Speech by Joan Burton TD, Minister for Social Protection
Tom Johnson Summer School 2013
‘Challenging Societal Divides’
The Crisis and its impact: intergenerational divides & the social welfare stimulus
The economic crisis that started in 2008 has taken a very severe toil.
In particular, those aged under 45 have been affected much more than those 45 and over, according to recent ESRI research. Younger people suffered far more than older people under all the headings examined by the ESRI, including unemployment, mortgage arrears and negative equity.
Furthermore, the recent NESC report on the wider social dimensions of the crisis found that austerity has hit double-income parents more than social welfare recipients and State pensioners. The losses were highest for earning couples with children, at more than 11 per cent. By contrast, families dependent on welfare experienced smaller losses of 2 to 7 per cent.
Perhaps the only positive we can take from this data is the tremendously effective impact of social welfare spending on reducing poverty. Data published recently by the CSO shows that in 2011, welfare payments reduced the at-risk-of-poverty rate from 51% to 16% –the best outcome in the EU.
But the welfare budget is not just about protecting the most vulnerable. It is also about stabilising the economy in a recession.
It is clear that the economic crisis has had a major impact on disposable household incomes and on private consumption. This is especially evident through the reduction in consumer demand across all sectors of the economy, thereby creating knock-on effects in terms of higher unemployment and reduced government revenue.
However what has featured less in the debate has been the role that expenditure on social protection has played in stabilising the domestic economy by supporting the overall demand for goods and services. In turn, this supporting role has significantly contributed to mitigating the societal consequences of the recession.
Our welfare spending acts as a Keynesian automatic stabiliser, supporting the economy by putting money into the hands of consumers who need it and through these hands into the tills of business.
The role of the welfare system in stabilising economic demand is well-acknowledged internationally.
For example a recent study for the European Parliament on the role of social protection as an economic stabiliser estimates that half of a large unemployment shock is absorbed by the welfare system in the EU, compared to only 34% in the US. The cushioning of disposable income leads to a demand stabilisation of up to 30% in the EU, compared to 20% in the US.
This European Commission also found recently that the automatic stabilisers embedded in European welfare states have limited the economic and social impact of the crisis.
So clearly the Government will have to think seriously about the positive demand impact of social protection spending in the economy when framing the 2014 budget as well as the spending targets for subsequent years. In particular it will be necessary to avoid a situation where the deflationary impact of spending reductions in terms of reduced economic growth outweighs the savings achieved.
The positive impact of social protection spending also needs to be borne in mind in any discussion on the potential stimulus effect of further capital spending programmes. In particular, we should pay heed to the US Congressional Budget Office’s evaluation of the 2009 Obama stimulus package. This found that the extension of emergency unemployment benefits was the most effective form of any stimulus, with a multiplier of 1.52. In other words each additional dollar spent on unemployment insurance produced $1.52 in additional economic activity.
There is no reason to expect that the multiplier is any different in Ireland.
So the key lesson is the more you cut, the more you affect not alone the vulnerable, but the economy at large. That is why the Government must proceed with great caution in making any additional reductions in social protection spending this and forthcoming budgets.
Building a recovery from the middle out: tackling the real costs of inequality
In his successful re-election campaign last year, President Obama won the economic argument hands down by showing time and again that the economy grows from the middle out. In doing so, he put another nail in the coffin of the supply-siders who claim that economic growth comes from lowering costs for businesses, keeping taxes low for the rich and weakening workers’ rights.
What Obama reflected was a growing body of research showing that the economy grows from the middle out, that investing in people is key to a competitive economy and that inequality hinders economic growth.
In his recent book, The Price of Inequality, Joe Stiglitz argues that rising inequality has led to a rise in what economists call ‘rent seeking’, in other words, vested interests trying to take a bigger piece of the pie, rather than growing the pie. Stiglitz concludes that if political power is concentrated among an economic elite and economic policy works for their advantage, economic growth is hampered.
In the US, economists have identified a continuum from high inequality and stagnating incomes among the middle class to the housing bubble, the financial crisis, the massive bailout by taxpayers to the calls for fiscal austerity that cuts services to ordinary Americans, including education.
Full employment
How do we start to grow our economy from the middle out?
The greatest divide in the modern world is between those who have a job and those who don’t.
