excluded, Ireland’s efficiency in redistributing income and fighting poverty is well-above EU peers. This result suggests that the degree of income redistribution that other EU countries achieve through pension spending, Ireland realizes through social benefits.

uA01fig27
Sources: Euromod; Eurostat; and IMF staff.1/ Changes in the Gini coefficient due to pensions and social benefits. Changes have an inverted sign, in other words larger positive values indicate a lower Gini coefficient after social transfers (including pensions) and hence a more equitable income distribution.2/ Risk-of-poverty treshold set at 60 percent of the national median equivalized disposable income. Changes have an inverted sign, in other words larger positive value indicate a larger decline in the at-risk-of-poverty ratio due to social transfers (including pensions).
uA01fig28
Sources: Euromod; Eurostat; and IMF staff.1/ Changes in the Gini coefficient due to social benefits (excluding pensions). Changes have an inverted sign, in other words larger positive values indicate a lower Gini coefficient after social transfers (excluding pensions) and hence a more equitable income distribution.2/ Risk-of-poverty treshold set at 60 percent of the national median equivalized disposable income. Changes have an inverted sign, in other words larger positive value indicate a larger decline in the at-risk-of-poverty ratio due to social transfers (excluding pensions).

D. Conclusions

26. Ireland’s tax-benefit system is effective in redistributing income and alleviating poverty. Despite the severe financial crisis and substantial budget cuts, the government succeeded in preserving most of welfare expenditure, which provided an important cushion for people against the worst effects of the crisis. A relatively progressive tax system funds a robust system of social transfers, a significant share of which is means-tested. The system of social transfers is particularly efficient in redistributing income and reducing the share of population at risk of poverty. During the crisis, the elderly were shielded more than younger generations, which are also facing more precarious job opportunities than before the crisis, although it remains unclear whether this represents a structural change. Despite the ongoing economic recovery, important structural challenges persist, particularly regarding intergenerational (and regional) disparities.

27. A multi-pronged approach is called for to reinforce more inclusive growth. To get more people into better paying jobs, unemployed workers need support to upskill and reskill through continued and more effective active labor market policies. More broadly, education paths need to be better aligned with market needs, while providing equal opportunities for disadvantaged children. Revising personal income taxation, supporting transition to work through additional (temporary) in-work benefits, and improving childcare availability and affordability will also support incentives for transition to work. These measures might contribute to mitigating market-income inequality thus reducing the pressure on the welfare system.

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1

Prepared by Alessandro Giustiniani. The author wishes to thank the participants to the seminar organized by the Central Bank of Ireland and, in particular, Reamonn Lydon for his useful comments to the presentation.

2

The term consistent poverty describes individuals whose income is below the relative/at risk of poverty threshold and who cannot afford at least two of eleven deprivation indicators (such as two pairs of strong shoes, a warm waterproof overcoat, or an adequately warm home).

3

Ireland also experienced a reversal in net migration, with outflows exceeding inflows. Without this, the increase in unemployment would have been worse. In addition, youth may have reacted to the employment collapse by delaying their labor market entry.

4

Dukelow and Considine (2014) emphasize that in the early stages of the crisis, debate on social welfare reforms focused on the generosity of the social system that had developed during the boom period and hence on the need to reduce work disincentives and keep the unemployed as “close to the labor market as possible.”

5

In particular, the universally paid Child Benefits, as well as unemployment payments and welfare payments to one-parent families, were reduced. Callan and others (2015) estimates that “policy-induced losses” over 2009–16 were just over 14 percent for the top income group and almost 13 percent for the lowest income group. Proportionate losses for single unemployed people without children were highest at close to 20 percent.

6

Spain experienced a similar real estate boom-bust cycle; Portugal entered into a EU-IMF supported program a few months after Ireland; Italy has a high debt burden, like Ireland during the crisis. The UK was also included as comparator, given the close ties between the two countries and the UK influence on the Irish welfare system.

7

Chen and others (2017).

8

The measure of economic stress is based on a set of indicators that are intended to capture debt problems but also capacity to cope with financial demands, such as structural arrears, burden of housing costs, inability to meet unexpected expenses, and difficulty in making ends meet.

9

The simple average of the share of households that were unable to cope with unexpected expenses; to avoid arrears on mortgage or rent payments, utility bills, instalment loans or other loan payments (in the past 12 months); and could not make ends meet.

10

The material deprivation rate measures the share of population unable to afford some items considered desirable or even necessary to have an adequate life.

12

In Ireland, the low-wage threshold is just above 55 percent of average gross earnings and 66 percent of median gross earnings, which are broadly in line with the simple average for EU countries (54.8 percent and 67 percent, respectively). Nonetheless, Ireland’s low pay threshold (10.99 in purchasing power terms) is about 25 percent higher than the EU average (8.80 in purchasing power terms).

13

Around 27.4 percent of inactive women aged 20–64 do not work because they must look after children or incapacitated adults (4.5 percent of men) and 26 percent of women who work part-time cite the same reason (3.6 percent of men). Single parents, mostly women, suffer from the lack and high cost of childcare support (European Commission, 2017).

14

The work intensity of a household is the ratio of the total number of months that all working-age household members (i.e. all members aged 18–59 years) have worked during the income reference year and the total number of months the same household members theoretically could have worked in the same period. A ratio between 0.20 and 0.45 indicated low work intensity.

15

Inequality of opportunities emphasizes the impact of circumstances for which individuals cannot be held responsible, such as socio-economic background, on individual outcomes in terms of income earnings. Parents’ educational attainment and occupation are usually used as proxies.

16

The 2017 budget envisages higher spending on education and the recruitment of more teachers in the future, reflecting also demographic-driven needs.

17

People receiving means-tested Social Welfare Allowances or with their income (and their spouse/partner’s income) below specified thresholds qualify for a Medical Card. Any income, savings, investments and property (except for own home) are considered in the means test (http://www.hse.ie/eng/services/list/1/schemes/mc/about/Amieligible/). Additional benefits provided to medical-card holders comprise exemption from payment of the health portion of social insurance (PRSI); free transportation to school for children who live 3 miles or more from the nearest school; exemption from state examination fees in public second-level schools; and financial help with buying school books.

18

The income tax rates are 20 percent on income within the standard band, which depends on the family type (single, single parent, married with one earner, married with two earners) and 40 percent on income above the standard band.

19

With the 2017 budget, the government reduced of the three lowest USC rates by 0.5 percent (from 1 percent to 0.5 percent; from 3 percent to 2.5 percent; from 5.5 percent to 5 percent).

20

The standard rate band threshold for a single individual, €33,800, is now below the national average wage, €36,815.

21

Lydon (2017) notes high low-income home-ownership in Ireland means local property tax tend to be regressive.

22

Social benefits in cash account for about 60 percent of total social protection spending; lower than the EU average.

23

A similar picture emerges if also in-kind social benefits are considered. In this case, Ireland’s social spending accounts for a slightly larger share of general government primary expenditure than the EU simple average.

Ireland: Selected Issues
Author: International Monetary Fund. European Dept.