ECONOMICS: Combat Poverty's new report confuses income distribution with poverty and castigates budget system for not producing that it cannot deliver

Ireland's income (GNP) per head in 2001 was some €23,000 according to the Department of Finance, against a figure of just €9,000 10 years earlier. If one takes inflation into account, the gain in real income per head over the decade is still extraordinary, at 75 per cent. Yet we are led to believe by some that poverty in Ireland has risen over the period, despite this astounding gain in real incomes, which is difficult to comprehend and factually incorrect.

Clearly poverty in an absolute sense has to have fallen - the number of households experiencing basic deprivation of food, clothing and heating has diminished as the economy has grown in affluence.

But the Combat Poverty Agency believes that Ireland is in the top half of the EU poverty league as reported in The Irish Times (April 17th) and that little has changed in this regard over recent years.

In fact, the Combat Poverty Agency is referring to relative income, which, of course, is very different from the concept of poverty as generally understood.

For example, if 80 per cent of people in Ireland were millionaires and the remaining 20 per cent had incomes of €400,000 would they be in poverty?

Twenty per cent of the population would have an income level below the average, but could one really describe that as being in "relative income poverty", as the agency's approach would lead one to believe.

The reporting of the agency's analysis of the recent budgets also leaves a lot to be desired. We are told that the richest 10 per cent of the population received 25 per cent of the budget "give-aways" during the last five years, while the poorest 20 per cent received under 5 per cent, but that is grossly misleading on a number of counts.

The first point is that budgets do not "give-away" anything; the finance minister can only take more or less of an individual's income. Tax "cuts" are not a "give-away" - the State is merely allowing workers to keep more of their income.

Furthermore, no tax system on earth can give a person on low income more in tax reductions than someone on a higher income.

Think about it. The Government can either increase allowances (or tax credits), which gives everyone a flat rate boost to their disposable incomes; or lower tax rates, which means the higher one's income the greater the gain.

So if I earn €10,000 and you earn €50,000 a flat gain of say €1,000 for us both boosts the two incomes by the same amount but the percentage gain for me is higher, at 10 per cent, than yours at 2 per cent.

It is meaningless, therefore, to look at the absolute gains in any budget as it has to favour the higher paid, as they pay the most tax.

What is more relevant is to compare the percentage gains at various income levels and that gives a very different picture, even using the Combat Poverty Agency data as quoted in The Irish Times.

The figures show that those on average incomes gained the most over the last five budgets, with disposable incomes rising by 14.7 per cent. Those just under the average gained 14 per cent while those just above gained 12 per cent, so the "ordinary man", so beloved of our politicians, clearly benefited most from the tax cuts over the past five years.

The top 10 per cent in terms of income distribution also did well, gaining 9.4 per cent, but the bottom 30 per cent gained 10.9 per cent and the lowest 20 per cent gained 9.3 per cent.

The fact that the poorest 10 per cent received the lowest gain of 7 per cent deserves to be highlighted, but is lost in a sea of misinformation.

The elimination of poverty is a goal all would share but the cause is not well served by confusing income distribution with poverty, and by castigating a budget system for not producing what it cannot deliver.

Research shows that increasing employment is the best way to reduce poverty in its true sense, and the chances of finding a job are greatly enhanced by education, so an anti-poverty strategy should concentrate on ensuring that children from poor families do not drop out of the educational system, thus breaking the poverty cycle.

It is this area that deserves more attention, not tables of income distribution masquerading as data on poverty.

Dr Dan McLaughlin is chief economist at Bank of Ireland.