I have prepared a handout for members of the committee. Our budget proposals cover six main areas — welfare payments, child income support, in-work benefits, child care, savings and pensions and tax reform. The first three are what one might call staple items. The other three are subject to much public attention at present. That is the case with child care. In the case of savings and pensions, the SSIAs are coming to an end and there is a review of pensions policy by the Pensions Board. With regard to tax reform, the Government has established a group to examine the issue of tax reliefs and incentives. We have something to say on that issue.
The details of our proposals and the costings are on page 1 of our submission. The proposals are outlined and there is a costing for each proposal where it was possible to get such a costing. Most of the items are costed by the Department of Social and Family Affairs and the Department of Finance. The first item is welfare payments. The Government's key target is to reach €150 as a basic welfare payment. The target was set in 2002 and is to be reached by 2007, two years hence. On an inflation adjusted basis the figure would be €171. The gap is approximately €22 at present. We argue that if one adjusts the figure of €150 from the start of 2002, and it was announced in February 2002, the gap is actually €30 which will require two payments this year and next year of approximately €14.70. Given that last year's increase was €14, we recommend that this year's increase be €15 in the personal rate. That increase should apply to all welfare payments. Last year there were two rates, €12 and €14.
A neglected area of welfare provision is the rate for the qualified adult allowance. This is where there is an additional payment for a spouse or partner. At present, this allowance is set at 66% of the adult rate. The agency's view is that this is too low and should be 70% of the personal rate. For that reason, we advocate that the qualified adult allowance be increased by more than the percentage increase for the personal rate. It should be increased by €11, which is 73% of the personal rate increase. This should be done to bridge the gap between the qualified adult rate and the personal rate. We also believe there is scope to improve welfare provision, particularly in the case of the fuel allowance given that it has not been adjusted for a number of years.
I will now deal with child income support. We are particularly concerned about child poverty and have identified a number of interventions which would specifically target children and the families in which they live. The first item is child benefit. The Government has a target of €149, which was to be met by 2003. That has been deferred for a few years. In 2006 values, that target would be approximately €160. While we require only an additional €8 to meet the target of €149, we suggest the increase should be €10 at the standard rate and €12 at the higher rates. This would be in line with the increases given last year.
While we are very supportive of the policy of increasing child benefit, such increases will not be sufficient to address the issue of child poverty in respect of those children living in low-income families. If child dependant allowances, CDAs, the top-up on welfare payments, continue to be frozen, they will be devalued for those on low incomes. We have conducted research which admittedly is now dated which indicates that the basic cost of a child per week is €54. The combined CDA and child benefit package comes to a total of €52, which means there is a shortfall of €2. The shortfall is even greater when it comes to older children as there is an additional cost of some €20 to €25. We suggest CDAs which have been frozen since 1993 should be revisited and increased in an age-related manner. We propose two age-related CDA rates of €20 and €55 per week which, for an unemployed person with a child currently in receipt of €16.80, would represent an increase of over €8 per week as compared to a child benefit increase of only €2. We have a number of other suggestions in terms of extending CDAs and improving school-related payments under the clothing and footwear schemes and the school meals programme.
The issue of in-work benefits is of concern to the Combat Poverty Agency for a number of reasons. First, it is important to ensure there are adequate incentives and rewards for those who take up work because taking up work is very important in tackling poverty. There is evidence of a growing problem of the so-called working poor, namely, people who are working but who fall below the poverty line. Some 9% of those in work can be considered to be the working poor. In other words, approximately 160,000 individuals are living in working poor households. We propose a number of measures to deal with this problem, including an increase in the earnings threshold for a qualified adult, currently €88.88, with higher thresholds for the retention of CDAs. This would provide a greater incentive for people to go out to work. We also propose an increase in family income supplement, FIS, of €42 as well as an increase in the income disregards for various secondary benefits.
The Government is examining the issue of streamlining income support for poor children by combining CDAs and FIS. We are in favour of this strategy but there are many practical issues that must be addressed. The idea is that there will be a streamlined income support system for poorer children which will not discriminate between welfare and work.
There has been much discussion in recent times about child care but from a child poverty perspective, the top priority should be the provision of pre-school education for all children living in low-income families. There is a wealth of research which indicates children who have not had the benefit of pre-school education are at a disadvantage. Obviously, those living in low-income families are doubly disadvantaged. Access to pre-school education for children living in low-income families is one way of counteracting this disadvantage. Any increase in the supply of child care facilities should be targeted at pre-school level.
