Welfare in a Time of Austerity.

I was reading an article by Lucy Kellaway in the Irish Times business section the other day. She mentioned that — for once — a business school had done a sensible piece of research. It found that we should stop worshipping the world’s top business leaders because they are not quite as good as everyone thinks they are.

The research found that the super-successful are outliers who achieve extraordinary things partly through luck. And once lucky, they get more so. Take Bill Gates. If he hadn’t come from a well-off family – making it easy for him to indulge his young love-affair with computers – and if his well-connected mother hadn’t opened doors with IBM, he probably wouldn’t have become the richest man in the world.

Just as Bill Gates gets lucky, some people don’t. They fall by the wayside because they didn’t get the same chances starting out — or some life event set them back along the way.

The role of the welfare state is partly to redress the imbalances that bad luck can bring. The welfare state redistributes wealth from the fortunate to the less fortunate. It encourages solidarity between generations and groups of people facing different life challenges. When you are inactive – young, old, pregnant, ill or disabled – you are helped. But you are also encouraged to contribute during your working life.

There are those who would argue that, at this time of scarcity, we cannot afford welfare — at least not the type of welfare we have become used to. There are others who go further and say that welfare itself acts as an impediment to recovery, that it imposes an unnecessarily high floor on labour costs, that it distorts decision making and that it reduces the incentive to work.

In short, there is no place for welfare in a world of austerity.

What this argument misses however is that welfare was borne out of austerity.

The poor law provisions in 19th century Ireland,

theBismarckconcept of Social Insurance in 1870sGermany,

the Roosevelt New Deal in Depression era America and

the Beveridge reforms in post war Britain – these were all responses to economic recession.

A recognition, even by conservative-led governments, that citizens and society itself needs protection from the vagaries of the boom and bust economic cycle which we all know only too well is a systemic feature of free market capitalism.

Welfare offers protection not just to the individuals in need – protection against Beveridge’s five evils of want, ignorance, squalor, disease and idleness -  but also to society.

This is the 70^th anniversary of the Beveridge report. William Beveridge is the founding father of the modern welfare state. His big idea was the creation of a system of benefits to provide social security so that people would be protected from the cradle to the grave. But crucially, security was based on the simple formula that you paid your contributions when you had a job and you would get benefits when you were in need.

At its birth the welfare state was based on a system of rights and responsibilities – the two went hand in hand. In reforming the welfare state, we have to ensure that we are faithful to Beveridge’s founding principles.

The current system became somewhat divorced from this contributory principle during the boom times when many people formed the view that the boom would continue forever and that they would never be forced to rely on welfare.

Or put another way, the strong belief in the power of the individual sometimes allowed people to forget that they might at some point in the future want to turn to their fellow citizens for support.

That day has now come and that is why there is such enormous focus on the welfare state and on the Department of Social Protection.

Ironically, the demand for social welfare supports tends to be greatest at the very time when state coffers are most depleted, which is an argument in favour of a sustained commitment to the principles of contributory systems over time.

A key aspect of my vision for the welfare state is the citizen’s duty to work whenever possible. That is why my primary aim as Minister has been to transform the system of social protection in this country from one of passive income support to one of active engagement with people who are unfortunate enough to become unemployed.

Some have questioned the effectiveness of labour market activation in circumstances where domestic demand is very weak and jobs are so relatively scarce.

However, to my mind, this entirely misses the point about the role of the state in ensuring that its citizens have the necessary skills and training to be job-ready in good times and in bad.

In this regard, I have been very impressed with the youth guarantees that have been introduced in other European countries where young people are guaranteed a job and training if they have been unemployed for a period of time.

This is why I have asked the Department’s officials to prepare a detailed policy paper setting out how such a youth guarantee could be introduced in Ireland.

Of course, the overriding objective that work should always pay has been called in to question in recent weeks by many commentators following the publication and subsequent withdrawal of a preliminary analysis by ESRI researchers. Though the research was acknowledged to be flawed, it resonated with both the public and some of my colleagues in government who are asking themselves the question whether some people are better off on welfare than working.

