It would be helpful if members followed the handout I have circulated because I will refer to a number of diagrams.
The analysis we are presenting is usually produced in February, in the cold light of day after the budget. However, we are delighted to be asked to present it before February, in almost record time. While this was a challenge for us, it allowed us to be more involved in the live debate of the committee. We appreciate the opportunity to present our ideas earlier than we have done heretofore. The final version of our document will be available in February and is still work in progress. We are very keen to hear members' views and comments on how our analysis could be improved through the incorporation of other data. We are still trying to make progress in respect thereof. We are focusing on assessing the poverty impact of the budget. Poverty impact assessment is not an option. It is a formal requirement under guidelines set out by the office for social inclusion under the national anti-poverty strategy and its successor the national action plan for social inclusion.
The Department of Finance applies an approach to the examination of the income tax measures of the budget. It is published as annexe B with the financial statement of the Minister for Finance. Our approach is slightly different. We focus on the combination of tax and welfare measures combined. This makes sense in that both tax and social welfare payments are instruments of income redistribution and can overlap in the population. Child benefit is a good example. Child benefit goes to everyone in the population so one needs to see what is the distributive impact across the whole range of the population and not just focus on those on lower incomes. That is the difference in our approach compared with that of the Department of Finance.
In terms of measuring impact, we look at two key measures of impact. One is the change in the at risk of poverty rate. This is the official EU indicator of poverty. It is also one element of the Irish Government's official indicator of consistent poverty which combines low income and deprivation. The second indicator we use is an overall indicator of income distribution. Again this is an official EU measure relating to poverty. I will also note some other poverty implications of the budget, but not in great detail. We will focus on the tax-welfare side.
The total tax-welfare package was €1,600 million. There are three components to this package as follows: approximately 46% or €752 million was spent on social welfare; 42% or €685 million was spent on income tax; and approximately 12% or €194 million was spent on child income support. In overall terms there was a 60% to 40% welfare-tax division. From a policy point of view it is a positive sign that priority has been given to welfare and child income support over income tax. That is a good starting point.
The package is down significantly at 40% less than was spent in 2007, which was €2,748 million. All three components in the 2008 budget are reduced. The income tax side is hardest hit. That is down by half compared with last year. The social welfare component is reduced by one third. Child income support is down by one fifth. Welfare income supports were protected in the reduced budget available whereas income tax took the big hit. An additional €700 million is being spent on the provision of services. The capital budget was also increased. We do not intend to focus on those but it is important to acknowledge them.
In terms of measuring distributive impact, it was interesting that Fr. Seán Healy mentioned the poverty impact of the budget. This is what we will try to show. We can use a tax-welfare model which is representative of the diversity of tax-welfare situations in Irish households. This is a computer-based model. We can put into this model the tax and welfare changes made in the budget and that will project the changes in terms of income distribution levels and in terms of income poverty. Using this model we can predict the impact. We will not have to wait two or three years for the EU findings. This is a far better way of analysing the budget than using case studies. A typical case study of two adults and two children represents only one in 20 households in the population. That is not typical. A model represents the whole diversity of the population, different family structures and the different combinations of income, tax liabilities and welfare transfers. Most people have a mixture of all of that. This model, which was developed by the Economic and Social Research Institute, is based on a national representative sample and is widely used by Government Departments. The Departments of Finance and Social and Family Affairs use it. It is a well tried and trusted mechanism.
What do we compare? We compared the impact of the 2008 budget with a wage index 2007 budget. We take 2007 policy and index it in line with wages, which is forecast at 4.5%. We do that in order to maintain relativities between those at work and those in receipt of welfare. This is referred to as a distributionally neutral budget. We are looking at the additional resources available in the budget over wage indexation of tax and welfare. We will then focus on what happened to that pot of resources.
We will consider, first, what household gained and if this is evenly spread across all income groups. Second, we will consider the changes in the numbers of people in poverty and what we call the poverty gaps. This measures the extent to which people in poverty fall below the different threshold lines, for example, are they €1 or €10 below the threshold. We are concentrating on the head counts and the gaps.
The net resources after indexation available in budget 2008 were €108 million. This is a relatively small amount, especially compared with the envelope of resources available after indexation in budget 2007, which was €1,086 million or ten times that sum. It is a small surplus but it is still interesting to see where the money went and its impact on poverty. The aggregate figure of €108 million hides internal patterns in social welfare and income tax. The actual net welfare gain is €170 million. However, this is offset by a tax shortfall of between €80 million and €90 million. In other words, the indexation on the tax side was not sufficiently in line with the forecast wage growth. There are no additional resources available for child income support, which was indexed in line with wages. When averaged across the population, the gain per household works out at 0.1%. That is much smaller than in the 2007 budget when the gain was 1.5%. In cash terms, the gain after indexation is less than €1 per household unit per week, while in budget 2007 the gain was ten times that figure. This is a much more modest budget.
