Dáil Éireann díospóireacht -
Wednesday, 5 Jun 1996

Vol. 466 No. 4

Written Answers. - Poverty Trap Elimination.

Peadar Clohessy

Ceist:

30 Mr. Clohessy asked the Minister for Finance whether his attention has been drawn to a research study undertaken by a student (details supplied) in Sligo Regional Technical College which suggests that disposable income of some families is less at £17,000 than at £11,000; and if he will make a statement on the matter. [11601/96]

Ben Briscoe

Ceist:

50 Mr. Briscoe asked the Minister for Finance the plans, if any, he has to attempt to eliminate or, at least reduce, the well-recognised poverty trap in the Irish economy. [11586/96]

Mary Harney

Ceist:

58 Miss Harney asked the Minister for Finance whether his attention has been drawn to a research study undertaken by a student (details supplied) in Sligo Regional Technical College which suggests that disposable income of some families is less at £17,000 than at £11,000; and if he will make a statement on the matter. [11600/96]

Minister for Finance (Mr. Quinn)

I propose to take Questions Nos. 30, 50 and 58 together.

I assume that these questions refer to an article in the Sunday Business Post on 19 May 1996. I am aware of the report in question and am familiar with the thrust of the findings which it describes. The article relates to the impact of the interaction of aspects of the taxation and welfare codes as they have evolved over a long period and, as a consequence of which, certain individuals can face a reduction in their net income as their earnings increase. This phenomenon is known as the poverty trap and the case described in the article is an extreme example of the phenomenon.

The number of people who potentially lose disposable income as gross pay increases is small. The main factors contributing to the decline in net income as the gross income increases are the 60 per cent withdrawal rate of family income supplement — FIS — combined with the operation of marginal relief system for income tax involving a 40 per cent marginal tax rate. In so far as FIS and marginal relief income tax are the main elements of the trap, the number of people affected is a direct function of the numbers who receive FIS and pay tax. The estimated numbers of people in this situation is in the order of 1,500 to 2,000. The OECD has also concluded that this situation potentially "applied to a very small proportion of the employee workforce (0.75 per cent)". While not attempting to minimise the problem for those affected, it is necessary to put it into overall perspective and not to seek to represent as a general problem what is in fact, an unusual and limited situation. While the newspaper article in question highlighted the acute problem faced by those with large families, such as eight children, the actual number of families with eight or more children who were in receipt of FIS in April 1996 was 89.

In interpreting the article in question, it is also important that the mechanism for reviewing FIS is understood. FIS is renewable on a 12-monthly basis. Once awarded, it will not be reduced or withdrawn until the end of the period regardless of any interim upward movement in pay. Therefore, gross income from employment can increase significantly during the course of a year while any adjustment of FIS will not occur until after the end of the year. The Expert Working Group on the Integration of the Tax and Social Welfare Systems has pointed out in its interim report that FIS withdrawal does not generally occur at the same time as a gross pay increase.

The Government fully accepts the need to create the incentive to work among the unemployed and to ensure that this incentive is maintained for those in employment. The various actions required to achieve these aims may produce aberrations and anomalies at points along the income schedule; this is not to say that these actions, being entirely valid in themselves, should be abandoned because of these unintended results affecting a small segment of the population. It has to be recognised that it takes both resources and time to eliminate the undesirable side affects which can arise.

It was to address the various complexities involved in this whole area that the Expert Group on the Integration of Tax and Social Welfare Systems was established. The group has concluded a detailed examination of the issues and will be publishing its analysis and recommended approach in the very near future. This report will be examined carefully. I do not expect a simple solution to the poverty trap problem; indeed, I know there is not one. However, I am ever mindful of the necessity to minimise any adverse impact which future changes to the tax and social welfare systems have on the more vulnerable in the labour force and I can assure this House that steps will continue to be taken to remove such consequences.