Economy

Will the coming election manifestos tackle economic inequality and poverty?

Ireland’s disposable incomes have become so evenly distributed, we now outrank Sweden

In most EU countries, tax and welfare systems help redistribute money from those on higher incomes to those further down the ladder. Photograph: iStock

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John FitzGerald
Fri Jul 5 2024 - 06:00

For much of the postwar period, western European politics divided on a left-right basis, and issues about the distribution of resources were central to political debate. On the left, social democratic parties sought to redistribute income and reduce poverty through progressive tax and welfare systems. On the extreme left, communist parties wanted to nationalise businesses and redistribute profits to workers.

The case for redistribution was opposed by parties who maintained that large-scale redistribution of resources would affect economic growth and longer-term welfare, undermine individual rights, or adversely impact those on higher incomes. The Thatcher government of the 1980s laid its emphasis on economic efficiency, not egalitarianism.

After decades of political debate, the social democratic model has largely prevailed across Europe, and in most EU countries the tax and welfare systems play a significant role in redistributing from those on higher incomes to those further down the ladder. The negative consequences for economic growth have been limited, if any. The role of state services in driving greater equality in living standards differs across the EU, with Scandinavian countries traditionally the most generous, funded by higher taxation.

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While inequality in pretax incomes may show a similar pattern in the EU, including Ireland, the US, and Japan, after tax and welfare benefits are included disposable incomes are much more evenly spread in the EU compared to the US.

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Other countries where disposable income is very unevenly distributed include Mexico, Turkey and Chile. Japan and Korea lie somewhere between these two extremes, and Canada counts as very “European”, with substantial redistribution of income from richer to poorer households.

Within the EU family, there are differences. Former communist-bloc countries have a more even spread of market, pretax, incomes than in western Europe, but less generous welfare systems result in a roughly similar spread of disposable incomes between the more easterly member states and the rest. Sweden had been one of the most egalitarian societies in the world, but over recent decades its distribution of disposable income has become more uneven. Ireland has gone in the other direction — our disposable incomes have become more evenly distributed and we now outrank Sweden in that regard. Overall, across the EU we have seen increasing convergence in terms of equality of net incomes.

US workers put in 15% more hours than Europeans, while Korea and many Central and South American countries work even longer

Another decidedly European trait is that we choose to work significantly fewer hours than in countries like the US, sacrificing some additional income for greater leisure and family time. Working hours in Ireland are a bit above the EU average, though the gap has been shrinking, but we still work much shorter hours than in the US. EU law provides a minimum of 20 days holidays per year, over and above public holidays, compared to a typical US arrangement of a fortnight’s annual holidays. US workers put in 15 per cent more hours than Europeans, while Korea and many Central and South American countries work even longer. Whether societies tend towards greater or lower equality, or work their people harder than others, reflects political and cultural preferences.

Traditionally, parties towards the right of the spectrum have favoured greater individualism, a smaller state, and cutting taxes, over more generous welfare benefits and public services. But in Europe, a less clear-cut picture is emerging. In recent times, some right-leaning populist parties in Europe have supported generous welfare measures alongside illiberal stances on immigration and LGBT rights. In Ireland, some parties, who see themselves as on the left, are opposed to income redistribution through property taxation.

The Economic and Social Research Institute and the Commission on Taxation and Welfare have suggested a supplementary welfare payment for children

In Ireland, the reduction in income inequality since we joined the EU in 1973 has also been accompanied by a large reduction in the numbers living in poverty. However, an estimated 3.6 per cent of the population in 2023 — about 190,000 people — were estimated to be in consistent poverty, that is experiencing low incomes relative to others and unable to afford key items. Those most likely to experience consistent poverty are people unable to work through illness or disability, lone parents and single-adult households of working age. However, our official estimates of poverty rates are based on a household survey, which does not cover those living in homeless shelters or on the streets.

While health and housing are likely to be key issues in the next general election, it remains to be seen whether economic inequality and poverty will feature prominently in the manifestos. The Economic and Social Research Institute and the Commission on Taxation and Welfare have suggested a supplementary welfare payment for children, which could reduce child poverty by a quarter, at an estimated cost of €700 million. Will any manifesto take this up?

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