How has this modest change been shared out among all income groups? The diagram shows that the budget favoured low income groups. For the bottom 30% of the population, the gain was around 1% to 1.5% in average household income. The fourth and fifth centile show gains in line with the average of 0.1%. The richest 50% of the population record a neutral or very small loss compared with a wage index budget. There is a very strong focus on lower income groups but at quite a small scale of impact of 1.5%
Next we look at the effect on income poverty. We use three thresholds, 50% of the median, 60% of the median and 70% of the median, to get a fuller picture because people's incomes are determined by the level of social welfare. Therefore, depending on the level of social welfare, that can be above or below a threshold. An examination of the three different thresholds provides a fuller picture. In cash terms, 60% of the median is €275 for a single adult. This is the cash value forecast for 2008. By way of comparison, 60% of the median in the EU survey to which Mr. O'Kelly referred earlier was €202.
In terms of income poverty, members will note from the three thresholds that the fall in income poverty is concentrated at the 50% threshold. This is the equivalent of €229 per week for a single person, a significant drop of 11.5%. Under this budget, relative income poverty at the 50% threshold will fall by more than 10%. However, at the 60% and 70% thresholds the position remains unchanged.
Head count measure is but one way of examining this issue. The analysis can be complemented by examining the gap in terms of the extent to which the incomes of those under the threshold fall below it by either €1 or €10. There is a consistent pattern of decline in the poverty gap of between 3% and 6% across the three thresholds. Effectively, the distance between the levels at which people fall below the poverty line has narrowed. While the head count numbers at the 60% and 70% levels remain unchanged, the poverty gap has decreased and this is positive.
To put the budget in context, I will speak now about its distributive impact as compared with budget 2007. I will do likewise in respect of poverty impact. There are two points to note when one compares budget 2007 with budget 2008. There is a similar pattern of targeted redistribution in both budgets in that both provide more resources for lower income groups. However, the scale of redistribution in budget 2008 is much smaller than that contained in budget 2007. For example, in 2008 the bottom 20% of the population will receive slightly more than 1% while they gained more than 4% in the previous budget. The sum provided in this year's budget is four times smaller, a common feature up the line. For example, there is virtually no change in the figure this year for the richest income group whereas they gained 1% last year. There are strong parallels in budget 2008 and budgets 2003 and 2004. I will explore this further in the detailed analysis.
I will now illustrate the effect on income poverty of budgets 2007 and 2008. At the 50% threshold there is little difference in the two budgets. The fall in both cases amounts to approximately 10%. At the 60% threshold, budget 2007 provides for a reduction of approximately 4% and this remains unchanged in 2008. At the 70% threshold, there is no affect in both budgets. I will summarise now the main points of this analysis in terms of the factors which contributed to the outcomes which I have just outlined.
The rate increases of between 6% and 7% are ahead of wages growth which is forecast to be around 4.5%. Welfare increases are ahead of this, resulting in rate gains for groups relying on social welfare, namely, those at the bottom range of the income schedule. Tax adjustments in terms of credits and bands were increased by approximately 4%. This is slightly short of the forecast wage growth and as a result more wage income will be taxable in 2008. This is the reason for the increase so there will be little gain in this regard. One might well question the positive impact on poverty given less money is being spent. There are two factors at play. First, the poverty thresholds are unchanged in cash terms. The thresholds in the wage-indexed budget and the actual budget 2008 are virtually the same. Effectively the threshold has not been increased, which can pose a challenge if there is rapid income growth.
Flat rate welfare increases will always benefit the poorest more. The increase of €12 per week will have a bigger impact on the poorest groups in society than on the groups below the 60% or 70% line. Flat rate increases are targeted at the poorest groups in society.
The level of child poverty is unchanged because the child income support package is just adequate to keep in line with forecast wage growth. There was not enough surplus to make an impact on child poverty.
I will talk about some medium-term issues which need to be addressed in future budgets and will flag up a few tax-welfare issues. The first concerns the implications of the pensions benchmark for the basic welfare rate. Budget 2008 marked time on this by giving an equivalent increase of €12 for the basic welfare rate and the non-contributory pension and €14 for the contributory pension. However, much larger increases are needed for the next four years if the €300 target is to be met, amounting to between €80 and €100, or €20 and €25 per week. What will the level of increase in the basic welfare rate be? Will it be in line with that figure or will it be lower? They will be the major policy questions going forward. As I said, this budget marked time on the issue, and the next few budgets will not be able to achieve the target.
The second issue concerns the policy direction for the qualified adult allowance payments. We see that the qualified adult allowance payments for a person aged over 66 who is the adult dependant of a contributory pension holder have been raised significantly to €200 per week or 90% of the personal rate. This raises the question as to what the qualified adult rate for all other welfare categories is. It is stuck at 66% of the personal rate, despite a commitment in budget 2000 to raise it to 70%. In cash terms this is now a significant gap, as the qualified adult in one category receives €200 but those in most welfare categories receive €131, which represents substantial inequality. This raises an issue in regard to the equivalence rate for qualified adult payments.
