Our analysis of budget 2006 completes the cycle that began with the submission we made on the budget. Following that, we assess the policy direction of the budget from a poverty perspective. As Ms Johnston said, this fits with our policy advisory role, prior to and following the budget.
In carrying out the analysis, a primary focus of our work is to assess the poverty impact of the budget. This is a requirement of the national action plan on poverty and the national anti-poverty strategy, the provisions of which include examination of the impact of various policy initiatives on poverty. This is a methodology that is still in development. Through our work, we try to show how one can apply a poverty impact analysis to a measure as major as the budget. In doing that, we build on some of the work done by the Department of Finance in terms of carrying out a proverty-proofing of the taxation elements of the budget. We examine the taxation and welfare elements together.
A distinctive element of our analysis is the use of a tax welfare simulation model to obtain a better insight into the impact of the budget on income equality and poverty. The difference between a tax welfare simulation model and the standard approach used in the budget, which examines the position of various hypothetical families, is that it is a representative sample of the total population. It allows us to examine the interplay between tax changes and welfare changes in real families. It is by far the best way of obtaining an insight into the impact of the budget at a micro level.
In applying the model, we compare the impact of the budget with a wage indexed neutral budget. We do not compare the changes in the budget with the pre-budget position. If current policy provisions — indexed welfare rates and tax bands — were increased in line with wages, we examine what then would be the added effect of the budget compared to that neutral comparator. The other feature of the model is that we examine the first round impact. We do not factor in behavioural changes, which we acknowledge are important, but we examine the output in terms of redistribution of resources. Neither do we take into account components such as indirect taxes, on which Dr. Healy will comment later, or charges that might be imposed on people following the budget. The model essentially focuses on the tax welfare component, which is the main focus of what the budget involves. In that sense, I believe we are capturing the key elements.
Budget 2006 is notable for a number of reasons, one of which is the scale of resources available in it. These resources amount to in the order of €2.3 billion, which is 50% more than those available in budget 2005. There was a large expansion in the tax welfare budget. In terms of the share-out of those resources among social welfare, child income supports and income tax, the big change compared to 2005 was the increase in the allocation on child income supports. Welfare payments received approximately 41% of the total, and that is just short of €1 billion. Tax measures received 38% and child income support benefited to the tune of 21%, or over €500 million. A key component of this was the new child care supplement. That is the overall package.
The key factor we focus on is how many resources were available compared to a neutral budget, where tax and welfare are indexed in line with wages. There was effectively a surplus of €1,248 million. These were the additional resources the Government was in a position to redistribute through the budget. It was a significant amount, and over two and half times the amount available in the 2005 budget.
The first portion of our presentation, in both its full and summary form, deals with the distributive impact of the budget. We considered this by breaking the population down into ten decile groups, ranging from the poorest 10% of the population to the richest 10%. We will deal with the poverty impact in a moment. The average cash gain per household unit was approximately €11, the equivalent of 2% per week. What is interesting is the manner in which the benefit of the budget was front-loaded towards those on the lowest incomes. The bottom 10% and next poorest group of 10% received gains of between 6% and 7% compared with what they would have received under a neutral budget. That gain tapers off the higher one goes up the income schedule. The higher income groups had a gain of less than 1%. The budget clearly had a strong redistributive focus.
In cash terms, the amount received by most groups was more or less equivalent. When €11 is given to a household on low income, the benefit will clearly be much greater than if it is given to a better off household. That is where a very strong favouring, in percentage terms, of low income groups comes about.
We considered the pattern of the last few budgets and compared it with budgets from the period 1998 to 2002. The significance of these two periods is that the first coincides with the first national anti-poverty strategy, and the second period coincides with the revised and updated strategy. The analysis demonstrates a significant contrast between the distributive focus of the earlier budgets, which were clearly giving higher gains to better off groups, and the focus of the budgets between 2003 and 2006, which are going in the other direction. The 2005 budget was most significant in this way, but the 2006 budget was even stronger in its focus on lower-income groups.
In the past four budgets, the gain for the poorest 20% of the population was approximately 17% or 18%, whereas the gain for the richest 20% was almost zero. That contrasts with the period between 1998 and 2002, when the biggest gains of up to around 10% over five years went to the richest 20% of the population. At that time lower income groups were getting less than 5%. That is a major reversal in Government policy. From an anti-poverty perspective, this was a welcome development.
At the outset I mentioned that a key element of this year's budget was the amount allocated to child income support. Approximately 20% of the resources over indexation, around €365 million, went on child income measures. We were particularly interested in considering the impact of these measures, especially in terms of child poverty. Tackling child poverty is the big policy focus in society under social partnership, as well as the focus of the Government. The next part of the presentation demonstrates the impact of the child income measures in the 2006 budget.
With regard to the impact of the child income measures in budget 2006, the average gain was €3.26 or 1%. Middle income groups tend to receive more because there are more children in these groups than there are in the bottom 20%. In percentage terms, the child income measures were progressive in that gains were up to 1% for lower income groups and tapered off among higher income groups to a fraction of 1%. The child income element of the budget was progressive because, even though the main feature of the budget, child income support measures, involved the universal payment of an early child care supplement, that payment means more to lower income households.
