Means testing Child Benefit? Well, if we’re going to have a debate a credible argument in favour might be useful… October 8, 2010Posted by WorldbyStorm in Economy, Irish Politics, Uncategorized.
… but you won’t find it in Jim Power’s curious contribution in the Irish Times yesterday. Jim Power is ‘chief economist with Friends First, a life insurance, pensions and investments company’. Now some of us will remember the submission of the insurance, pensions and investments industry to the Green Paper on Pensions in 2007. You will know the one, where they argued that pensions should not be mandatory…
Take it away the Irish Insurance Federation:
* We do not support the idea of mandatory pensions. The introduction of fully mandatory pensions would create more problems than it would solve. There would be a high degree of complexity involved and it would be very difficult if not impossible to design a regime which would be appropriate for all participants. In our opinion the better option is a reasonable basic State pension and voluntary provision on top of this.
* Why not mandatory? Because:
o Enhancing the “Pillar 1” State pension, as recommended, would go a long way towards providing an adequate retirement income for low- to middle-income earners; this in turn reinforces the idea that any additional pension provision – while it should be promoted and incentivised by the State – should remain voluntary;
o It represents an abdication of personal responsibility and it weakens the link between effort and reward;
o It removes personal choice;
o It enshrines the principle that citizens must be taken care of by the State from ‘Cradle to Grave’ and increases ‘Big Government’;
o It creates a dilemma regarding who should manage funds and may result in a lack of individual savers’ control over the management of their retirement funds.
So remember that as you read the following contribution from JP.
It can be summed up as follows:
There’s a massive economic crisis ‘ a situation of unprecedented and very deep crisis’.
Public expenditure is too much ‘The structurally unsustainable public finance situation is fundamentally due to the fact that it quite simply costs too much to run the country’.
We can’t afford child benefit… ‘universal child benefit is a structure that we simply cannot afford’.
I asked my son to look into it… but he’s none the wiser than me… ‘When he asked me how much we receive in child benefit, I had no idea because it goes straight into an account that will eventually be used to fund third-level education or marriage or whatever’.
I asked my mates and they’re no better… ‘I just conducted a straw poll of a few people I know with children on the level of child benefit, and none could tell me how much it is worth to them’.
Therefore if we don’t know what it is we don’t deserve it… er what?
‘While I recognise that this is not a significantly robust statistical sample, it does strike me that if somebody does not know how much they receive then they probably should not be getting it in the first place’.
WTF? This is what he considers to be a serious argument on this matter?
[on a tangent I have a perfectly formed Excel spreadsheet which I do my personal finances on. If you asked me how much I earn, after tax, a figure I look at frequently as I do my finances each week, I honestly couldn't tell you. It's no great sum let me tell you, but clearly I don't deserve it].
His use of statistics is astonishingly relaxed…
Figures in last year’s Commission on Taxation report showed that 65 per cent of families who benefit have an income between € 40,000 and € 100,000 and 15 per cent have an income in excess of € 100,000. On grounds of equity and efficiency, universal child benefit does not score very highly.
How precisely does he work that out?
If expenditure cuts are focused on people with a high marginal propensity to consume, as is the case with many recipients of social welfare, then such cuts are more damaging to the economy.
On the other hand if cuts are focused on those with a lower marginal propensity to consume, the economic impact of such cuts are less severe.
The marginal propensity to consume is lower on average for recipients of child benefit than for most other forms of social welfare, so it would be a less damaging way to proceed.
Three thoughts strike me. Firstly he surely won’t be using arguments about marginal propensity to consume as regards other cuts, whatever their impact on low earners. Secondly he ignores a well-developed body of literature that demonstrates that universal benefits are much more effective as a means of ameliorating issues such as child poverty than means tested ones. [link to relevant documentation two thirds of the way down the piece]This is in no small part due to a tendency for means tested benefits to dissuade take-up. Thirdly, why not the obvious solution to his problem and increase the tax rate marginally to take account of the benefits high earners will gain from child benefit. But no, perish that particular thought.
Because for all the talk of pain and solidarity what we’re seeing is the removal of the fairly tenuous and residual instruments of social solidarity. These may be symbolic, but they’re indications that we are all in this together, that the state isn’t merely an appendage to the economy, but that it is part of a broader social compact.
He concludes with the following unreferenced figures:
The cost of child benefit this year is estimated at €2.26 billion. Savings of at least €800 million could be achieved here. This of course would not be enough to bridge the gaping gap, but it would represent a start. Whatever way one looks at it, we will all end up paying more tax and getting less from government over the coming years, but we must have no sacred cows in this debate. Every tax and spending option should be given due consideration to identify the relatively better options.
The operative words being ‘due consideration’.
But oddly if we turn to a document from last year another guy called Jim Power, also – coincidentally, with Friends First had the following thoughts on child benefit…
Spending cuts which could be considered include:
• Some cut to child benefit costs – a basic cut of 20% would save the Exchequer €500 million per annum. Taxing these benefits would be fairer, but would be very difficult to engineer quickly enough.
And those lower paid workers whose marginal propensity to consume isn’t that much lower than those on welfare?
• A broadening of the tax base to increase contributions from tax exiles and lower paid workers. It is nice, but it is just not sustainable to have 50% of workers paying no income tax at all.
I find the glib tone of the ‘it is nice’ fairly revolting given the impacts of what is being discussed (I should add I also agree with the notion of bringing all workers into the income tax net, though I’d see this as a further gesture of social solidarity potentially alleviated by credits).
And what of the unemployed?
• Cutting the social welfare bill by 5% would save €1 billion in government spending.
Ah… what indeed, would appear to be the answer.
Meanwhile let’s consider his reading of the entrails of the housing sector last November, just for the craic, y’know…
“Against a background of excess supply and constrained demand, it appears likely that house prices will fall further over the coming year. It is difficult to measure price changes in an illiquid market but a further decline of up to 15% appears likely, before the market is likely to bottom out in the second half of 2010.”
Oh dear… better not show this to him…
Less welcome are three separate reports on the property market published this morning, which show that residential house prices continue to slide across the State.
Websites Myhome.ie and Daft.ie and property group Sherry FitzGerald have all published their latest analyses of house prices for the third quarter.
All three reports show the same broad trends, pointing to continued declines in price.
According to Myhome.ie, a property website owned by The Irish Times, prices nationally fell by 3.9 per cent in the third quarter.
The latest fall brings the total decline from the peak of the market in late 2006 to almost 32.4 per cent, according to Myhome.ie.
Daft.ie says prices fell by slightly less – 3.7 per cent – in the third quarter of the year on the previous quarter. It says prices nationally are now 37 per cent down from the peak recorded in 2007.