Written by Dr. Laura Bambrick
Dr Laura Bambrick is the Social Policy & Employment Affairs Officer at the Irish Congress of Trade Unions. Congress is the umbrella body for 46 unions and seven associate members, representing over 700,000 workers and their families, and the largest civil society organisation on the island of Ireland.
Introduction
The COVID-19 pandemic was both an unprecedented public health crisis and the biggest economic shock in the history of the State, causing unparalleled disruption to the economy and individual livelihoods.[1]
It exposed the weaknesses in our social safety net and heightened public demand for a bigger role for government protecting people’s living standards against common risks.[2]
A period of heightened inflation has seen consumer prices and mortgage costs rising faster than incomes since 2021, adding further to the demand for government to do more.
None of this is to say that people were previously blind to inadequacies and gaps in the funding and provision of social welfare income supports and public services. However, calls for reform typically focused on parts of the welfare system in isolation, rather than changing the fundamental nature of the system – minimalist and heavily means-tested social provision catering largely for the poorest households unable to meet their needs from their own resources, that is closer to the US and UK welfare systems than those of northern and western Europe.
For some, the next logical development in the future direction of the welfare system is a basic income – a tax-free regular payment sufficient to cover essential needs, paid from general taxation to every resident irrespective of their age, wealth, income, or employment status. That is, it is universal and unconditional of all qualifying criteria of current social welfare income supports, including a means-test and work requirement. It would replace all existing social welfare payments, income tax relief and minimum wage protections.
Others, including trade unions, hold the view that the money needed to fund an adequate basic income would be more effective and better spent on improving income supports and providing high quality universal public services. In other words, raising the social wage.
What is meant by the social wage?
A household’s final income depends on the money wages its members receive in the labour market minus the taxes and social insurance contributions on those wages paid to the state plus the social welfare income supports and public services it receives from the state. The supports and services received from the state constitutes the social wage.
Access to free or low-cost services reduce out-of-pocket expenses and act as a virtual income top-up to a household’s cash income from work or welfare.
There are no clear criteria in the academic literature on redistribution and welfare systems for deciding which public services to include as part of the social wage.
In principle, the social wage encompasses all publicly-funded goods and services. State spending on, for example, policing, sanitation, broadband or roads and street lighting benefits everyone and lifts the living standards of the entire community.
In practice, conventional measures of the social wage adopt a much narrower definition and limit to expenditure from the public finances on areas such as housing, childcare, education, health, transport and other goods and services that have a direct and tangible benefit to households, with a focus on social wage differences across income groups or over time.
Occasionally, analysis of the distribution of the social wage will include tax expenditure. Tax expenditures are a form of hidden public spending.
Reducing taxes on income offers the illusion of a pay rise by increasing take-home pay. But tax cutting is a short-sighted way to protect and improve living standards. Not just because tax benefits tend to disproportionately go to higher income households but because cutting taxes while spending more cannot be pursued indefinitely.
The deficit it creates in the public finances inevitably leads to spending cuts.
In the name of helping ordinary working families through income tax cuts, these same households will have their social wage gutted in terms of reduced provision of public services and inadequate social welfare income supports.
What is more, there is no scope for tax cutting in Ireland; quite the opposite, in fact.
On the face of it, the public finances appear to be in rude health with very large budgetary surpluses projected out to 2026. But the headline figure masks significant vulnerabilities.
The headline is being bolstered by an exceptional, but unreliable, inflow of corporation tax receipts from a very small number of foreign multinational companies.[3] This is on top of the State facing long-term cost challenges from an ageing population and the twin green and digital transitions, while having one of the highest levels of per-capita national debt in the world.
Trade unions are not alone in warning that the direction of travel for policy will need to be net-revenue raising, as opposed to net-revenue reducing.[4] The Foundations for the Future report of the Commission on Taxation and Welfare recommends that “the overall level of revenues raised from tax and pay related social insurance as a share of national income must increase materially.”[5]
The social wage in Ireland
Ireland has very low levels of per-capita public spending by Western European standards.[6]
In 2019 (pre COVID-related spending), Ireland spent €2,801 less per person compared with the average spend in similar high-income member states.[7] This amounts to an annual shortfall of €14 billion when scaled to the population.[8] Our young population – that is our comparatively low age-related expenditure on pensions, healthcare and eldercare – only explains a fraction of this spending gap.
Because of the minimalist and heavily targeted nature of the Irish welfare system, the value of the social wage for full-time workers is exceptionally low.
An unusual feature of our (and other English-speaking nations’) welfare system is that despite paying pay-related social insurance contributions when in employment, workers receive low flat-rate benefits in return if they lose their job, have a baby, or get sick.
In almost all EU member states, contributory social welfare income supports are pay-related (i.e. the weekly payment is a percentage of a worker’s previous wage), to allow workers continue to pay their mortgage and other bills so as to maintain their normal living standards in the short-term when out of work.[9]
By way of demonstration, Jobseeker’s Benefit (€220 a week) replaces just 25% of the average wage or 49% of the full-time minimum wage in Ireland. Whereas pay-related unemployment income supports in Belgium replace 91% of a worker’s previous wage, 79% in Denmark and 69% in the Netherlands.[10]
There are means-tested top-up cash benefits paid for a dependent spouse or partner (€146) and for each dependent child (€42 if aged under 12 years and €50 if 12 years or over) and a range of non-cash benefits tied to reducing the cost of renting in private rented accommodation,[11] healthcare, education, utilities, and transport, that increase the replacement rate[12] of our social welfare income supports and raises the social wage.
