Opinion Piece: Budget 2014 must build on signs of economic turnaround
Oct 14, 2013
Since the economic crash in 2007, Irish Governments have had the unenviable task of applying serious cuts at every budget.
Like a surgeon dealing with a rapidly spreading disease, successive Ministers of Finance have had little option but to wield the knife and remove problems that had been allowed to develop. A bubble culture developed in the late 2000s to the point where on bursting we had no option but to expose the patient to harm and go for an extensive program of treatment, including major surgery.
However, post operation the vital signs are improving. Adjustments have been made and appear to be working. The Live Register is modestly pleasing, showing small but significant increases in employment. Retail figures are going in the right direction and anecdotal evidence from members of Chambers of Commerce around the country suggests things are getting better.
Just like the Hippocratic Oath compels doctors to “keep them from harm” now is the time for the Government to apply that maxim to the economy.
When Minister Noonan stands up on the 15th of this month, the first thing he should do is show the business community that he will support the tentative signs of growth by doing no harm; by introducing no new taxes, especially taxes on employment. There must be no increase in the amount of PRSI paid by employers and no transfer of responsibility for sick pay onto employers. The removal of the redundancy rebate in previous budgets has made employers hold back on creating new posts and further increases in the cost of employment would compound the fear associated with job creation.
Like a businessman who chooses to cycle to work, gets his heart pumping and creates knock on benefits for the rest of his body and overall health, a similar ‘organic analogy’ can be applied to the economy. There are a number of relatively simple things the Government can do to improve business conditions, get people back into work, reduce the strain on the country’s finances and produce knock on benefits for the whole of society.
A major goal must be to increase the velocity of money in this economy. While we are aware that there are many indebted households, the Quarterly Household Savings rate of around 15%, which had been as low as 4% in 2006, suggests there are significant numbers of consumers engaged in precautionary saving. This money not being spent has contributed to an unprecedented 20% collapse in demand. Policy measures must focus on rebuilding this demand to a more sustainable level. Chambers have proposed a number of measures that can support this goal.
Firstly, it would seem that there is a huge amount of pent up demand for home improvements that could unleash consumer spending and spur employment growth in the construction trade. A special time limited reduced VAT rate for the Home Repair, Maintenance and Improvement sector could incentivise consumers to invest in their home and, in turn, generate domestic demand. Buoyancy created by the increased activity would more than compensate for the reduced VAT rate. This would also go beyond the construction trade, as people would also spend on white goods, brown goods and other furnishings at the 23% rate, further improving VAT revenues.
Secondly, recent evidence from the Central Bank shows that it is newer and smaller businesses (including a small number which have the potential to grow rapidly) that are responsible for the majority of job creation. It is essential that Government does what it can to support micro, small and medium-sized enterprises. It is vital that these businesses are given access to the working capital they so desperately need to allow them to grow, develop and create new jobs. This could involve raising the qualifying amount for companies to use cash accounting for VAT, enhancing the profile of the Seed Capital Scheme (and speeding up the turnaround time to drawdown SCS funding upon receipt of approval) and improving the Employment Investment and Incentive Scheme, which is currently not being activated in great enough numbers.
The Government has an almost unique opportunity to use savings achieved from Local Authority mergers and the arrival of the Local Property Tax to support retailers and other small businesses in town centres. Targeted rate reductions on town centre businesses which are, for the most part, domestically focussed and as a result highly challenged could be the difference between staying in business and going bust. Vibrant town centres, with a mix of retail, business and leisure are not just good for jobs, they have the potential to resuscitate communities and community values.
On the spending side, all Departments must ensure that the decisions they take are job proofed. In this context, it is important to resist the temptation to close Departmental funding gaps via taxation rather than reforms. It is vital that the Department of Social Protection is sympathetic, not only towards employers but also to the self-employed, by not making PRSI contributions mandatory. Similarly the Department of Health must learn to live within budget rather than simply hiking charges such as the Health Levy without any regard for their impact on labour costs and the wider viability of the Health Insurance market and seeking yet more emergency funding. If Local Authorities can live within budget even as their revenue sources have been hammered then the health sector must also develop the skills to do so and be held accountable.
Finally, while we say this every year, it is no less important so bears repeating; it is essential that Ireland maintains a tax regime that supports our strong foreign direct investment sector. Accordingly Corporation tax must remain at 12.5%. The special VAT rate of 9% for the hospitality sector must also be continued to provide further security for that vital employment sector across all regions in the country.
Post-crash, things didn’t look good for the patient, who also experienced a period ‘in denial’. Radical and invasive surgery was required to remove the worst manifestations of flawed decisions and choices. But while there has been extensive pain over the last 6 years, we do appear to be at an important inflection point.
Now is the time to keep on the right path and make sure the recovery is steady and sustainable. And, above all else, to do no harm.
This opinion piece by Chambers Ireland Chief Executive Ian Talbot appeared in The Sunday Business Post on 13th October 2013.