Growing the Economy the Robin Hood Way

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Who said the following?

‘ . . . if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth.’

Or

‘The poor and the middle class (middle income) matter the most for growth.’

Or

‘ . . enhanced power by the elite could result in a more limited provision of public goods that boost productivity and growth, and which disproportionately benefit the poor.

The Socialist Party of the World?  The European Zapatista League?  The People’s Front of Judea (or the Judean People’s Front or the Judean Popular People’s Front)?

No, it was the International Monetary Fund, that crazy gang that gave us poverty, deprivation and economic deterioration to just about wherever they went (now playing in Greece).

The IMF has recently published Causes and Consequences of Income Inequality: A Global Perspective – a strongly argued study that concludes that increasing equality is one of the best things a country can do to promote sustainable growth (that, and investment).  They propose a number of channels – fiscal redistributive policies, investment in education and health, and financial inclusion policies (e.g. basic bank accounts, etc.).

A particularly noteworthy finding is an estimate of the impact of redistribution on growth.

impact1

If the income share of the poorest 20 percent increases by one percentage point, GDP grows by 0.4 percentage points.  However, if the income share of the highest income group, the top 20 percent, increases, GDP growth actually falls.

In other words, redistribution that leads to greater equality is good for the economy; redistribution that favours the highest income groups is bad (Britain after the Tory budget, take note).  You want to grow the economy?  Do a Robin Hood on it – take from the rich and give to the poor.

So what can we make of the Minister for Finance’s latest comments?

noonan1

‘I use the Budget for economic management purposes and I’m going to cut personal taxes in this Budget . . . I’m going to cut the Universal Social Charge (USC) by at least 1 per cent and maybe a bit more.’

 

The ESRI estimated the impact of cutting the USC’s standard rate of 7 percent on income groups.  This is what they found.

impact2

A cut equivalent to €500 million (cutting the USC standard rate from 7 to 5.35 percent) has almost no impact on the poorest 20 percent.  There’s not much of an increase in the second quintile group (the 3rd and 4th deciles).  However, the greatest gains go to the highest income groups – the 9th and 10th deciles.

In effect, what the Minister proposes to do is forgo promoting growth and provide resources to income groups which will depress growth.

Now let’s play fantasy Budget 2016 and pretend that Robin Hood is the Minister for Finance.  Here’ s what he would say.

robinhood1‘I use the Budget for economic management purposes and I’m going to promote economic growth through greater income equality . . . I’m going to increase social protection payments by at least 2 percent.’

impact3

Ah, now that’s more like it.  The ESRI shows that a 2 percent increase in social protection payments , costing €330 million, gives the greatest boost to the lowest 20 percent income group and, unsurprisingly, the least to the highest income groups.  This is a policy that would promote equality and, therefore, have a more positive impact on GDP.

And there’s another positive spin-off.  The USC cut, which promotes greater inequality and, so, lower growth, costs more than the egalitarian, growth-promoting social protection increase – €170 million more.  What could we do with that extra money?  We could

  • Build nearly 1,000 social houses – kick-starting the drive to end homelessness

All of these would put people back to work, help businesses to expand (or start up new businesses) and increase our productivity.

These are the benefits of a more egalitarian policy choice.

Small steps, yes.  But steps in the right direction.

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