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Smart Money: A new report from Ictu shines a light on ‘the social wage’

Poorer services in Ireland can reflect lower spending or less efficiency – Ictu’s case is that the State needs to spend more. Photograph: iStock
Poorer services in Ireland can reflect lower spending or less efficiency – Ictu’s case is that the State needs to spend more. Photograph: iStock

How much tax people pay on their incomes in the Republic versus what they pay elsewhere has long been the subject of debate. But there is another vital side of the equation – what taxpayers get in return. Taxes pay for a whole range of public services, of course. But what about how households benefit in Ireland from spending on key services such as health, childcare and welfare versus what happens elsewhere? And does this explain some of the pressure on the living standards of many, even those on average or above average incomes ?

1. The ‘social wage’

In a recent document, the Irish Congress of Trade Unions (Ictu) uses the cost of the "social wage" – the measure of how much better off individuals are from social spending by government on welfare supports and services. For example, even if you pay a bit more tax, or earn a bit less, you may be better off if you live in a country which provides better childcare services, or healthcare, or better supports for people who are out of work. Ictu – taking a range of Nordic and western EU countries as comparators – says the social wage in the State is low. Its analysis excludes less well-off countries such as Portugal, Spain and Italy. And it sets it within a context of high price levels in Ireland – the second highest in the EU according to Eurostat, with prices 37 per cent above the EU average in 2020 – which reduces the real value of a relatively high Irish minimum wage level.

2.Overall spending

Comparing Ireland to eight Nordic and western EU countries – Germany, the Netherlands, France, Belgium, Austria, Sweden, Finland and Denmark – the report points out that public spending per person (excluding debt servicing) is lowest among the peer group, at €16,821 compared to an average of €19,622. A younger population and lower spending on defence are two of the reasons for this. But Ictu argues that a younger population only explains a small part of the spending gap, which it estimates comes to €14 billion when scaled to the population.

Poorer services in Ireland can reflect lower spending or less efficiency – Ictu’s case is that the State needs to spend more. It also believes that there is scope to raise more tax to help pay for this.

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Certainly two areas highlighted by the report – Ireland’s relatively low level of employer PRSI, which means the cost of employing people here is relatively low, and the favourable PRSI treatment of the self-employed, are likely to be targeted as revenue raisers in the years ahead.

But they will not pay for everything.The Commission on Tax and Welfare, which will report during the summer, will have key role here and in identifying other areas where new taxes can be raised.And the Government will have to decide what to do about this.

3. Welfare benefits

The move during Covid-19 to introduce the Pandemic Unemployment Payment (PUP) was a step towards protecting people’s incomes beyond the normal supports. The idea of extending this pay-related benefit concept – where what you get in supports related to what you earned before – is now on the Government agenda. The Ictu report shows how Ireland lags richer EU countries in this respect – pre-pandemic a single worker on €27,000 in Ireland in employment had just 39 per cent of earnings replaced by jobseeker’s payment compared to 70 -90 per cent in Belgium, the Netherlands and Denmark. Middle income workers face an even bigger fall. Rent supplements – and payments related to spouses and children – do improve the comparison for Ireland in some cases. But the European-system gives workers more chances to keep paying their bills during temporary periods out of work.

The Government is legislating for improved sick pay and has promised proposals on pay-related unemployment, though the scope of what might happen here is not clear. However this goes, the pandemic has put greater State supports on the agenda.

4.Housing

Tens of thousands of words have been written analysing the housing crisis. The Ictu report highlights some key issues. These include a relatively low income level in Ireland to qualify for social housing. The size of the social housing sector in some other smaller EU countries– notably Austria and Denmark – is much larger, accommodating 24 per cent and 19 per cent of households respectively. A major expansion of social and affordable housing is promised under the Government’s new housing plan, but delivery will take time.The report also points to the familiar story of rising rents and house prices, hitting those in the market sectors, with affordability worsening sharply for both renters and buyers – and a “generation rent” group living in private rented accommodation with earnings too high to qualify for housing subsidies but unable to afford a home at current prices.

5.Childcare

After housing, childcare is the major cost for many families and the Ictu report covers the different approaches across the EU. In eight of the EU 27, free or low-cost publicly provided childcare is available for all, but more typically costs are subsidised for those on lower incomes. Here, increases in child benefit during the Celtic Tiger years and the 2019 National Childcare Scheme, offering a universal subsidy and targeted top-ups in some cases, have been the main policy measures. However, OECD data still shows the average couple spends 20 per cent of their joint disposable income on full-time care for two pre-school children, the highest of the comparator group. Ictu argues that a key issue is lack of regulation of childcare fees – which are high in the Republic – and says the market model has failed and the State needs to provide childcare as a vital public service.

6. Policy implications

Debates on spending and tax tend to focus on specific issues – such as which taxes should be cut, or how a public services problem can be fixed with more money. The Ictu report takes an interesting approach in highlighting the impact of spending in new areas on people’s lives and arguing that more money – and more taxes – are needed to address this. This looks set to play into the economic debate in a few ways.

In the run-in to pay talks now getting underway, senior trade union figures have been pushing the social wage concept. They may be prepared to trade off improvements here against wage increases, though they will clearly seek the latter too.

The ICTU report specifically says it prefers this approach to the concept of a basic income level guaranteed to all citizens put forward by some other campaigners, above current welfare levels.There will certainly be trade-offs ahead as the Government looks at the role of the State post-Covid.

As well as low-income households, there is a vital debate ahead about supporting the so-called squeezed middle, who will also be hit hard by inflation. Is this best done through income tax cuts – as some in Fine Gael are supporting – or higher spending on services? Surging revenues have allowed a bit of both in recent years, but the exchequer finances are likely to get tighter. Measures to tackle high costs in Ireland are also vital.

The Commission on Tax and Welfare, due to report over the summer, will outline the long-term position of the public finances and the need to raise revenues to cover an ageing population and the green transition, as well as meeting general spending needs. This will be controversial, particularly in light of the cost-of-living crisis. But it is a debate which Ireland has to have.