Extra €4bn in payroll costs being imposed by State from next year will be too heavy a load for many Irish SMEs to bear

For many businesses, especially those in retail and the experience economy, Christmas is a crucial trading period. The activities during this time are essential to create a financial cushion that helps manage the natural lull experienced in January by some sectors.

This year, however, rising operating costs have forced many businesses to operate within tighter margins. Factors such as high energy costs, wider cost of doing business, and a volatile global trading environment continue to contribute to an unpredictable business landscape.

As we step into the new year, businesses face two additional hurdles – a multitude of new Government-imposed labour cost changes and a shifting economic landscape. It can be expected that the January 1st 12 per cent increase in the minimum wage will dominate much of the business discourse and focus.

One might be forgiven for assuming that the Government’s Increased Costs of Business Scheme (ICOB) is being introduced solely to address the challenges posed by the minimum wage jump alone, but the ICOB’s remit will be needed to offset much greater costs than just this in the short term. And that is before changing economic factors.

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Ibec member companies have consistently expressed reservations about the adequacy of the overall allocation of the €250 million fund, and these concerns have grown with a realisation emerging that the distribution of this fund across the economy will be too sparse.

The existing challenges in cost competitiveness present a formidable challenge for the majority of employers in Ireland. Adding a series of additional changes in quick succession, including increases to employer PRSI, changes to statutory sick pay, the introduction of pensions auto-enrolment, new Revenue reporting requirements, and enhanced protective leave entitlements, will undoubtedly impact labour cost competitiveness further.

Ibec estimates that the annual increase in labour costs arising from these measures will exceed €4 billion. This financial burden becomes even more pronounced when considering potential knock-on effects such as relativity pay claims and administrative costs, which are not accounted for in the initial estimate.

If Government proceeds with its plan to take the minimum wage to 60 per cent of median earnings by 2026, it will equate to a salary floor in the economy of an annual equivalent of €30,000. Other wages in the economy are priced off this base rate and this will mean that Ireland will very quickly be right at the top of the EU wages ranking.

Businesses and the economy would only be able to maintain competitiveness if productivity growth could move in line with the wage cost increases. However, the cumulative scale and pace of the increases are simply too great in the short term for either export or indigenously focused firms to be able to deliver double-digit productivity gains.

The Government’s implementation of billions of euros in labour market taxes, entitlements, and regulations over the coming years lacks an overarching strategy or consideration of the cumulative cost impact. Regardless of the cause – poor planning, lack of co-ordination, or unfortunate timing – the reality is that many businesses will be forced to further increase prices, and in some cases, see their very viability threatened.

It is likely that January will see the first real indicators of this wave of business closures. For many Ibec members, the concern is not about the merits of these changes, particularly in the case of pensions auto-enrolment or pay-linked benefits, but rather the timing and their cumulative scale. In short, too much is being done too quickly without sufficient transition support.

It is important to take stock of where our economy is likely to be in the short to medium term. Our latest Ibec economic outlook indicates a shift into a new phase – a period of consolidation after an unprecedented level of growth.

Export and domestic growth in the period ahead is likely to be much slower than that experienced in recent years. Business margins will be under increasing pressure and management focus will be on maintaining competitiveness. The impact of the Government-imposed labour cost surge will be felt most acutely in regional and rural areas, particularly by small and medium-sized firms, where business models and the customer base simply can’t cope with the proposed scale of increase.

Many of our members are already looking beyond the festive season and are concerned about the cost and margin challenges facing them in 2024. A renewed Government response, which should involve three elements, is required in order to avoid unnecessary business closures and job losses.

Firstly, the support package should be more effectively targeted at those firms experiencing the most challenging labour cost increases. Secondly, there should be a moratorium on new labour market regulation and, thirdly, a more co-ordinated and consultative model is needed for labour market policy more generally.

The Irish economy remains the envy of most nations but our hard-won success is also fragile and must not be taken for granted. An increased policy focus on the costs of doing business will go a long way to preserving our record levels of employment and prosperity into 2024 and beyond.

Fergal O’Brien is executive director of lobbying and influence at Ibec