I sense that the public remains to be convinced that people at work are always better off than people on welfare. That is why I have been examining areas where there may be disincentives, so-called welfare traps, particularly in cases of people who have children. Of course, the answer to this problem certainly does not lie in discouraging people from having children, and in fact we should celebrate the great news from our maternity hospitals this week that we are among the more fertile people in Europe, along with that other great welfare stateFrance.

It is clear that in some ways we and the French are doing some of the right things to support families. We should be aware of the fact that there are welfare traps for some families, primarily ones with children for whom the costs of childcare may be a very big disincentive.

This government is on the side of families who want to work irrespective of whether they are married, co-habiting, lone parents or any other situation. What families need is income supports that recognise the additional cost of having children and also services that make it easier for them to return to work place so that they can balance work and family life.

That is why Minister Frances Fitzgerald and myself have established a group of senior officials across our Departments and with the Minister for Education to develop proposals for the expansion of childcare facilities and places for families that want to work. We will be presenting our proposals to my Cabinet colleagues in the autumn.

The glue that binds the contributors and beneficiaries of the Social Welfare system together is social insurance, what is known in this country as PRSI. It is crucial to remember that the title of Beveridge’s report was Social Insurance and Allied Services. So the implication is that the delivery of benefits and services is guaranteed and funded by the PRSI contributions made over their lifetime. I think this simple fact is often overlooked in current debates on our welfare system as well as wider discussions on the appropriate level of taxation.

Many commentators say that Ireland needs to move to the European average levels of taxation in order to provide the types of services that people require while keeping state finances in a sustainable state. And at the upper end, there may be a lot of truth in this largely because the wide variety of tax reliefs which continue to exist to enable the wealthy to sustain an effective level of taxation far lower than the headline top rates.

I believe there remains great scope to secure much greater tax justice by concentrating on effective rates rather than the top marginal rates which can distort the argument. A landlord with a substantial number of investment properties may earn a six figure income but has little tax to pay due to the legacy of property tax shelters. Similarly others can arrange their affairs to draw income through the lower taxed capital gains.

The public is increasingly taking a dim view of these kind of schemes. Indeed, British comedian Jimmy Carr learned the hard way recently that the British public doesn’t regard tax avoidance as any laughing matter in these times of austerity.

However, my main point at this moment is to highlight how remarkably distinct Ireland is in social insurance levels.

Here is an interesting fact from the recent EU Tax Trends Report: our taxation structure is characterised by a strong reliance on taxes rather than social security contributions.

In fact, social security contributions represent a meagre 5.8 % of GDP compared to an EU-27 average of 10.9 %.  Indeed, we have the second lowest social insurance contributions in the European Union.

The very low social security contributions result in one of the lowest level of taxes on labour in the EU (11.7 % of GDP compared with 17.1 % in EU-27

The consequences of these figures have been starkly brought home to me by initial drafts of the actuarial review of the SIF. This shows that the fund has a significant short fall of about €1.5 billion.

Simply stated, the benefits that are paid far exceed the contributions that are made by employers and employees. The review clearly shows that this situation will only get worse over time with increased numbers of pensioners and other calls on the system, particularly in the context of high unemployment and an ageing population.

It is clear to me that something has to give. We can either make a decision as a country to reduce the level of benefits that we wish people to have or else we  can make a decision to properly fund these benefits both now and in to the future. This is clearly an issue of major political importance that will have to be addressed in the lifetime of this government.

People who have strong views on the question of reducing welfare benefits should bear in mind that society as a whole benefits in at least two ways from a welfare state.

Firstly, welfare promotes social cohesion. By providing a minimum standard of living to those who cannot, for whatever reason, support themselves we send a strong and powerful signal that “you” are one of us.

Consider for one moment the response of Irish people to the onset of austerity with those in other countries. We haven’t seen mass demonstrations or violent protest, but then neither have we seen long queues at soup kitchens or empty shelves in pharmacies as the supply of medicines dried up, or the stasis that results from repeated and inconclusive parliamentary elections.

I believe our welfare system has cushioned the blow of recession and provided a more stable environment in which we can plan our way to recovery.