The Combat Poverty Agency recognises that the cost of child care is a particular burden for low-income households. We suggest the provision of a child care disregard as part of FIS which already targets low-income households. A child care disregard of €100 would be worth up to €60 per week for those in receipt of the supplement.
If the Government decides to look at a more general subvention for the cost of child care, we are not in favour of tax relief or similar proposals. Child benefit is the fairest way to support households with children and child care costs. We suggest a €20 supplement per month for households with children under the age of five. This would obviously not discriminate between those who are at home and those who work outside the home.
The subject of savings is in the air with the concept of developing a savings culture. The SSIA scheme has not addressed the issue of low income households that need to save, should be encouraged to save or do not have access to savings. While this is a difficult task for low income households, it is an important bulwark against indebtedness. MABS, as part of its intervention with people in debt, encourages people to save with their local credit union. Our savings scheme is built on this model and extends it, giving people a clear incentive to save even small amounts of money.
On pensions, the €200 pensions target should be achieved in the next two years for both non-contributory and contributory pensions. As well as improving direct State pensions there is a need to improve the second tier of pensions, and the main vehicle to do this is the personal retirement savings accounts, PRSAs. At the moment only 50% of the population have an occupational pension. We propose that PRSAs be made mandatory for everybody in employment and that for those on low wages the Government make a direct contribution to these pensions. The money would be collected through the PRSI system but would then be managed as a private pension fund. Tax relief on private pensions costs the State more than the State pensions, and this could be more targeted.
On tax reform, the PAYE tax credit is a better way to deliver tax reductions than the personal tax credit, and this should be the focus. We do not propose a change to the bands. Tax incentives should be reviewed as to their value for money and the reliefs available for high earners should be curtailed. In the past we recommended a minimum effective tax rate of perhaps 20% for high earners to prevent them from reducing their tax liability, as they currently can, to almost zero. We also need to avoid regressive income taxes.
I will now assess the policy impact of these proposals. I am sure committee members feel there are many proposals put forward at budget time, but the key issue from a policy perspective is the difference this will make to the well-being of people in Irish society. We need a tool to assess the policy outcome of the various budget proposals. This policy tool must combine the effects of tax and welfare changes. This is often done in the form of a so-called typical family, but the stereotype usually used describes only one in 20 families. The alternative we use is the tax benefit model, which simulates welfare entitlements and tax liabilities for a representative sample of households. One can input the different options we recommend into this model and then assess the benefits of the outcome. This can be assessed in three main ways as follows: the distributive impact of the proposals if the population is divided into ten income deciles from rich to poor, in other words, the categories that would gain most and least; the families that would benefit; and, crucially from a poverty perspective, the impact on relative income poverty. We have a clear mechanism to evaluate, if something is done well, the outcome, particularly in terms of poverty. We are obviously concerned about this as our target is that the budget should reduce the level of income poverty by up to 2%. However, it is a requirement that all Government policies be poverty proofed; it should not be done only by us. Each proposal needs to be assessed in terms of its poverty impact. As I will demonstrate shortly, not only do we assess the poverty impact of our proposals, but we also look at the poverty impact of a more conventional budget where the resources are divided 50:50 between tax reductions and welfare payments. Again, this will indicate the policy choice members, as policymakers, can influence in terms of the budget.
Using the switch model, the cost of our budget proposals is €1.4 billion, approximately €500 million more than the cost of indexation. The full cost of our proposals is more than €1.6 billion. The switch model does not include everything, as sometimes it is not possible to measure every aspect.
On distribution, I refer members to some of my handouts. The first slide is comparative and shows current distribution of income in Ireland by deciles. This breaks the population into ten equal size groups from the poorest to the richest. The analysis shows that the bottom 10% of the population receives approximately 2.5% of total income. This figure gradually increases with the result that the top 10% receives approximately 23% or 24% of total income. This is our starting point.
