As I noted about the problem of social spending in the poorer areas of Belfast, now is probably not the time to slash long-standing social budgets (in the way some department officials would clearly like)… But the Republic faces a bigger problem, as Michael Casey eloquently notes in the Irish Times today..
As Colm McCarthys report pointed out, expenditure on social welfare has reached 22 billion a year, or 38 per cent of total spending of 58 billion. It is simply too big to ignore. Social welfare spending tripled between 1996 and 2007. This rapid rate of increase is very difficult to explain, given that the period was characterised by full employment. There is little doubt that a foolhardy populism underlay this meteoric increase in social welfare. Childrens allowances, for example, quadrupled over a six-year period. Many of these payments are received by people who are far from needy.
Even if you don’t buy the arguments of market purists like Guido (in an excellent piece which, IMHO, shows his true qualities) about the dangers of embracing reflationary policies, the bumping up of benefits in a time of plenty looks like utter rashness now revenues are disappearing faster than government seems able to respond (McCarthy’s rather generous scope for cuts may all be needed by the time the December budget comes round).
The intractability of the trap is plain:
Some weeks ago a young woman called a phone-in radio programme and said that she had been offered a job at 330 a week. Since her social welfare payments came to approximately the same amount (there were a couple of children involved) she had no option but to turn down the job. By the time she paid bus fares etc, she would be taking home less money than she was receiving on the dole.
Many people called the show and some accused the woman of being a sponger. Of course she is nothing of the sort. She is reacting in a perfectly rational way to the perverse incentives created by government. This situation is inimical to economic growth and job creation.
And a context in which bank shareholders look like being protected at a considerable cost to taxpayers makes cutting benefits an even more upopular move than it would otherwise be:
Although most welfare recipients do not pay taxes, any reduction in their benefits could be seen as a contribution to the coffers of banks. A PR genius could not spin this any other way. It comes across as obscene: the poor subsidising the rich. It must be the worst nightmare of spindoctors. To make matters worse, one bank, Irish Life and Permanent (ILP), has been allowed to increase its mortgage rate by a half percentage point even though this is in direct opposition to monetary policy as formulated by the ECB.
Instead of cutting its margins like every other firm in the country is having to do, ILP are increasing their margins by using their dominant market position. Having caused unprecedented damage to the country, banks like ILP are not showing any remorse but are ready and willing to exploit their customers all over again. And there is a deafening silence from the Central Bank and the consumer side of the Financial Regulator.
McCarthy seems to be about right in his estimate of the cuts needed. But there is a wide body of opinion which will not accept this, especially in the light of the banking system bailout. The implications for civil unrest should not be discounted. At some stage the economic merits will have to be balanced against the wider social costs.
That comes down to the capacity of one party or another grasp a pretty nasty political nettle. Mack’s calculation that rival economists are playing with calculations that suit their own ideological bents is probably correct. But it is not the economic experts that will steer the country out of this prolonged crisis, but the filling of the currently empty suits on all sides of Leinster House…