The Republic has achieved the “sharpest reduction” in income inequality in the OECD over the past six years because of policies implemented by the Government, the Minister for Finance said on Friday.
Michael Noonan was delivering the keynote speech at a seminar on "inclusive growth" hosted by the European Commission and Institute of International and European Affairs.
Asked beforehand about his biggest achievement in office, he said it had been dealing with the troika: “Moving them out of the country without any precautionary programmes, and getting straight back into the market.”
The Minister, who is to leave office in mid-June, used his last major speech to defend his record in Government.
“Ireland has enjoyed strong economic growth over the last number of years, but it cannot be viewed as inclusive growth unless such growth creates opportunities for all individuals in our society and we distribute the benefits of increased prosperity widely across society,” he said.
“Our income tax system is one of the most progressive systems in the developed world, the most progressive within the EU members of the OECD and second-most progressive of all members of the OECD.”
A progressive system ensures that the burden of taxation falls most heavily on those with a higher ability to pay.
“In addition, the low effective tax rates for low-income workers, which are a feature of progressivity, are a growth-friendly aspect of Ireland’s tax system which simultaneously promotes inclusivity,” said Mr Noonan.
“Income taxes, including USC, are both pro-growth and pro-employment, whilst at the same time ensure a greater degree of fairness than other developed countries.
Reconciling efficiency and equity
“As the OECD has put it, tax design for inclusive growth is tax policy which reconciles efficiency and equity concerns; Ireland’s income tax system does this.”
Mr Noonan also pointed to the fact that taxes raise the revenue needed to finance public expenditure programmes that will reduce inequality.
“The welfare state plays a crucial role in redistributing market incomes (that is, incomes before taxes and transfers) and in reducing the gap between richer and poorer households,” he said. “Such redistribution is sizeable in Ireland’s case.
“In many OECD countries fiscal policy has become less redistributive over time. But the opposite is true in Ireland, where the combination of the tax and social-transfer system results in both the sharpest absolute and proportional reduction in income-inequality in the OECD.
“Nevertheless, we know there are areas beyond the tax and welfare systems where more could be done to improve inclusivity. Barriers to labour market participation – be they related to skills and training deficits, affordable childcare, health issues or other issues – will continue to require the attention of policymakers.”
Mr Noonan said the costs of noninclusive growth “can be high”. Inequalities may prevent the lowest-income households from “participating fully” in economic activity, “certainly harming” their personal prospects and endangering growth.
“Rising inequalities can also put pressure on public social budgets,” he said. “And, ultimately, higher inequality may hinder citizens’ trust in public sector institutions, which can constrain Government’s capacity to act.”
AIB gains
Separately, Mr Noonan said the Government “broadly agrees” with the European Commission’s recommendation to use windfall gains, such as the sale of AIB, to “reduce the government debt ratio”.
Mr Noonan added that the UK's exit from the European Union and the move towards protectionism in the US meant "heightened uncertainty" surrounding the international outlook.
“The best way of dealing with these risks is through prudent management of the public finances and competitiveness-orientated policies,” he said.
“However, the sharp increase in policy uncertainty associated with the Brexit negotiations and the change in policy direction in the US, could weigh on economic activity over the short to medium term.”