The next slide shows the distributive impact of the Combat Poverty Agency budget proposals which is indexed or compared with a neutral or a wage-indexed budget. This shows a different outcome where the available resources would be targeted at the bottom end of income earners. Effectively, it tries to counter some of the existing distribution patterns in terms of market income. The average gain would be less than 1% or approximately €4 per person per week. However, we have front-loaded the proposed gains in order that those on the lowest income — the bottom 20% — would gain approximately 4.5% to 5%, or in cash terms a gain of approximately €9 per person per week. This tapers off for the third and fourth deciles where the gain would be between 2% and 3%. However, this would be 2% or 3% of a higher income and in cash terms would come to approximately €8.50 per person per week. The fifth to seventh deciles would receive very little in percentage terms but would still receive approximately €4 or €5 per week. The top three deciles would gain nothing. It is crucial to bear in mind that we are not suggesting the top earners should be given nothing at all; as their tax burden would still be indexed in line with wages, they would not pay more tax. However, they would not gain any more from our proposed budget and, effectively, would stand still.
In terms of total income, we would redistribute approximately €450 million to €460 million, 89% of which would go to the bottom half with the top half only getting 11%. The bottom fifth would gain approximately €200 million. We are talking about significant amounts of money, which shows the opportunity presented in this year's budget. We have significant resources available. It is not as if we would be taking the money from one group and giving it to another. We would simply be taking the surplus and giving it to those who need it most.
My next series of slides assesses the impact on relative income poverty. The first slide shows the current scale of relative income poverty in society. That are three different lines, namely, 50% of the median income — as Ms Johnson stated earlier this is approximately €180 — 60% and 70%. Some 10% of people are below the 50% line, 23% are at 60% and 29% are at 70%.
Moving on to the next slide, we look at the impact of our budget proposals on income poverty. This, again, is compared with a wage-indexed budget. At the 50% line, there is a drop of 2%. The latter is the equivalent of 20%. Those two percentage points are a drop of one fifth in the total number below that line. That is a significant reduction and it would take one budget to achieve it. At the 60% line, the reduction would be approximately 1.5 percentage points. At the 70% line, it would be just under 1%. Clear results are emerging in respect of relative income poverty, which is our starting point and which forms the basis of orientation in terms of both what we are trying to achieve and the national poverty strategy.
How do our proposals compare with a more conventional budget where the same amount of money would be available but where it would be divided 50-50 between tax and welfare? The resources are shared out in a different way. This is illustrated in the next slide where we compare our proposals with a conventional budget. One could arrive at another budget and it could be compared with a conventional budget. Last year the share out of tax and welfare was 55% welfare to 45% tax. We are replicating that divide 50:50.
Combat Poverty proposals are much more favourable to those in respect of those on lower incomes. They will gain by up to 2.5% more than under a conventional budget. The middle three deciles are much the same. For the top deciles our proposals are not as generous as those that would be introduced in a conventional budget. Under our proposals, people on higher incomes would lose a small amount. A conventional budget would be the actual model if implemented last year.
The poverty impact of the Combat Poverty Agency proposals compared to a conventional budget is much stronger. At the 50% line, our proposals would reduce income poverty by 0.5%, at the 60% line by 1.2% and at the 70% line by approximately 0.5%. We are willing to compare our proposals with another set of proposals if the committee can come up with one.
Income poverty has to be taken seriously, especially in terms of its impact on children. There is a sense, given that the economy is doing well, that more people are working, that consistent poverty is falling and that we need not be too concerned about income poverty. This is a mistake because if it persists, income poverty will eventually create greater divisions in society. From a child poverty point of view, bringing up children in poverty is a life long sentence for which we will pay double and treble time. Not only will the children pay for it but society will pay in higher unemployment, poor health, more social delinquency. It is in our interests to address this issue. Tax-welfare policy is key to reducing income poverty. In other European countries the tax-welfare policy works better in reducing income poverty. Those countries would have the same market rate of income poverty but they work better than ours. We need to boost our social transfers to reduce income poverty, including child poverty.
Budget 2006-07 presents a no-pain opportunity to reduce income poverty but it must have a pro-welfare focus. If the resources are simply shared out 50:50 between tax and welfare, the opportunity will be missed. Our proposals have a clear poverty impact compared to alternative. We can stand over that in saying our proposals clearly deliver in terms of policy outcomes. We have suggested some other policies, such as pre-school education, savings and pensions, which need to be implemented to achieve a long-term impact on poverty. There are both immediate and long-term welfare changes that will improve the situation in respect of pensioner and child poverty.
