| The Minister came close to delivering a good Budget. Why did he ruin it with silly PRSI proposals? |
Labour costs inflated
The Minister’s decision to remove the limit over which the employer’s contribution to PRSI did not apply is crazy. The effect is to add 12 per cent to the cost of paying wages in excess of ?36,600 per annum per worker.
This adds to labour costs in those areas of the economy currently suffering the greatest labour scarcities and threat of wage inflation - the high tech areas requiring skilled educated workers.
It is remarkable that in a week in which the Government made such efforts through the PPF to restrain inflation in wage costs, they should gratuitously add 12 per cent to those wage costs.
What has been done cannot be without consequences. The cost of employing top creative people in this economy has been significantly increased overnight. Either the competitiveness of the employer must suffer, or the salary of the employee must suffer. If the employer’s competitiveness takes the hit, potential inward investment in the high tech area is likely to divert itself to Eastern Europe. The electronics manufacturing area is currently in difficulty because of the increase in Ireland’s cost base and scarcity of suitable workers. The Minister’s move may not only deter new investment from coming here, but may determine the departure or scaling down of existing projects. Should the employee’s salary take this hit the employee may divert elsewhere!
Business tax is up, not down
The Minister’s argument that this move is justified by falling tax rates does not stand up to examination. Those areas of our economy on which growth depends and on which our prosperity is built - software production, high tech manufacturing and international financial services - are not benefiting from falling tax rates. Instead they face the prospect of a 25 per cent hike in their corporation tax rate on 1 January 2003. They also face hikes in commercial rates. What falling tax rates does the Minister refer to in these cases?
Nor has the unincorporated sector of the economy been experiencing much in terms of falling tax rates. The outcome of the Minister’s current budget has been to increase the effective top marginal rate of PRSI and tax by 1 per cent, when his other PRSI changes are taken into account. Nor is the Minister’s claim that business taxes have been falling borne out by his own statistics. In 1997 corporation tax represented 11 per cent of total tax receipts. They now represent 14 per cent of total tax receipts, an increase of almost 27 per cent.
Our current prosperity was brought about in part by a clear focus at the highest levels of Government on economic growth. After a very short period of prosperity that clear focus appears to be lost in a welter of political posturing.
Not all bad
After so much complaint, it would be ungracious not to acknowledge the many excellent aspects of the Budget. Some movement has occurred in reducing the tax write-off life for plant, although not enough was done.
The Minister is also to be congratulated on having taken on board the full thrust of the article in the May issue of this magazine, entitled ‘In praise of the lodger’. Elderly retired persons with spare bedrooms, first time entrants into the property market with heavy mortgage obligations, and students desperate for accommodation have all good reason to thank the Minister for his imaginative introduction of the ‘rent a room exemption.’ |
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| Article appeared in the January 2001 issue.
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