However, workers on short-term contributory income supports with a working spouse or partner, savings, or other source of income are markedly less likely than households on long-term social welfare income supports to qualify for these uplifts to the social wage.[13]
In short: workers see their income fall off a cliff during short gaps in employment. The recent lay-off of the 650-strong workforce in Tara Mines in County Meath stands as a case in point.[14]
Free or heavily subsidised publicly-funded services also have a big part to play in making people less vulnerable to financial insecurity in and out of work.
Again, Ireland is atypical in heavily means-testing access to public services over universal provision.[15] As such, workers above modest earnings rarely pass the means test and must pay market prices out of their take-home pay for essential services, driving up their cost of living and wage demands. For example, Ireland is the only EU country without universal free-at-the point-of-use GP care. A GP visit is €53 on average per visit nationally, with consultation fees higher in urban areas. [16] Fees in Dublin city can be between €65 and €80.[17]
Across the rest of the EU, access to public services is contingency-based. People, for example, with a child and a job will need childcare. They are eligible for publicly-funded childcare at little or no charge regardless of the size of their wage or household income.
Exiting the pandemic and in the teeth of a cost of living crisis, trade unions refused to allow this once-in-a-century opportunity for pathbreaking welfare reform to go ignored. On May Day 2022, the Irish Congress of Trade Unions published comparative research on the social wage gap between workers in Ireland and other high-income EU countries as a platform for radical change.[18]
In response, and to offset the effects of soaring inflation, good progress has since been made in raising the social wage through a number of measures to permanently widen access to public goods and services and reduce the out-of-pocket cost of childcare, primary education and school transport, healthcare (notably including abolishing hospital in-patient charges publicly funding contraception and IVF), and increasing the very low qualifying income thresholds for eligibility to free GP care and social and cost rental housing.
A new pay-related jobseeker’s income support is under consideration and new workers’ rights to pay-related domestic violence leave and sick pay are being rolled-out. Ireland was one of three of the EU’s 27 members not to require an employer to provide paid sick leave to workers too ill to work.[19] There is also a commitment to introduce mandatory employer contributions to a worker’s retirement savings. Ireland is the only OECD country not to operate auto-enrolment or similar pension savings scheme. The qualifying age for the State pension is to remain at 66 and eligibility for a fuel allowance top-up (€33 a week) has been widened to cover some 80,000 more retired workers over 70.
Despite this, there is still a considerable distance to go to before the Irish welfare system is in line with how well our European peer group protects household living standards against the vagaries of life and markets. For example, given that acute capacity constraints in our public healthcare services are already significantly impacting the delivery of existing entitlement, without a matching pro rate increase in health staff, widening coverage will remain an empty promise.[20]
Funding a raise in the social wage
If government is to scale up spending to improve the adequacy of social welfare income supports and expand eligibility to public services, then it needs to generate more tax revenue. Not only has Ireland comparatively low levels of public spending, the overall level of revenues raised from tax and social insurance as a share of national income is low in comparison to the EU average and compared to other high-income member states.[21]
This is mainly a function of our under-taxation of labour income. The Implicit Tax Rate (ITR) on labour income – income tax, USC and social insurance combined – is 33.5% and below the EU average of 38.1%. However, drilling down into the headline figure shows that the ITR paid by employees in Ireland (24.3%) exceeds the EU average (21.1%). The shortfall is from the revenue collected from employers. The yield from employer social insurance contributions would need to almost double to reach the EU average.
Income from self-employment is also under-taxed. The self-employed pay a 4% rate of social insurance compared to the standard 15.05% contribution paid in respect of most employees – comprising of 4% paid directly by the employee and 11.05% paid on their behalf by their employer. Historically, self-employed workers only qualified for a narrow range of contributory social welfare income supports which was the justification for their smaller contribution. But this is no longer the case.
Following social welfare reforms by the previous government, 350,000 self-employed contributors are now covered for all bar 4 of the 24 contributory income supports in return for a contribution 11% lower than that made in respect of PAYE workers.
The State’s own advisory body, the Tax Strategy Group, has proposed that consideration be given to gradually adjusting the self-employed social insurance contribution rate to the employer rate (i.e. from 4% to 11.05%).[22] This is a call that has been echoed by a range of bodies, including both the Pensions Commission and the Taxation and Welfare Commission.[23]
Our under-taxation of labour as a share of national income amounts to over €10 billion.
Conclusion
Our minimalist and heavily means-tested welfare system is not fit for the twenty-first century. It doesn’t work for working households or the wider economy.
Widening access to public services and improving the adequacy of social welfare income supports would make workers less vulnerable to financial insecurity in and out of work. It would cut out-of-pocket costs, easing the pressure on wages. It would reduce search costs for unemployed workers to find a new job that better matches their skills, promoting pay and productivity growth. It would reduce poverty traps for low-work intensity households moving from welfare into work or more hours worked, increasing labour supply and narrowing the gap between the haves and have-nots. It would leave our welfare system less susceptible to attack that there are ‘those who pay for everything while getting nothing in return’. When people know that they can rely on the welfare system if and when they need it, it strengthens social solidarity and public support for tax and social spending.
It will be argued that increasing the tax take to the EU average in order to cover the costs associated with raising the social wage will stunt economic growth and erode national competitiveness. But we are currently experiencing ongoing affordability crises in housing and childcare, and chronic underfunding and capacity constraints in delivery of public services, which is having far more negative implications for our competitiveness.[24]
Besides, we only have to look at the success of Nordic countries: Despite higher than average taxes to fund their comprehensive welfare system, their economies rank amongst the most competitive in the world, with high levels of labour productivity and per-capita output.
The outbreak of COVID-19 brought the deep failings in how we protect workers’ income and living standards into sharp focus. Just as with the Second World War, “one happy consequence of this otherwise desperately unhappy experience”[25] can be to radically transform our welfare system.
