PRSI change is bad decision, Mr McCreevy

Churlish! The big give-away Budget was designed to evoke charges of churlishness against anyone who dared to criticise it. OK, call me churlish, but one decision in the Budget is so fundamentally at odds with the ethos of business development that it has to be challenged. The decision to lift the ceiling on employers' PRSI has rightly caused an uproar from employers. As this change was announced under the mantle of PRSI reform, it should be asked if the ceiling for employees' PRSI will also be removed?

The removal of the ceiling of employers' PRSI is a direct tax on employment. That will not encourage foreign companies to set up here. Indeed, with the emergence of eastern European countries queuing up to join the EU, more corporations will be tempted to set up in these low-cost countries. The loss of a US project involving 1,000 "high quality" jobs to Hungary earlier this month should provide a grim warning of the future.

It is difficult to see Charlie Mr McCreevy's rationale for the new measure. Announcing the changes, he said "this initiative must be seen in the context of the substantial reduction in business taxation in this and earlier budgets". Certainly corporation tax has been coming down and the latest Budget shaved a further 4 percentage points off the standard rate to 20 per cent with the ultimate target of 12.5 per cent by 2003. But this move will even hit some traditional companies; CRH, for example, gets no benefit from the tax cut as it pays 10 per cent and will face hefty extra costs from the PRSI change.

The banks will be hit hard, but, following their role in DIRT evasion, they will evoke little sympathy. However, the change will particularly hit high-tech companies which need to attract high-skilled people. These companies, in the start-up stage, are usually loss-making and will now face much higher costs. That scenario is at odds with the Government's policy to make the State the hub for high-tech industry.

The present employer PRSI ceiling is £36,000 and the intention was to raise it to £39,000. Its removal took employers, who had just agreed to a new top-up pay deal, by complete surprise; they will now be faced with an extra 12 per cent tax payment for the higher paid. One IT executive, in Shane Kenny's RTE business report, rightly called it the stealth tax. The stance by SIPTU, the State's largest trade union, is odd. Just after getting a new pay agreement it has asked the Government to "stand firm" and argued that the changes would still leave employers' contributions among the lowest in the EU. Surely all the partners to industrial development should be advocating the lowest cost base? Hasn't our favourable corporation tax base been one of our main engines for this boom which is being envied by our EU partners? That is the way forward. SIPTU's reasons are retrograde.

Given this extra cost burden, is it any wonder that employers were outraged on the day of the Budget. IBEC's director of social policy, Mr Brendan Butler, said the measures "flies in the face" of Government policy to encourage growth in the high-technology sectors of the economy, and to create high-salary, and high value-added jobs, in the Irish economy. The Construction Industry Federation said the measure could have serious implications for manpower shortages in the industry and would affect the implementation of the National Development Plan.

The chambers of commerce of Ireland claimed the Minister had increased the cost of employing a highly-skilled employee earning £60,000 by £2,500 and said it was bogus to counter balance this against reductions in corporation tax.

The Institute of Chartered Accountants in Ireland opposed the measure but also noted it "will have a negative effect on many professionals like accountants, solicitors, architects and doctors who do not incorporate and do not benefit from the lower corporation tax rates".

The minister, it noted, gave no rational reason for the change or why he has singled out this group for such negative treatment. Since then opposition to the measure has swelled. Significantly, the American Chamber of Commerce in Ireland which represents more than 400 US companies employing more than 60,000, has strongly criticised the measure. Most of the chamber's members, for example, are already paying the low corporation tax of 10 per cent, so they won't benefit from the reduction in the corporation tax rate.

And crucially IBEC last week threatened to "walk away from the national agreement and the partnership process" unless the Government reverses the changes to the employers' PRSI ceiling. When Mr McCreevy stood up to deliver the Budget he said it had four basic objectives. One of them was "to manage our economy to secure our continued prosperity", and another was "to reward work and enterprise through ongoing tax reform".

The decision to remove employers' PRSI ceiling is not in keeping with those goals. A bad decision Mr McCreevy and I'm glad to be churlish about it.

bmurdoch@irish-times.ie