On first viewing, Wednesday's proposal by the Minister for Finance, Mr McCreevy, to abolish the employer PRSI contribution ceiling had a straightforward rationale. The measure would raise £159 million (€202 million) to partially finance a purported give-away Budget from a business sector perceived to be favoured with low tax rates.
However, when reviewed, employers, particularly those in the high-tech and international financial services sectors, should feel rightly frustrated at the lack of reasoning for the measure. The reality is that the proposal is bereft of rationale.
In his speech, the Minister stated that the proposal "must be seen in the context of the substantial reduction in business taxation in this and earlier budgets". Of course corporation tax rates have been falling, in line with the Government's strategy of introducing a standard, across-the-board, corporation tax rate of 12.5 per cent that would enable Ireland to continue to attract multinational investment, despite EU constraints. However, this reduction is merely to the headline rate of tax.
In the four years of Mr McCreevy's stewardship, Exchequer receipts from corporation tax have more than doubled. When he introduced his first Budget in 1997, Mr McCreevy anticipated corporation tax receipts in that year of £1.45 billion. His latest estimate of the out-turn for 2000 is that corporation tax will contribute more than £3 billion to the Exchequer. This is anticipated to continue growing at 15 per cent per year. Corporation tax now represents 14 per cent of overall tax receipts, as against 11 per cent in 1997, reflecting a relative increase in the tax burden on the business sector in that time frame. Commercial rates have also increased substantially during this period. Therefore, the argument that the abolition of the employer PRSI ceiling is merely recouping reduced business taxation does not stand up.
Nor can it be argued that the measure stems from fiscal necessity. Despite a tax reduction package costing the Exchequer £1.23 billion, the Minister anticipates an Exchequer surplus in 2001 of more than £2.5 billion. Therefore, he clearly did not need to find the resources.
Equally, the measure does not sit well amongst the budgetary objectives which the Minister set down for himself at the outset of his speech. These included continued prosperity, improvements to quality of life, promotion of a fairer society, and rewarding work and enterprise. Prior to the Budget, most business commentators had signalled rising inflation, a continually tightening labour market fuelled by almost full employment and infrastructural bottlenecks as the principal constraints on our continued growth. Increasing employer PRSI costs does nothing to alleviate these concerns. The measure heightens concerns regarding wage inflation for employers. It seems incongruous that the Government could sit down with the social partners to amend the Programme for Prosperity and Fairness, and negotiate an agreement with control of wage inflation at its core and then, within 48 hours, impose an additional direct tax on wages.
Some may see the measure as a means of exacting fiscal rectitude against large-scale employers in the financial services sector in the aftermath of the DIRT inquiry. However, quite apart from the effect on the domestic banks, the measure will substantially increase wage costs in the high-tech sector and in the International Financial Services Centre, as well as for other large employers in the services sector.
Reduced competitiveness is the clearest consequence of the proposal. If the Minister persists with the measure, then one of two eventualities must arise. Either employers must absorb the cost and accept a higher rate of wage inflation or wage increases in certain sectors may have to be curtailed. Either way, the measure represents a disincentive to employers to reward their staff through higher salaries. Increasing PRSI costs for employers also serves to lessen our competitiveness in an international context.
It has been suggested that the imbalance in the Minister's proposal could be dealt with by reducing the rate of employers' PRSI. While a rate reduction would be welcome, that does not negate the lack of reasoning for the measure. In the meantime, employers will have an anxious wait for the publication of the Finance Bill.
David Kennedy is a tax partner in KPMG
