BusinessOpinion

Employers have manufactured the SME ‘crisis’ to boost profits using assertion and anecdote

Increased profits, increased employment, a below-average insolvency rate: this doesn’t look like any kind of crisis

The Irish economy is on a path to a low-growth future

Joe Cunningham
Mon Apr 15 2024 - 06:00

In the past few weeks employer organisations have mounted a relentless campaign over a manufactured crisis that they claim is driven largely by government policy. This has resulted in employer demands to suspend progress on labour market initiatives, including the national minimum wage, auto-enrolment pensions, sick pay and family leave entitlements.

There are further demands for billions of euro in new business subsidies and the freezing of real wages for the lowest paid.

Critically, though, there is little evidence of a crisis. Since 2019, just before the start of the Covid lockdowns, profits in our domestic economy have increased substantially, including the wholesale and retail, and SME-dominated hospitality sectors.

This increase was so significant that it led the Central Bank of Ireland to conclude that profits were a major contributor to domestically sourced price increases in 2021 and 2022. Last year employment increases in the hospitality and the wholesale and retail sectors exceeded the economy-wide average.

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This doesn’t look like any kind of crisis.

Employer groups point to insolvency statistics showing an increase in business closures in 2023. However, insolvencies are still below their 2019 level and well below the long-term historical average. Insolvencies were kept artificially low during the pandemic with State subsidies extending the survival of many unviable businesses that, in normal times, would have closed down. Now that these subsidies have been removed, we are experiencing a return to normal trends.

Increased profits, increased employment, below-average insolvency rate: the crisis that employer groups describe is a manufactured one, based on anecdote and unsubstantiated assertions.

It is not in our economic interest to maintain market-distorting subsidies that prop up nonviable companies

So what’s really at play?

Some businesses became reliant on State subsidies for survival. The Department of Enterprise estimated that in the past few years, €32 billion was provided in Brexit, Covid, and direct and indirect cost-of-living business supports. While many of these subsidies were absolutely necessary to rescue sectors during the lockdowns, especially the temporary wage schemes, as these supports have been withdrawn, some businesses have been unable to return to commercial viability.

It is not in our economic interest, however, to maintain market-distorting subsidies that prop up nonviable companies.

Still, employers’ organisations affiliated to the SaveJobs campaign are demanding substantial tax cuts, with a price tag of nearly €2 billion.

Ironically, this subsidy is not directed at struggling businesses. The demand for a cut in the standard VAT rate, which would cost €1.2 billion, would spread this subsidy among successful businesses not in need of support. In effect, employers’ groups want the State to subsidise their profit margins.

And not only through tax cuts; employers want a real wage freeze for the lowest-paid employees on the minimum wage, confining increases in the wage floor to inflation. This is not about reducing “labour costs”; it is about ensuring that wage increases don’t reduce rising profits.

Calls to suspend labour market initiatives and increase business subsidies deflects attention from the serous issue of poor productivity in our domestic sector. The National Economic and Social Council recently referred to a slowdown or even negative growth in many domestic sectors.

In a paper to be published shortly, the Nevin Economic and Research Institute and Siptu found that Irish productivity in domestic sectors compares poorly with other small open economies in the EU; in particular, hospitality and wholesale retail. Poor productivity depresses both wage and profit growth (and, so, indirectly impacts negatively on business investment).

Trying to overcome these productivity deficits by suppressing wages and in-work benefits can only exacerbate this trend.

How can we develop resilient, sustainable and market viable companies capable of overcoming these deficits?

We need a charter for good companies – businesses that prioritise investment over value-extraction, promote collective bargaining, resource in-work training and career development, pursue decarbonisation and eschew precarious work contracts.

The government can promote these companies through social clauses that make public procurement contracts, grant subsidies and tax breaks conditional on meeting good company criteria. We can no longer afford to subsidise low-road business practices.

Supporting good companies requires an enhancement of labour rights, starting with collective bargaining. Collective bargaining not only increases workers’ living standards and life quality, it is an efficient and effective process to promote productivity, innovation and enterprise performance. Collective bargaining is a space for resolving problems that businesses face. This enhancement can be achieved through a comprehensive transposition of the EU Directive on Adequate Wages into domestic law, vindicating the right of all employees to collective bargaining.

A further step the Government should take is to establish sectoral taskforces, as per the programme for government commitment. This would allow stakeholders – notably, employees and employers - to identify productivity and innovation deficits, and facilitate consensus on the best policies to promote high-road enterprise activity. A high-road future is a negotiated one.

In good times and bad, many businesses will struggle. Against the background of this charter, we can introduce short-term and temporary supports to businesses who are committed to good company practices. This would ensure that business subsidies are contributing to a resilient and sustainable enterprise base in our domestic sectors; and are being directed to companies that see employees not as a cost, but as partners in promoting productivity and performance.

The Irish economy is facing into considerable challenges: climate change, AI and automation, and a low-growth future. This is in addition to our infrastructural deficits, such as housing.

We need to negotiate new pathways and ensure all sectors of society benefit from increased prosperity. Most importantly, policy needs to be evidence-based, not relying on mere assertion and anecdote.

There are many strengths in the Irish economy that we can build on, to create a strong social state, good companies and greater diversity in decision-making. Let’s not squander this opportunity.

Joe Cunningham is general secretary of Siptu

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