The relative impact of income or financial poverty is a critical measure, from our point of view and at a European level, of how well our society is performing, although the official Irish measure of poverty is based on consistent poverty. Given that Ireland has a higher level of income poverty than the European norm, this relative income measure is even more important from an Irish perspective. The budget had a positive impact on relative income poverty, with a reduction of up to 1% at the various median income thresholds. The reduction was almost 1% at 50% and 70% of median and 0.5% at 60% of median. This impact is magnified by the combined effects of the 2003 to 2006 budgets. During the past four years, relative income poverty at the 50% of median income has been reduced by 6%, a major achievement in light of our high levels of relative income poverty. It is welcome that Irish income poverty rates are clearly being brought into line with EU best practice.
I wish to briefly discuss some of the specific policy changes that were introduced in the budget. The minimum welfare target established in the national anti-poverty strategy in 2002 set out a minimum welfare payment, in 2002 values, of €150 by 2007. We began with a welfare rate of €118.80 and have reached €165.80 in real terms. Adjusting for inflation, the target figure of €150 has risen to €167.02 and will be €171 by 2007. The Government need only increase social welfare payments by €5 to meet that inflation adjusted target by 2007. However, given that the Government did not specify the mechanism to be used to adjust the figure over time, some have argued that it would be more realistic to adjust the original target figure in line with wages. Such an adjustment would increase the €150 target to €191 by 2007 and result in the significant shortfall of €26. One could say that the Government has allowed itself wriggle room in terms of the lower figure of €5.40. Given that the welfare increase in budget 2006 was €17, we can be far more ambitious in terms of targeting and going for the higher figure of €191, or plus €26.
There is no doubt that setting a welfare target of €150 has been a key driver in reducing income poverty. It has focused policy on increasing welfare rates by significant amounts. The way the Government has delivered on that in recent years has fed through in terms of income redistribution and the effect on relative income poverty. The current target has almost been reached. Setting new welfare targets for the next period of the national anti-poverty strategy becomes a critical policy goal.
I will speak briefly on child income support. I outlined in a table the level of child income support for different categories of children and through different policy mechanisms. One can see it is quite complex. There are three categories, namely, children on welfare, children in low paid households and other children. I distinguished between children under six years of age and over. There are five mechanisms for delivering child income support, namely, child dependant allowance, family income supplement, the clothing and footwear allowance, child benefit and the new early child care supplement.
The level of child income support in Ireland is now quite significant. Whatever category one picks, the level of support from Government varies between a low of €34.50 for a child not on welfare to a high of almost €100 per week for a child in a low income working family. Given from where we have come, with a very low level of child income support, the State is now among one of the better performers at European level in terms of child income support. That is a great achievement and one which needs to be acknowledged.
There are, however, a few quirky features which need to be highlighted. The level of payment for children in social welfare households is now below the Government target of 33% to 35% of the adult rate. It is now around 32%. We are slipping a bit in terms of ensuring income support for poor children is kept in line with income support for poor adults. Children in low paid households get substantially more income support from Government than children on social welfare payments who have no other form of income support. This is an anomaly because obviously people in low paid households are paid but people in social welfare households have no other form of income. We have perhaps lost a bit there.
The age differential is becoming a significant factor. In welfare dependent households, children under six years of age get a premium of almost 50% over children over six. The reason for that is the child care area but it creates some interesting anomalies. A child moving from one age to the next loses a significant amount and there are concerns about that.
The early child care supplement is a significant one for children under six years of age. A disappointing element of that is that while income support was increased, no attempt was made to link it to increased access to early childhood care and education. The Commission on the Family, which recommended this idea of a child care supplement for younger children, made it contingent on increased access to early childhood care. Income support is only half the equation; the other half must be about improving access to services and, in the case, early child care services.
Budget 2006 is strongly redistributive. It builds on the approach of the preceding three budgets but goes beyond them in a significant way. The engine of the income redistribution is the high welfare rates being delivered in recent budgets, particularly that of 2006. The child support component is also progressive, although its benefit is more universal. It is progressive in that it focuses on lower income households. However, the impact of child income support on low income households could be increased if the Government increased the child dependant allowances, which have remained frozen — and, therefore, devalued in real terms — since 1993. This is a missing component of Government policy on child support. We have been devoting many more resources to it but have tended to neglect some of the more targeted options that would give better bang for one's buck in terms of child poverty.
We are now on the way to reducing income poverty in Ireland in line with the EU norm. It is important to operate within a European framework in setting poverty targets and raising our aspirations and standards, not only to decrease poverty by comparison with previous years but also to improve anti-poverty performance in a European context. In light of our affluence, this should be our aspiration.
There are still outstanding child care issues to be addressed, particularly in the area of early child care. A critical issue, on which there will be more discussion, arises in respect of pension provision. We are conscious of it because pensioners comprise one of the social groups most at risk of relative income poverty. Ensuring adequate pension provision is critical, not only for older people on State pensions but also for the increasing proportion of the population in low paid employment who do not have access to supplementary pension schemes.
The buoyancy of the economy and the revenue being generated as a consequence should ensure that we can afford more of the same in budget 2007 and in the years ahead without our having to endure the pain of taking resources from any particular group. We have ongoing opportunities to make major inroads into addressing relative income poverty in the future.