No new taxes on employment

Oct 7, 2012

Following our bailout and the commitments made by the current Government, there is an awareness that, for the foreseeable future, budget time will be stressful for everyone in Ireland. In addition, let’s not overestimate the role of the Troika in decision making — this and future budgets are ours to be accountable and responsible for.

However, when Minister Noonan rises to deliver his Budget in the first week in December, there are a few simple things he can announce that will help the business community.

Firstly, it is essential that further substantive savings are made in public spending.

Secondly, any broadening of the tax base should be focussed exclusively on funding local services.

Finally, there can be no further increases in the cost of employment. We tried this in the 1980s and it led to disaster… the Government cannot be allowed to raise employment costs further while hoping for the confidence fairy to wave her wand and deliver desperately needed job growth thereafter.

Confidence is built brick-by-brick on top of solid foundations and those foundations are most likely to be delivered by structural reform and cost containment measures rather than by chasing scarce cash in ‘easy’ taxes.

This Government has been keen to talk up the savings it has made in the public sector. Staff numbers have indeed fallen and the overall pay bill has been reduced and the voluntary redundancy programme is welcome; however, with 36pc of Government spending going on public service pay and pensions much more needs to be done.

What we cannot forget is that the Government, even allowing for the bank bailout, is a virtually bust employer and struggling employers do not tend to give pay rises, especially if they are borrowing more than €1 billion every month to meet their pay bill.

Further radical and transformative measures must be taken now. Five years into this crisis the business community does not want to hear the future tense being used in the context of reform. To be credible, Government spokespersons need to be talking now in the past tense regarding meaningful savings achieved.  Similarly benchmarking against 2008 will not cut the mustard. 2008 was the final kick of the Celtic Tiger. We need to benchmark ourselves at 2005 at the latest to determine progress made.

The recent reversal on allowances reforms give rise to concerns regarding a lack of will in Government to address this issue. We now know that the Department of Public Expenditure and Reform has been notified of 1,100 different allowances. Allowances cost €1.442 billion per annum. Combined with overtime, they total €1.8bn.

Set against the gap we face between what the State takes in taxes and what it spends, how can only one allowance have been cut thus far?

Remember that pay differentials between public and private sector staff generally do not include these allowances when measuring the differences.

If we cannot make the progress on allowances that we were assured of earlier in 2012, then it is yet another perfectly valid and appropriate reason that a three year pause in increments be put in place now.  We’re not talking about a cut in wages but rather maintaining pay levels already reached. Most employees in the private sector would be ecstatic at such a commitment.

In 2011 alone, increments increased the public sector pay bill by €250 million. When an employer is virtually bust, increasing salary costs is not a viable option. 

The only area where the case for broadening the tax base may be clear is in Local Government. For too long the tax base in Ireland has narrowly targeted the business community.

Waste and water charges along with business rates have placed a stark burden on struggling small and medium sized businesses.

The planned new property tax is a step in the right direction provided that it is broad-based and applied fairly. However, it must be used exclusively to broaden the revenue base of appropriately reformed and structured Local Authorities.

It is essential that this new tax leads to an appropriately targeted reduction in rates and other charges paid by local businesses to help sustain our ongoing improvements in competitiveness, support existing employment and grow new opportunities in the future.

The tax cannot be used to indirectly boost Government coffers by introducing matching reductions in the level of the annual General Purpose Grant from Central Government to Local Authorities. This must be ring-fenced and maintained at the level of 2012 funding for an appropriate transitional period of approximately five years.

There is no doubt that for Ireland to continue to take steps in the direction of an economic recovery, the numbers of unemployed persons must be reduced. The Government is very aware that it is not in the business of creating jobs but is committed to creating the conditions necessary for private businesses to create jobs.

While this rhetoric is sound, it has not been fully matched in terms of delivery. The Action Plan for Jobs is strong in aspiration but slow in results and certain recent disagreements in Cabinet do little to promote confidence. Surely it is inconceivable that the Cabinet would agree to any measures to increase employment costs?

In particular, the Minister for Social Protection seems determined to make the task of job creation more difficult. Ongoing efforts by that Department to transfer responsibility for the first two to four weeks of sick leave to employers are misguided at best.

The uncertainty created by this debate also damages the business case for hiring new staff.

Minister Burton claims the move would simply bring Ireland into line with international norms; however, this analysis fails to appreciate the myriad of other ways that the cost of doing business in Ireland is greater than the OECD average.

Any increase in the rate of PRSI or related sick pay costs paid by employers would be little more than a tax on employment. Businesses of all sizes represented by the Chamber network around Ireland contend that any such move would make them less likely to employ new staff, would increase the possibility of job losses and would make the job of attracting future Foreign Direct Investment to Ireland more difficult.

The Government should use this budget as an opportunity to affirm that there will be no new taxes on employment.

Is the economic recovery going to be easy? No. Are future budgets going to be stress free? No. But given that we are in a balance sheet recession, focussing on cost containment measures rather than tax increases will enable business, households and ultimately consumers to take the first steps in the right direction for a return of consumer confidence and economic growth.

Ian Talbot is Chief Executive of Chambers Ireland. This article appeared in the print edition of the Sunday Business Post on Sunday 7th October 2012.

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