The strongest protection against inequality is decent, secure and fairly paid work. This has been my abiding political conviction since I first entered politics and it has informed me throughout my career.
Sadly we live in a world where the availability of decent, secure and fairly paid work has contracted massively since the financial crisis.
In particular we face a generational crisis of youth unemployment. Across Europe right now, 5.5 million young people – one in five of those aged between 15 and 24 who are on the labour market – are without a job. In some individual member states, the situation is even worse.
We are all familiar with the notion of the scarring effect of unemployment – where periods of unemployment earlier in people’s working lives lead to lower earnings and less meaningful careers later on.
But there is an even more insidious aspect to unemployment, which is the bias and discrimination that those who are unfortunate enough to be unemployed face in re-entering the labour market.
My attention was recently drawn to US research which found that employers would rather call back someone with no relevant experience who’s been out of work for a few months than someone with lots of relevant experience who’s been out of work for longer than six months.
In other words, it doesn’t matter how much experience you have. It doesn’t matter why you lost your previous job — it could have been bad luck. If you’ve been out of work for more than six months, you face an enormous uphill struggle to return to employment.
This is particularly the case for young people who have never had a job or who have limited work experience.
This is why I have long advocated a formal guarantee that any young person will receive training, work experience or an apprenticeship within a short period of becoming unemployed.
I was therefore delighted to reach agreement on an EU wide Youth Guarantee at February’s EU Council meeting and look forward to making this guarantee a reality for young people in Ireland in the months ahead.
However all our policy responses will be set at naught unless we can move to a position where the target of close to full employment becomes the overarching objective of economic policy.
And in order to do this, we need to make a very strong argument at EU level for a decisive shift away from what has now become the counter-productive policy of austerity.
So what would an EU growth strategy look like?
Longer term the ECB should, like the Fed in the US, pursue a dual strategy of price stability and growth. In particular it needs to have an employment target that is as close to full employment as possible.
In the short-term there is clearly room for core euro area countries to raise spending. This is because borrowing rates for countries like Germany are close to zero and the euro area as a whole has a debt ratio similar to areas such as the UK and the US, where central banks are actively willing to purchase sovereign debt.
So a eurobond-financed stimulus programme would be economically feasible and effective. The only obstacle is a political one.
It is my strong personal conviction that the time is right to put in place a new economic strategy based on sustainable growth, investment and full employment.
Building a social security system for the 21st century
Last year was the 70th anniversary of the Beveridge report, which led to the creation of the modern welfare state.
Beveridge understood that his plan would be immeasurably strengthened by broad public support. So he shaped his proposals around the principle that “benefit in return for contributions, rather than free allowances from the State, is what the people of Britain desire”. Everyone would put something in, and everyone would get something out. Beveridge appealed both to altruism and self-interest.
And crucially this reciprocal system depended on there being close to full employment so that citizens would be in a position to contribute throughout their working lives.
This is often described as a welfare ‘contract’ or ‘bargain’. But that would be to misunderstand why the welfare state used to be so popular.
As the British filmmaker Ken Loach shows brilliantly in his recent film ‘The Spirit of ’45’, the welfare state was popular because it represented an emotional connection, a way of thinking about the type of society which Britain was after the war – a covenant between each to look after all.
How then do we reignite the Spirit of ’45?
My strong conviction is that the starting point for the next phase of reform should be work and wages – in particular for the lower paid.
Living Wage
A huge increase in our welfare budget in recent years has come from the income supplement we pay to people not on the dole but in work. These payments are necessary because people are not earning enough to support a family in their jobs either because of low wages, insufficient hours or both.
The low wages and zero hour contracts of many employers are effectively being subsidised by social welfare. This presents a profound challenge to both the welfare system and to the wider economy.
That is why I was delighted to reintroduce the minimum wage when I first entered government. But we need to go further. That is why I think we will need to look at moving towards so-called ‘living wage’ arrangements in the second half of this government’s term and beyond
Of course some people will say that increasing the minimum wage will undermine competitiveness; there is clearly an issue there. Because some industries depend on low-waged work, such a programme would have to be introduced on a phased basis.
But equally, our competitiveness is undermined by taxing people so we can keep paying ever higher income supplements to people in work – and effectively subsidise employers in continuing to pay low wages.
So raising minimum wage levels towards a Living Wage would cut welfare spending and would bring in substantial tax revenues that would mitigate the cost.
And good employers see the benefits of ensuring that their employees are paid sufficiently to make a decent living – it also puts more money back into the economy and creates a healthier country. It’s really that simple.
Contribution
The current negative attitude to welfare is partly down to people’s perception of fraud and abuse but also down to their own experiences of the system.
At the moment, social welfare offers people too many benefits that are marginal in good times and that are insufficient when they lose their job, become sick or have a child. We could and should choose to do things differently.
That is why I believe that we need to move decisively over the next decade to a contributory system for social protection.
When the economy recovers, the most pressing change would be to progressively replace Jobseekers Benefit with a new system of Income Protection.
This would offer anyone who had made sufficient contributions but became unemployed or lost their business an income that was proportionate to their previous earnings so that they don’t experience a catastrophic loss of income when they lost their job or business. To ensure such a scheme would not exclude people with periods in and out of the formal labour market, we would extend the notion of contribution to include those unwaged contributions that people make to society through caring and child rearing.
Income Protection would protect contributors from the dramatic drop in income they face on losing their job, which can often trigger a spiral of further problems, like losing their home, relationship breakdown or falling deeper into personal debt. It would also give people the safety net and springboard to find a new job
This would ultimately be self-financing as it would encourage much higher participation in the labour market.
In short, Income Protection would offer much greater security to people when it is really needed, without imposing significant new net costs on the state.
Universal Pensions
I know that anyone who thinks about pensions before they are thirty is considered to be old before their time. But it is in fact never too early to think about this crucial security for our later years given dramatically increased longevity.
As such, I will soon bring proposals to Cabinet on the roadmap for implementation of a new universal occupational pension scheme – based on the auto-enrolment system advocated by the OECD.
In moving to any new system we must be conscious of the economic circumstances of citizens. However, as a country we must plan for pensions, and sometimes a time of crisis is the time to plan for the future.
So the decision on a date for introduction of auto enrolment will be made in light of economic circumstances – but it is clearly the direction in which we need to decisively travel.
A very significant benefit of introducing this system of universal personal pensions – that stay with you whatever job you have – is that it will very much encourage people to set up their own business and work for themselves. It will closely reflect the much more fragmented and diffuse labour market we all face – especially those starting their careers now.
Together with a system of Income Protection it is a reform that reflects changes in the labour market where people change jobs and careers several times during their working lives but as a result need a safety net to protect them
Moving On: A Public Dividend from the Banks
When we look at the crisis in Ireland, it is striking how wages chased property prices which in turn were inflated beyond reality by the vast wall of credit made available by the financial markets. The result is people whose incomes have been very severely damaged still servicing boom time mortgages and bailing out the very same banks that carried out this reckless lending.
So, a distasteful but necessary part of the economic strategy has been to recapitalise and repair the banking sector at huge public expense.
As we come out of the recession, and the banks recover, we should examine if there’s some way of giving something back to those who kept the banks afloat – the public.
In particular, we should consider giving the public a dividend in the banks that they bailed out at such an enormous cost; this would be particularly important if any of the same banks are sold off during the government’s term.
This would in some small way be in recognition of the enormous sacrifices the public has made in supporting the banks in the past number of years and would also provide people with some level of financial benefit to reflect this.
Therefore in any future sale of the bailed out banks, I believe that we should seriously examine allocating a sizeable portion of shares to the public. This would have the twin benefit of allowing us to get the banks back onto the markets while also ensuring that the people who bailed out the banks in the first place benefit financially.
Conclusion
If the task of social democracy is to prevent unnecessary suffering and remove social divides, then we face challenges on many fronts.
Divides between young and old; between people in mortgage arrears and the bankers that put them there; between those with a job and those without; between those with permanent pensionable positions and low paid workers on zero hours contracts; between young people with no pension and those with great prospects for their retirement.
In addressing all of these challenges and divides we see the crucial and indispensable role of a strong and inclusive welfare state and a system of social security and insurance underpinning it.
Building and renewing this humane and progressive system has been the life’s work of social democrats from the 19th century until the present day and the very reason our political movement exists.
Reconstructing it and strengthening it is the central objective of our party for the 21st century. There is no better reason for Labour to always participate in governments in this country.
Thank you very much.