After the 2008 global financial crisis, Ireland’s tax and welfare system aimed to reduce income inequality within its citizens and succeeded in doing so. A research was done by the Economic and Social Research Institute (ESRI) found that the automatic stabilizers implemented created a reduction in tax and an increase in welfare payments from the State. This all led to an offset in the rise of income equality.
These automatic stabilizers, which are usually considered a country’s economy’s first line of defence in a financial crisis, reduced inequality at more than just the governmental policies level. Even during the COVID pandemic, many governments have gone a step further with the implementation of the automatic stabilizers by using them as a buffer against the financial shock, and in doing so have introduced a system of direct wage supports to combat the fallen employment rate experience globally.
Recent studies have looked further into the impacts of the tax and benefit policy on income equality in five of the euro zones that were hit the worst economically in the COVID pandemic. These zones are Ireland, Greece, Italy, Portugal, and Spain. In all of these zones, the inequality in market income, which is the income before any transfers and taxes, increased significantly between the global financial crisis of 2008 and 2013. This was all due to increasing levels of unemployment nationally within each state and wage cuts across the board.
However, inequality in disposable income, which would be income after transfers and taxes, fell overall within these countries. This was largely due to the tax systems each country implemented during the crisis that was more progressive in that workers on higher incomes pay relatively more taxes than those on lower incomes. The impact in all these countries from the automatic stabilizers were far larger than the impact of the discretionary policies and in some countries, the sheer magnitude of the impact of these stabilizers was even compared to market income changes by some economists.
Even now, in Ireland, Portugal, and Greece. Benefits still exist to cushion the economy from shocks that could occur from changes in market incomes. This shows that out of the first zones, three of them have maintained stable levels of income inequality during the Great Recession that should be attributed mainly to pre-existing benefit systems. Countries that had allocated more resources to unemployment support such as Ireland and Spain were the countries where unemployment protection played an important role in cushioning and lessening inequality.
Lucas Zhang was a Finance major at Ohio State University. He writes about finance, mortgages, and technology for Irish Mortgage Brokers.
Relevant Links: Central Bank information, COVID Policy tracker
