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How it went wrong Back  
The publication of the Tax Strategy Documents is an insight into the origins of the Minister’s budget announcement that he was abolishing the ceiling on employers PRSI contributions.
The decision to remove the ceiling on employers PRSI contributions is widely regarded as the major blunder of the last budget. Hopefully it is a blunder that will be reversed, although hopes are fading at the date of writing.
Where did the idea come from? The Tax Strategy Documents are documents prepared by the Civil Service in planning for a budget. Those relating to the year 2000 budget have been partly published. These include two papers on the topic of PRSI.

One discussed the PRSI simplification. PRSI simplification had been promised by the Minister in his December 1999 budget speech and this paper considered how it might be achieved. In fact the Social Welfare Bill (which amends PRSI legislation) has attempted nothing in this area.

The second paper ‘outlines the principal policy issues relating to any consideration of PRSI changes for 2001.’ This paper, rather than any ‘solo run’ by the Minister, appears to be the genesis of the fatal decision. That said, the Minister seems enthusiastic for the decision.

PRSI is, in theory, an insurance scheme, although in reality it is a tax. Because it is structured as an insurance scheme the contributions extracted from the insured go into a fund, and the benefits provided are paid out of the fund.

For many years that fund was in deficit. It had to be supplemented from other taxation sources. In the last few years however falling unemployment and rising employment have brought about the unexpected result of the income of the fund exceeding its outgoings, so that it has built up a modest balance.

The Civil Service projections suggested that this happy situation might not continue into the future. It should be said however that if this prognosis was the basis for such drastic action, it was not a costed prognosis. Factors which might lead to increased demands on the fund were mentioned, but rarely were figures put on them nor was the extent of any forecast shortfall quantified.

The paper then swiftly moved on to consider ‘reform options.’ The opening paragraph makes it clear that ‘reform’ is to be equated with ‘revenue raising measures.’ The paper declares ‘the fundamental reform of the PRSI system would involve abolition of the employee/self-employed and employer annual earnings ceilings.’ Oddly enough, it did not seem to consider that reform might also involve extending full rates of PRSI to Civil Servants.
The paper then examines separately the abolition of the employer ceiling and of the employee ceiling.

As we know, only the employer ceiling was abolished with potentially drastic effects upon the competitiveness of key areas of our economy. The point was not overlooked. It is stated ‘there will be a sharp increase in total liability in certain parts of the Financial Services sector and the Information Technology sector.’ And there the matter was left.

There was no consideration of what impact that sharp increase in total liability would have on those sectors other than a comment further down the page that ‘abolition of the ceiling could play a role in reducing earnings inflation at higher income levels.’ That appears to be the extent of the economic analysis of the proposal.

It is not explained why ‘reducing earnings inflation at higher income levels’ is a good thing. It certainly isn’t good for the employee. It isn’t good for the State who receives a sizeable chunk of it in tax. It would of course be good for the employer if he can get employees to work without increasing their salaries. But since this is to be achieved by passing on a very significant additional cost to the employer, it does not appear to have been in the employer’s interests that the paper was concerned with. So who benefits? The paper is silent.

The paper then points out that if cash emoluments have to bear PRSI without limit, whereas benefit in kind emoluments do not, there would be a move from cash to benefits in kind. It says ‘The legislative and administrative implications in making fringe benefits liable to PRSI would have to be considered if earnings ceilings were to be abolished.’ The Minister did not point this out in his budget, nor has it so far emerged in the Social Welfare Bill.

The paper described above was prepared by the Department of Social, Community and Family Affairs rather than the Department of Finance. It was discussed by the Tax Strategy Group on 19 September where it was recorded ‘Various options were discussed without any particular conclusions being reached.’

It is not possible to be sure that the published Tax Strategy Group papers represent the totality of economic analysis and debate that informed the decision to abolish the employer’s PRSI ceiling. I think it is fair to say that one would not expect a Government to take such a sensitive decision on the basis solely of these papers.

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