It is often argued that the recession has been rough on all of us but that high income groups have had it the roughest. European Commission Director István Székely came to Dublin late last year to assure us that the ‘the better-off sections of Irish society have borne the largest share of the brunt of the bailout programme’. I don’t know whether this was intended to soften the blow as it were, making the austerity programme more palatable. I do know, however, that it is not true. Dr. Székely is not alone; many have argued, using ESRI findings, that higher income groups have borne the greatest burden during the recession. I will critique the ESRI findings below but first let’s go through some other evidence.
Higher income households have managed to increase their incomes, as noted in a recent Friday Stat Attack.
This is not true for all sectors. For instance, public sector managers and professionals have taken substantial hits in income. And there are compositional effects to take into account. However, at a national level we see that this group has received a substantial increase in income compared to other workers whose weekly earnings have flat-lined. Even if higher-income groups have taken a hit through tax increases they have managed to recoup a large part of this through increases in earnings. This didn’t happen for most other workers, never mind those on social protection.
Losing one’s job is probably the biggest hit a household can suffer. How have these losses been distributed?
Managerial and professional employment has actually increased during the period of recession while all other occupations have experienced a decline – in some cases, substantial declines. And the occupational groups suffering a loss have lower income than the managerial and professional groups. So lower income groups, on average, have been hit by the jobs recession much harder than higher-income groups.
To fall into deprivation is another strong indicator of recession-suffering. What has been, according to the Survey on Income and Living Conditions, the distribution of deprivation among income groups?
Quintiles represent the population in fifths. Unfortunately, we only have data up to 2010. But as we can see, the largest increases in deprivation occurred in households with below-average net equivalised income (household income factoring in adults and children) – particularly, the 2nd and 3rd quintiles, both of which are below the national average. The lowest 20 percent income group also suffered an increase, but they were suffering at the start of the recession so the increase has been slightly less. The smallest increases occurred in the highest income groups. If deprivation was the measure of ‘bearing the burden’, we could only conclude that it was the lowest 60 percent income groups that got most severely hit.
Ability to Absorb Losses
Yes, high income groups got hit with tax increases. However, it is these groups that can absorb budgetary adjustment with little if any reduction in their living standards.
According to the CSO top two deciles (20 percent) income group have incomes substantially in excess of household expenditure while for lower income groups, the situation is reverse. It is often asked how households can spend so much more than their income. The CSO gives an explanation:
Households with recently unemployed household members may draw on savings to maintain their expenditures. Self-employed consumers may experience business losses that result in low incomes, but are able to maintain expenditure by borrowing or relying on savings. Third level students may get by on loans or savings from summer employment, retirees may rely on savings and investments. In addition, across all deciles there may be an under-reporting of certain categories of income (e.g. shadow economy employment income).
And, lower-income groups may borrow from money-lenders from week-to-week to pay for necessities but at the cost of outrageously high levels interest (sometimes over 100 percent).
But to return to the point. If I’m on €2,900 a week (the average income for the top 10 percent in 2010) and I get hit for 15 percent as the ESRI analysis shows, I have over €570 as a cushion in excess income over expenditure. And my income may be increasing, depending on my occupation. And, yes, I might cut back but such is my outgoings that such reductions will not affect my overall living standard.
Now imagine those with little excess income – or even spending more than income: they get hit and they have little or no cushion. Their incomes are not rising (they may even be falling).
Proportionately, it is low-average incomes that bear the brunt.
Impact on Discretionary Spending
The ESRI study focuses on the impact of budgetary adjustments (tax increases, spending cuts) on disposable income. This allows us to assess the impact on overall incomes. However, this doesn’t assess the impact on living standards. When a household gets hit with a tax increase or a cut in income support, it will respond by cutting back on spending (if they can’t increase their income).
