We are preparing a paper on emerging poverty risks and challenges in the current economic downturn. Much of the focus recently has been on the financial and banking aspects of the downturn, but there are also the social effects to consider. The purpose of our paper is to focus on these issues. The downturn radically changes the policy context for tackling poverty, reduces resources to address ongoing poverty challenges and creates more poverty risks. Ireland faces particular challenges owing to a confluence of factors, including the severity of the economic downturn, the existing scale of poverty and the high expenditure on social welfare.
Our paper deals extensively with employment and unemployment issues. Everybody is aware of the rapid increase in unemployment, with recent figures suggesting 10% of the labour force, or considerably more than 200,000 people, are out of work. There are indications that the live register will point to a total number of unemployed of some 400,000. Moreover, there are suggestions the rate could increase to 14% by the end of the year. From a poverty point of view, the risks arising from an increasing unemployment rate are clear. Unemployed persons are between six and 13 times more likely to be in poverty than those at work. This points to an undeniable correlation between unemployment and a hugely increased poverty risk. Few of the current trends in unemployment are new, with many also evident in earlier recessions. Of concern, however, is the rapid rise in youth unemployment, signalling the persistence of educational disadvantage. Also of concern are the rise in non-Irish national unemployment, gender differentiated trends and the rise in unemployment of the self-employed who face a combination of structural barriers and high levels of personal debt combined with business debt.
Another cause for concern is the administrative burden of dealing with rising unemployment, which is most evident in the delayed payment of benefits. Moreover, we are concerned that recent reforms in the payment of unemployment benefit may create poverty risks and traps. We have included suggestions in our paper for addressing these issues by providing supports to facilitate the unemployed in returning to work. We must also take action to address the haemorrhage of jobs, especially in vulnerable sectors. We will include suggestions as to how this may be done.
Another theme in our paper on emerging poverty risks is the issue of the consumption of goods and services by those on low incomes. Low-income households face several barriers in consuming goods and services, including structural and market problems, low bargaining power, a tendency to operate on a pay-as-you-go system, affordability issues, and a lack of access to facilities, transport and so on. At the same time, there is increasing Government reliance on market and private sector-led models for service provision which often do not have a strong social component. An example of market-led service provision is waste collection charges. There is often no social dimension to such arrangements such as the provision of a waiver. A recent review by the Office of the Ombudsman concluded that the administration of waste management services did not make adequate provision to mitigate the cost burden on low-income households. More generally, the report notes that the current model for privatisation of public services, of which we are likely to see more in the future, can act as a barrier to public authorities in exercising their social policy obligations. This goes back to the point that in the current situation new poverty risks are emerging all the time.
We also refer to the issue of over-indebtedness. This refers to a persistent inability to repay instalments associated with credit agreements and household bills. Over-indebtedness is associated with people in poverty, those on lower than average incomes and those who have experienced a major income drop for reasons of ill-health or unemployment. We have a separate paper coming out on the issue of over-indebtedness and what needs to be addressed in this regard.
Surveys in recent years have estimated that, on average, between 7% and 10% of households experience problems with arrears and/or have to borrow for essential expenses. Therefore there is a great deal of evidence which suggests that over-indebtedness is on the increase. The main policy response to this in recent times has concerned mortgage debt and a moratorium on repossession proceedings. However, this does not go far enough because there are many other types of over-indebtedness that need to be addressed. In our new paper on this topic, which we will launch on 21 April, we will set out a range of preventative, ameliorative and rehabilitative measures to address the issue of over-indebtedness.
I also wish to highlight the issue of child poverty. The current economic downturn poses a number of poverty risks for children. Children and child poverty will be affected by a rise in workless and working-poor households, changes in household consumption, and associated social, cultural and psychological effects. Youth unemployment and educational disadvantage are especially of concern. We cannot be complacent on the issue of child poverty. In one sense we have got away with the issue because people leaving school with low educational attainments have been mopped up when there was a huge demand for labour. That is no longer the case, however. The effects of child poverty and educational disadvantage will be magnified in the current economic downturn, so we need to intensify measures to address them. Otherwise we will be left with an economic millstone in future years which will cost us far more to remedy.
I will now turn to our approach, and our submission, on the supplementary budget for 2009, which has been announced for next week. It will be an unusual budget in the sense that it will not be about spending more money, but primarily about extracting resources from the economy and from households to reduce the Government's borrowing requirement.
We feel the budget should not diminish the Government's focus on reducing poverty, especially given the increased poverty risks I have already highlighted. We acknowledge that the Government has to reduce public expenditure and raise tax revenues to control the budget deficit. This goal should not conflict with protecting those in poverty or improving the effectiveness of welfare provision to address the new poverty challenges.
There is a key point here. While fiscal policy initiatives are clearly required, no matter how progressive, they will be unsustainable and ineffective if not accompanied by measures to address the social effects of the economic downturn, in particular the growth in unemployment. Social policy cannot stand still in the current environment, but must be re-focused to generate better outcomes in terms of access to employment, educational opportunity and basic living standards. It is not enough to say that we need to protect the vulnerable, we must go beyond that. We have to find new measures to support and address ongoing poverty issues, so that people will be in a better position to improve their living standards and then avail of what opportunities might come from an economic improvement.
The Combat Poverty Agency advocates the following six-point comprehensive policy approach to the supplementary budget: prioritise income tax increases over cuts in welfare expenditure; maintain welfare rates and child income support; seek better value for money for welfare expenditure; support employment and enable the unemployed to return to work; ensure user charges are in compliance with social policy; and address problems of over-indebtedness.
I would like to summarise the first three points, which are particularly relevant to the joint committee's remit. In terms of prioritising tax increases over cuts in welfare expenditure, our approach is evidence based. We have examined how the Government has spent resources over the past ten years and the additional tax welfare measures involved. We need to claw back some of those resources to fill the current deficit in the public finances. The evidence suggests that of the €10 billion that was provided in additional tax welfare improvements over that ten-year period, 65% was channelled through tax reductions, welfare payments got 19% and child benefit got 16%. Overwhelmingly, therefore, the resources went into tax reductions. As a result the distribution of these resources massively favoured higher income groups. For example, one third of that resource package, around €3 billion, went to the richest 20% of households. By contrast, lower-income groups received a far smaller share. The poorest decile got 4% and the poorest quintile got 10%. There is no question that if we need to find more tax resources the evidence is there that we must claim back some of the money we gave in the past, which overwhelmingly went to tax cuts. This is not an ideological question, it is one of clawing back from where we spent the money because we need it now. Let us get that money back from the groups that got it.
I will now address the issue of maintaining welfare rates and child income support. A key policy objective of the budget should be to protect the living standards of those at risk of poverty. This requires ensuring that welfare rates, and in particular the minimum rates, are not reduced. We are outlining four reasons they should not be reduced. Welfare rates are the main determinant of poverty levels in Ireland. Cuts in welfare rates are likely to increase poverty and will further differentiate Ireland from European best practice. Welfare rates are currently not adequate to meet minimum essential budgets in many cases. Research by the Vincentian partnership for social justice shows that only 15 out of a sample of 27 low-income household types are able to afford minimum essential budgets. Therefore, half of them do not currently have the required resources.
The argument has been advanced that in a situation where the annual consumer price index is in decline — and recent figures suggest a decline of around 2% in the CPI — this does not support a view that basic living costs are falling. The main driver for the reduction in the consumer price index is lower mortgage rates, which are down by 26% on the year. That is unlikely to benefit welfare recipients. Excluding mortgage interest rates, the consumer price index in fact rose by 0.5% in the last year. Annual food costs, which account for up to a third of income in the poorest households, increased by almost 1%. Also, the cost of utilities and local charges is up by 11%, which will have a bigger impact on low-income households.
A final argument for not cutting welfare payments is that maintaining them boosts economic demand and directly supports agricultural production and employment in the retail and other sectors of the economy. Therefore there is an economic reason as well as a social one.
What should the policy approach be in regard to child income support? It can be argued that child benefit should be reviewed on the basis that it is a universal payment, but we suggest caution in this regard. Child benefit is now the predominant form of child income support and any reduction will adversely affect poor, middle income and better off families. Combat Poverty's preferred approach, if restricting the payment, is not to cut it or means test it, but to tax it. That would take some time to work out, however, and the matter is being examined by the commission on taxation. The Government should await the outcome of its deliberations.
As regards seeking better value for money in welfare expenditure, we are suggesting that there are some ways in which current resources would be better spent. I will cite three examples. One concerns targeting cash resources towards greatest needs. For example, the early child care supplement could be better targeted to directly fund access to pre-school provision for children aged three and four from low income families. This would be in line with the original proposal from the commission on the family. This could be done by providing an enhanced voucher payment of around €3,000 per child per annum to purchase pre-school education from a provider of their choice. That would be a better use of their resources than spreading it across the board as is currently the case.
A second suggestion is the linking of income support with supporting cash measures. The welfare system provides cash subsidies towards items such as private rented accommodation, home heating and fuel. Frequently, these do not represent good value for money because of deficiencies in the quality of housing. Linking income subsidies with measures to improve housing conditions could improve outcomes. For example, recipients of the fuel allowance should be prioritised for home improvements under the warmer homes scheme. Another option might be to replace the smokeless coal allowance with a capital grant for switching to energy efficient heating systems. Similar value for money reforms could be made in the rent and mortgage supplement and by improving the range and quality of housing available.
Tackling poverty is not an option. Poverty is on the increase and we must maintain the existing provision and if possible get better value for money for the resources being provided as well as adopting a more proactive approach, particularly to unemployment. There are economic benefits for the wider economy in supporting welfare payments and keeping their value up. We need smarter policies, as well. In particular, we need to invest in the future and we must, especially, address the issue of child poverty. If we do not do this now, we shall pay the cost for that in the coming years. Intervention now, particularly as regards pre-school access, is critical and should not be seen as something that can be deferred until we have more resources.
