Dealing with the increased cost of living
Two practical ways to reduce the cost of living would be to benchmark core social welfare rates to 27.5 per cent of average weekly earnings and to make the two main tax credits refundable. By benchmarking core social welfare rates to 27.5 per cent of average weekly earnings and making the two main tax credits refundable Government could directly assist people on fixed incomes and people in low paid employment who are most impacted by the rising cost of living.
Benchmark social welfare payments to 27.5 per cent of average weekly earnings
- Social Justice Ireland proposed a €10 increase in core social welfare payments in Budget 2022. This would have set Government on the correct path to benchmark social welfare rates to 27.5 per cent average weekly earnings over a two-year period, which was the standard set in 2007.
- Government should commit to reaching this benchmark by 2023, and outline what steps will be taken, including an additional increase of €5 to core social welfare rates in 2022, and the remaining increase in 2023 to meet the benchmark.
- In 2021 the updated value of 27.5 per cent of average weekly earnings equals €222.08 implying a shortfall of €19 between the minimum social welfare rates being paid in that year (€203) and this threshold. Should wages rise during 2022 this gap will increase further.
- Once the benchmark of 27.5 per cent of average weekly earnings has been met Government should establish a process of indexation of minimum social welfare payments to ensure recipients do not fall behind the rest of society.
- Benchmarking core social welfare rates to 27.5 per cent of average weekly earnings would provide a stable and adequate income for welfare dependent individuals while not undermining labour market participation incentives.
- By moving this benchmark gradually towards a target of 30 per cent of average earnings certainty would be given to households on fixed incomes, Government would have budgetary certainty, and issues regarding one off impacts of high costs of utilities for example could be addressed in a more targeted manner.
For more detail on benchmarking and indexation of the social welfare system please see our presentation to the Select Committee on Budgetary Oversight on this issue and our briefing on social welfare rates in advance of Budget 2022.
Introduce refundable tax credits
- If a low income worker does not earn enough to use up their full allocation of tax credits then they will not benefit from any income tax reductions introduced by government in the annual budget via increases to the PAYE or Personal tax credits.
- Making PAYE and Personal income tax credits refundable would be a simple solution to this problem. It would mean that the part of the tax credit that an employee did not benefit from would be “refunded” (essentially paid, at the end of the tax year) to him/her by the Revenue Commissioners.
- The main beneficiaries of refundable tax credits would be low-paid employees (full-time and part-time). The benefits from introducing this policy would go directly to those on the lowest incomes and it would help address the disincentives currently associated with low-paid employment.
- According to our research almost 113,300 low income individuals would receive a refund and would see their disposable income increase as a result of the proposal. When children and other adults in the household are taken into account the total number of beneficiaries would be 240,000.
- The majority of the refunds would be worth under €2,400 per annum, or €46 per week, with the most common value being individuals receiving a refund of between €800 to €1,000 per annum, or €15 to €19 per week.
- Almost 40 per cent of refunds would flow to people in low-income working poor households who live below the poverty line.
- Tax credits are fairer way of achieving a tax reduction than any past or present systems of allowances or reliefs, and mean that (for the most part) any changes to the tax system implemented via tax credits will be felt equally by all.
- Making tax credits refundable would address the problems of low pay and in-work poverty in a straightforward and cost-effective manner.
Further detail on how to implement Refundable Tax Credits is available here.
Supporting households on fixed incomes
Benchmarking core social welfare rates to 27.5 per cent of average weekly earnings would provide certainty to households and people on fixed incomes and it would also begin to address the many challenges of making ends meet with limited resources on an ongoing basis.
Poverty impacts hardest on those experiencing it in their day‐to-day lives. It limits their options and opportunity and narrows their focus to week‐to‐week survival and the unavoidable trade‐offs of living on inadequate incomes. 661,518 people in Ireland are living in poverty, of which 210,363 are children. Social welfare payments play a crucial role in reducing poverty. Without the social welfare system almost four in every ten of the Irish population would have been living in poverty. However, welfare payments reduced the poverty rate by almost 25 percentage points to 13.2 per cent.
The latest Parliamentary Budget Analysis shows that a failure to index core social welfare rates to either wages or inflation from 2011 – 2022 has resulted in a significant fall in the real value of these payments. Examining Jobseekers benefit over the period 2011-2022 the Parliamentary Budget Office found that the real value of the €208 weekly rate in 2022 will be €192.36. This analysis highlights the importance of benchmarking core social welfare rates to average weekly earnings.
Supporting people in low paid jobs
Having a job is not, of itself, a guarantee that one lives in a poverty-free household. According to the latest CSO data that in-work poverty is 6.2%. This equates to approximately 133,627 people in employment living below the poverty line. The in-work poverty figure has remained consistently over 100,000 for several years now, reflecting a persistent problem with low earnings which policy-makers and successive Governments have thus far failed to make any impact on.
The idea of a job as an automatic poverty reliever is clearly contradicted by these figures and trends. The job must be well paid with decent conditions. Specific interventions are required to tackle the issue of the ‘working-poor’. Until Government makes tax credits refundable, it will not have an efficient mechanism by which it can address the issue of the working poor.