However, there is some spending that can’t be cut back on – or only through great difficulty. These expenditures can be termed ‘non-discretionary’. For instance, I have to spend money housing, on food, on light & heat. If I have to cut back, I will do so by reducing spending in other areas (I don’t have to go to the pub every night).
The problem is that for those on lower incomes, these non-discretionary spending items make up a higher proportion of their income. Take food, for example: according to the CSO, food expenditure made up 29 percent of income in the lowest decile. For the middle 5th decile, it made up 15 percent. For the top decile, it made up less than 7 percent. We see the same pattern for spending on housing and light & heat.
So the following table factors this in – applying the reduction in disposable income as found by the ESRI to incomes minus expenditure on food, housing and fuel & light. The remainder spending could be called ‘discretionary’. I have not, though, included all necessary expenditure such as telephones, non-durables (soap, toothpaste, cleaning products), clothing, etc.
When we look at the impact of budgetary adjustments on incomes, excluding non-discretionary expenditure, we find that that the combined budgets have been quite regressive with the highest income groups taking the least hit to their living standards. And as this is a very conservative estimate (not including other necessary expenditures) the reality would be much worse for those on low-average incomes.
Capital and Labour
This is rarely referred to but there is that little issue of those who earn their living through labour and those who earn it through capital. When we compare their relative fortunes we find that between 2007 and 2012, total wages in non-financial companies fell by 15 percent, while profits (gross operating surplus) fell by only 1 percent. Profits in this sector have nearly recovered to their pre-recession levels; wages have not.
But when we look at the year profits troughed – 2009 – we find that profits have increased by 27 percent since then; aggregate wages fell by 7 percent.
Of course, there is the problem of profit-booking – profits generated in other jurisdictions but imported into Ireland for tax purposes. So we can’t be sure what has happened with profits generated in Ireland. But with overall profits rising, someone is making money either here or somewhere in the world. Irish workers, on the other hand, are not so lucky.
The ESRI Report
Let’s turn to the ESRI report which shows that budgetary adjustments have had the biggest impact on the highest income earners. Social Justice Ireland critiqued this and made a telling observation:
‘It is important to realise that a single piece of data, while accurate in itself, can often lead to a false interpretation of the overall reality.’
Another way of putting this is that the data tells you what it tells you. For instance, the ESRI researchers work with the SWITCH model which uses detailed data from the Survey on Income and Living Conditions. There are three issues here:
- First, the SWITCH model does not capture the impact of public service cuts. It rightly points out that this is a complex calculation and is beyond the scope of SWITCH to factor this in. But it is reasonable to assume that those more reliant on public services – low/average income earners – would be disproportionately hit by these cuts.
- Second, the SWITCH model assumes wage increases (or declines) are constant for all deciles. Again, this is understandable, especially when working with current year budgetary impacts – as this information lags considerably (if I have not correctly interpreted their methodology on this point, I am certainly open to correction).
- Third, the SWITCH model does not assess the impact of budgetary policies on employment. For instance, if someone loses their job because of deflationary austerity policies, they are likely to fall several deciles. SWITCH doesn’t capture this impact – and, in truth, it would be a difficult exercise to factor in macro-economic impacts in what is a household model.
These criticisms don’t invalidate the finding of the SWITCH model which ESRI researchers have used to bring greater clarity to the debate on a wide range of issues down through the years. Indeed, their findings are integral to the debate (which I used to assess the impact on living standards). This is only to acknowledge its limitations – many of which the ESRI researchers themselves point out to their credit. As I said, it tells us what it tells us. And it cannot capture all the factors that are needed to assess who are the winners, losers and not so losers.
The problem does not lie with the ESRI research. It lies with commentators and officials who use one piece of evidence to vindicate their preconceived views without reference to all the other, and considerable, evidence that suggests otherwise.
When one takes all the evidence together, it is hard to sustain the proposition that the highest income groups have borne the brunt of the recession and austerity policies. And for those who continue to maintain this position despite all the evidence to the contrary, I have only one thing to say:
They should get out more.