Inflation and Income Distribution

Anonymous1987

The recent ESRI report (attached) on inflation and income distribution suggests that the 5% cut in social welfare payments is too large given that deflation in the economy has favoured those with higher incomes more than those on the lowest incomes. It also makes the case that while private house rents have fallen yet local authority rents are actually increasing. The authors suggest a 3% cut is more appropriate than the 5% proposed by McCarthy. It would certainly seem to make the case well for a smaller cut but I would think that the current levels of deflation would be temporary and would not make a substantial impact on income distribution in the medium term.

Also I found it odd that in figure 7 the lowest income decile receives less in social welfare benefits than the second lowest.

Flamed Diving

What makes you think that our recent deflation is only temporary and non-substantial? It appears to be rapidly increasing, if anything.

Senna

If SW was only being cut because of deflation, then fine, the report is correct. But SW payments spiraled upwards during the bubble days to an unsustainable level. Deflation is being used as an excuse, but its got nothing to do with it.

Flamed Diving

Cutting transfer payments will add to deflationary pressure, which will lead to cutting payments, which leads to deflationary pressure...

Deflation is not an argument for cutting SW.

Anonymous1987

Flamed Diving wrote: »

What makes you think that our recent deflation is only temporary and non-substantial? It appears to be rapidly increasing, if anything.

I was basing this on the recovery gaining momentum (e.g. France, Germany, Japan showing growth) and the various economic stimulus packages (e.g. US and China) that will hopefully stimulate demand globally. Our own small open economy should benefit from this in time (I'm aware that currently imports are decreasing in those countries) but you're right on the deflation and on second thought I'm probably jumping too far ahead in very uncertain times.

I would be very interested in what McCarthy would think of his recommended cuts in light of this report.

In response to Senna, in fairness prices in general also spiraled upwards during the boom times which should justify higher welfare payments at least in line with inflation. I watched the prime time report on welfare payments making comparisons to the UK which offers a lot less than the Irish system but PT failed to factor the cost of living into their figures as far as I could tell which is a relatively large difference.

Also given the state of the public finances I would agree that at present the welfare payments are unsustainable however they do offer a stimulus to the economy since the people that receive the most welfare benefits are also the most likely to spend it. I suppose what it comes down to if we are maintain our current spending on social welfare what other government expenditure will have to sacrificed and in light of this report what are the consequences for equity?

Hasschu

Inflation and deflation as related to government indexed benefits. Inflation usually occurs during good times. Deflation usually occurs during bad times when gov'ts tend to cut benefits. The consensus is that cutting benefits slows the recovery since the money is going to people who spend it within a month and are also spending it close to home. While an across the board cut is not wise that does not preclude means tests and other ways to cut expenditures. There is one caveat with deflation when cutting single mother allowance and that is has the basket rent, heat , essential food items declined as much as the overall CPI. The best way to handle the minimum wage is to abolish it, particularly as in the case of Ireland with rising unemployment and an inability to pay unemployment benefits without incurring more debt.

FridaysWell

Hasschu wrote: »

The best way to handle the minimum wage is to abolish it, particularly as in the case of Ireland with rising unemployment and an inability to pay unemployment benefits without incurring more debt.

Good point. But it shouldn't be abolished. Should be lowered. To about 5.50 or less. To alot of peolpe a jobs a job. If you were to lower it you could even see productuvity going up.:pac: