July 23rd Afternoon: The Recession Diaries

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a1_postoffice.JPGYou know its recession time – the unemployed are getting hammered. Mary Hanafin, straight from slashing the education system in her previous portfolio, is now getting her hooks into those who have been thrown out of work. Why? To save money. Apparently, there are queues of people ripping off the social welfare system. Let’s go through some numbers and see what we get.

According to the Minister, since last September Department officials have been monitoring new people signing on the Live Register. 2,048 cases of people on the Live Register who were being paid through their bank accounts were investigated. Of these 182, almost 10%, were found not to be resident at the time they were claiming benefits, or were claiming a level of benefits which they were not entitled to. Stopping these claims resulted in savings of over €1.5 million in that period.

A 10% cheat rate (well, actually less than 9% but rounding up to double figures is so much more media-sexy): three things are noteworthy. First, this figure, if annualised, amounts to approximately 0.001% of the entire social welfare budget. In terms of saving us from fiscal meltdown, it amounts to 0.002% savings on the Exchequer deficit. Okay, you don’t want to throw money away, especially if it is being wrongly claimed – but a little perspective helps.

Second, it is striking how successful the current system is at catching people who shouldn’t be claiming. If the current system of investigating abuse is working, reducing the amount of waste by 0.001%, why change it? If it’s not working, then basing a policy change on the basis of its findings is somewhat problematic.

But, third (and here it gets bizarre), the reason why the Department originally switched to direct payments into bank accounts in the first place, according to the Minister at the time, the late Seamus Brennan, was that it would be ‘flexible, cost-effective and would take account of the needs of social welfare recipients’. The consultancy group, Accenture, was commissioned by the Government to assess the savings of transferring to an e-payment system. They found it would save the taxpayer €200 million – and that was in 2003.

So what are the administrative costs of reverting back to the old payment regime? Does this cost cancel out the savings made? Are there other resource issues involved? Could we find that the savings currently being made – 0.001% – will be much lower when the changeover takes place? Could the Minister’s publicity stunt actually end up costing the taxpayer more?

These are the fractions of pennies the Government is hunting down. But what about the Euros? There would seem to be real fraud going on – but its not in social welfare offices. According to the most recent Comptroller and Auditor General’s Report, the annual random audit survey of self-employed taxpayers conducted by the Revenue Commissioners revealed a 29% non-compliance rate – more than three times the rate discovered by Social Affairs officials. And the average ‘underpayment’ of tax amounted to €7,500 a pop.

Now, it’s a speculative exercise to use this survey to extrapolate the total savings that might come from auditing every self-employed person in the country, but let’s see what kind of ballpark we’re in. The Revenue Commissioners’ latest data on self-employed income indicates that there were 275,000 taxpaying self-employed in 2004 with a total income of over €15 billion. Apply that 29% non compliance rate to all self-employed (and the average ‘underpayment’) and we come up with a potential of nearly €600 million in tax evasion. That’s 400 times the ‘cheat’ rate of people signing on.

Of course, an audit of all self-employed wouldn’t get this amount – a high number of self-employed don’t make much money. For many, it’s a precarious living. And going around hassling window cleaners or childminders or gardeners wouldn’t get you a lot of money.

However, whereas there are a lot of self-employed, most income from self-employment goes to the highest income groups. The CSO’s Survey of Income and Living Conditions indicates that 72% of self-employed income goes to the top 30% of all households. So we could start there – a more targeted approach. But that would mean employing more tax investigators, and that could run foul of the Government’s hiring freeze and 3% cut in public sector payroll. So, there’s a lot of savings out there but Government policy means we can’t realise it. We’re stuck with shaking the unemployed for pennies.

How very differently we treat people: we don’t force the self-employed to present themselves to their local Revenue office on a weekly basis in order to receive their tax credits and allowances. But the Minister Hanafin has no hesitation sticking it to the unemployed. Why? These are recession times – you don’t have to ask.

And if you do, you risk having to present yourself to the nearest Minister.

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