Social welfare payments questionably targeted in budget

The grim joke doing the rounds in towns and counties severely hit by unemployment is that signing on the live register is joining the 204 club. It's a reference to the €204.30 weekly maximum payment people get in jobseekers' benefit or jobseekers' allowance. From a position of all but full employment 18 months ago, the jobless rate has tripled to 12.6 per cent. The live register count last month stood at 423,639 - an increase of 183,422 in the year - triggering a big rise in the social welfare bill to about €21bn this year. The rising jobless numbers has increased scrutiny on the increasing costs, with the old rule of thumb holding that a 10,000 increase in the live register adds approximately €115 million to social security spending. That measure - often repeated by lofty commentators, among others, in the Central Bank, appears hopelessly out of date. Households, whose main earner has lost a job or faces reduced earnings because the full-time job has become a part-time one, face a struggle to make ends meet. Families in this severe recession need all sorts of supports, including Government support to help meet the monthly mortgage payments. Rising unemployment implies a whole new set of problems for the banks' bad debts. More people will continue to lose their jobs over the following year as more money is taken out of the economy in higher taxes and capital spending cuts. With the rising social welfare bill has come calls from officials and Government advisers for cuts in social welfare payments. Last week, Tom O'Connell, assistant director-general at the Central Bank, inadvisably (as a regulator of the Irish banking industry) waded into the highly political issue by saying that the social welfare bill had increased. Then, last weekend, the new programme struck between Government coalition partners, the Greens and Fianna Fail, ruled out reintroducing university fees but, significantly, failed to ringfence social welfare from cuts in the looming December budget. The proponents of cutting social welfare use four or five points to argue their case. First, they say bluntly, at €21bn, the social welfare bill is such a big chunk of overall Government spending that, during these straitened economic times, it would be unthinkable not to examine all items on the bill. They argue that the value of the social payments have risen as the cost of living, as measured by the monthly-updated consumer price index, has fallen. The gap between the nominal value of payments in the Republic and those in the North has therefore widened. The proponents of cuts then argue that social welfare recipients should, supposedly like other parts of this society, do their part to contribute to economic recovery. Colm McCarthy, the UCD economist, used all these arguments in his July report on public service spending and numbers to argue for cuts of between three per cent and five per cent in social welfare spending. In Volume 2, the McCarthy report says: "The scale of the contribution of welfare payments to exchequer expenditure is illustrated by the fact that a one per cent reduction in personal welfare rates could save in the order of €170m a year…rates with competing labour market jurisdictions, notably the UK" and "the significantly weaker position of the public finances is also a relevant consideration". On cuts to other social groups, McCarthy says: "The adoption of the pension levy in 2009 has, on average, reduced public sector wages by 7.5 per cent and saved the exchequer in the order of €1.4bn in a full year. There appear to have been reductions in private sector pay rates in many sectors…on balance, it seems clear that both in the public and private sectors there have already been significant reductions in wages." On inflation, the report goes on: "Rates of payment in the social welfare system were increased across the board by approximately three per cent in the budget of October 2008. Since that time, the Consumer Price Index has fallen by 5.3 per cent (up to May 2009), while the HICP (the harmonized measure that strips out mortgage interest payments) has fallen by 1.6 per cent...the real value of weekly and monthly social welfare payment rates would have risen in real terms since October even if no increase had been granted in the budget." McCarthy continues "The group considers it is important that the rates and benefits available under the social welfare system do not inhibit a return to work. For those of working age, there are increasing indications that the level of welfare payments is creating disincentive effects for improved labour participation." And it concludes: "Accordingly, the Group recommends that social welfare rates should be reduced generally by five per cent, saving around €850m in a full year. This would effectively preserve living standards for affected groups relative to 2008. Alternatively a three per cent reduction, reversing the increase of October last, would save around €510m a year. More will be known about pay and price developments closer to the budget of December next, and the Government will be in a better position to make a judgment on the matter in the light of those data." McCarthy's arguments are fairly questionable. First, comparing the €204.30 weekly unemployment benefit with the £64.30 paid in the North to an unemployed person aged over 25 is bizarre because the social welfare systems North and South are different. The price level, wages and the cost of living are significantly higher in the South than the North - explaining why so many euro shoppers head to Newry, Enniskillen and Derry to do their weekly groceries. Comparing price changes - the inflation or deflation rate - as McCarthy does over a short period is highly questionable. As illustration, significant parts of the CPI inflation index have shown big rises, not falls. Prices of solid fuels in September have risen over six per cent, 17 per cent, 28 per cent and 39 per cent in the last one, two, three and four years. Insuring a home has climbed 25 per cent in the last year. The cost of health insurance has increased 20 per cent. Prices in hotels and restaurants are still 1.5 per cent higher than September 2007 and 5.5 per cent than late summer in 2006. Transport costs may have fallen by almost four per cent in the past year, but are still 2.3 per cent higher than September 2006. Even the much-heralded cuts in the price of food are not quite what they seem. Since September 2007, food prices in the shops are unchanged and remain 2.7 per cent and 4.5 per cent higher than September 2006 and September 2005, respectively. The argument that high rates of social welfare are preventing people from seeking work is spurious. Evidently, unemployment has not surged because people have been incentivised to give up work. Maybe the viewpoint and stories from the 423,639 people on the live register should be canvassed before the Government sleepswalks into further cutting social welfare benefits this December.