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Economists believe that Budget should reverse ‘skills tax’ Back  
The Survey has seen the emphasis on supply-side measures remain, while the majority have called for the reintroduction for the employers PRSI ceiling, removed in last year’s Budget.
Irish economists believe almost unanimously that Charlie McCreevy should reintroduce the ceiling on employers PRSI payments, saying that last year’s move has seriously damaged Ireland’s competitiveness.

Ten of Ireland’s leading economists have written open letters to the Minister of Finance, published in this month’s edition of Finance, and addressing key areas of policy which they believe the Minister should address in the upcoming budget.

While many of the respondents called for cuts in public sector spending and for a widening of the current tax bands, they most often specifically called for removal of the employers PRSI ceiling, a move which they say will strengthen Ireland’s position in a global downturn.

A growing unease amongst the panel is detected about the level of public spending, which, as one respondent points out, has risen by 54 per cent since the Government took office, while it promised to keep the annual increase to 4 per cent during its term of office. However, the broad consensus is that tax cuts should not be sacrificed, rather than current spending. This is particularly so with public sector pay, where benchmarking and relativities should take into account the increased risk of job loss attaching to private sector employment, with its increased job insecurity. There is widespread agreement, too, that the various ‘Bacon’ measures on housing should be rescinded, because they are now no longer necessary, given that house prices have fallen or stabilised, while accommodation rents remain artificially high. On the Budgetary side, there is agreement too that the National Development Plan should not be scaled back, and that the economic downturn should be used as an opportunity to press ahead with necessary infrastructure improvements, particularly in transport.

Austin Hughes, chief economist at IIB Bank, said ‘I still find it hard to understand the logic behind last year’s removal of the cap on employers’ PRSI contributions. Increasing the effective cost of labour in this manner seems to go completely against the thrust of supply-side policies. If Ireland is to move up the ‘value-added’ chain, this will serve as a major disincentive to employing more highly paid workers. Last year’s decision should be reversed. Acknowledging this mistake would underline a determination to assist competitiveness and would be a very healthy development.’

Echoing these thoughts, Colin Hunt, head of research with Goodbody Stockbrokers callsfor a ‘u-turn’ on the PRSI issue. He said ‘Last year’s decision to abolish the ceiling on Employer’s PRSI was a bad policy move whose detrimental effect on Ireland’s profitability has now been aggravated by slowing world growth.

Last year’s decision significantly increased the tax burden on those industries that Ireland is seeking to retain and attract. There is no logic in penalising companies for paying decent wages particularly at a time of heightened employment and investment uncertainty.’

Meanwhile Dan McLaughlin, chief economist at Bank of Ireland said ‘Last year’s decision to abolish the PRSI ceiling made little sense, other than to send a message to firms contemplating coming to Ireland that the Government is rowing back on its commitment to lowering profit taxes by effectively raising the tax rate by other means.’

Dermot O’Brien, chief economist at NCB Stockbrokers agrees and said ‘removal of the ceiling on employers’ PRSI contributions should be rescinded. This is a direct tax on employment, especially at the higher end of the skills spectrum, which fly in the face of industrial development and employment policies.’

With the Minister facing a very different international economic environment this year there were calls for the Budget to focus on the economy rather than the likely election next year, with one respondent calling for a ‘small budget’.

Public sector spending is also on the minds of Ireland’s economists. According to Aziz McMahon, economist at Ulster Bank, ‘the biggest challenge facing Mr McCreevy is to control growth in public spending, in particular the public sector wage bill. A number of economists think that public sector wage gains are being driven less by improvements in productivity and more by the overly strong bargaining strength of public sector unions. Current buoyant public finances have masked an increase in public sector spending that could present financing difficulties were the economy to slow by more than is expected.

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