Secondly, welfare expenditure acts as a ‘Keynesian automatic stabiliser’’ acting in a counter-cyclical manner to support the domestic economy to put money into the hands of consumers and through these hands into the tills of business.

The Department of Social Protection spends approximately €20bn in payments to beneficiaries.

How much of the €188 per week paid to a recipient of Jobseekers Allowance leaks out of the economy in the form of savings or transfers abroad? I think that the answer is evident  – very little if any at all.

So then ask yourself this, what impact would across the board welfare cuts have on businesses operating in the Irish economy? On retailers? On tradesmen? On their suppliers?

So while we  do accept that not all welfare spend is targeted as effectively as it could be, we need to be careful not to fall into the trap of believing the sometimes simplistic analysis that compares the highest earning welfare recipient with the lowest earning employee to paint a picture of welfare spongers  on the take.

This type of populist narrative not only disparages the many thousands of our citizens who, despite their best efforts, depend on, and are grateful for, the safety net of welfare but it also undermines the community ethos that is core to welfare  – an ethos that  underpins our system of social democracy.

What is needed therefore is to reform the system of welfare to make it more effective, to ensure that it does not act as a disincentive to employment or promote welfare dependency but, in fact, has as its central tenet   the aim of engaging with people to help them out of dependency and back into the labour force.

This Government has made such reforms one of its top priorities.

For example, the establishment of an integrated employment and income support service is a key commitment in the Programme for Government. The integration of this service is in line with international best practice and involves a number of key actions. It will result in more on-going and intensive engagement with those who are unemployed.

The establishment of the new integrated service is in the early phases of its implementation. Pilots are underway place at four locations and will be rolled out to a further 10 locations by the year end.

We are making progress in other areas too.

During the year we rolled out two new work programmes – JobBridge and TÚS and take-up on both of over 9,000 is ahead of target. Feedback from participants and host organisations is also very positive. And the progression rate into full-time employment at c 40% is ahead of European norms.

There is an edge to what we are doing and those clients who do not engage with our support programmes will be penalised by being put on a lower rate of payment.

To date close to 900 people have had their personal payments reduced by about 23%. If they don’t produce evidence that they are genuinely seeking work they face losing their payments altogether.

While there have been criticisms of these measures, I want to reiterate that Labour is the party of work and that I have a responsibility to maintain overall confidence in the system among general taxpayers who fund it and among contributors who wish to be sure that it will survive the stresses to which it is subjected in these turbulent times.

Equality has always been a core principle in Labour politics and it informs many important current single issue campaigns such as gay marriage and gender equality in politics.

I do think the party now needs to go further and take a more general look at the creeping inequalities in wealth and income that threaten to destroy the progress of decades. If we allow the gaps in the distribution of wealth and opportunity to widen as seems to be happening in western societies then the entire social democratic agenda falls by the wayside.

Make no mistake about it. The current economic crisis has deepened economic and social inequalities and has created an environment where the most bizarre claims are being made that inequality is an essential ingredient of recovery.

I don’t buy that for one moment. This attitude suggests that greater inequality is good because as the rich accumulate more wealth, they invest it and improve the economy by innovation. In fact, many studies from the IMF itself suggest the exact opposite but the advocates of this viewpoint never let facts get in the way of promoting their vested interests.

According to Joseph Stiglitz, the top 1 percent of American income earners captured 93 percent of the income growth in the 2009-2010 period of economic recovery, one contributory factor in the weakness of that recovery that may derail the Obama election effort.

I mention this rather briefly now but it really is at the heart of our subject today. Welfare, whether in a time of austerity or in a time of plenty, has the politics of equality embedded into its DNA. Never let that be far from your discussions.

May I conclude by recalling some of President Higgins’ many memorable contributions to this Summer School in past years. Michael D. often laced his contributions with the opinions of the German social philosopher Max Weber.

In 1919 Weber wrote as essay on Politics as a Vocation where he said that politics is ‘the slow boring of hard boards. It takes both passion and perspective’.

He meant that change comes in agonising increments to those who want it. You try to move mountains and find it takes lifetimes. Please keep that in mind when you judge what our Party is attempting to do in extraordinarily difficult circumstances.