PRSI may be focus of change in 'boring' Budget

Just over one week out, the chances that Budget 2003 will deliver major drama look slim. The Estimates were this year's spectacle, commentators say, with some even going as far as to predict a "boring" Budget.

For the business community this would be the ideal result, since anything qualifying as excitement would be almost certain to add to their financial burden. Until the Minister for Finance completes his Budget speech on December 4th, however, they are unlikely to relax.

Before then, a number of issues will be foremost in their minds, notably PRSI, VAT and, worse still, the possibility that a new tax will spring from the ether as the Minister tries to gather up every spare cent he can.

Behind all of this worry, significant comfort will come from the Government's guarantee that corporation tax will drop from its current rate of 16 per cent to 12.5 per cent at the start of next year. This commitment was reinforced on the evening of the Estimates by the Tánaiste, Ms Harney, who said the Government would not delay the cut.

With this assurance in place, attention must turn to what else might be targeted in its place. A logical approach, it might be argued, would be for Mr McCreevy to look at "clawing back" what he will lose on corporation tax receipts through some other measures.

Mr Jim McDonnell, tax partner with PricewaterhouseCoopers, has been scratching his head on this issue over past weeks, but is finding it difficult to come up with answers. Looking at the tax reliefs typically claimed by business, for example, he says that scope for movement is limited.

On areas such as interest relief on borrowings and capital allowances, he says that he has "absolutely no expectation" of change, such has been the pace of innovation over the past few years.

Mr McDonnell is similarly sceptical on the rate of VAT, which has been both lowered to 20 per cent and raised to 21 per cent within Mr McCreevy's tenure in the Department of Finance.

"Raising it to 22 per cent would be pretty much putting us out of step with most of our EU competitors," he says, acknowledging however that it may be an option.

If something has to give, Mr McDonnell's cautious bet is on PRSI, particularly on the ceiling that currently applies to employees' PRSI.

He admits that the raising (or removal) of this limit - currently €38,740 - would be unpalatable for the average voter, but says that it might be justified by the provision of better social services.

As for employers' PRSI, Mr McDonnell says that Mr McCreevy's intentions are hard to predict "because there have been so many U-turns".

Dr Dan McLaughlin, chief economist with Bank of Ireland, is also looking at employees' PRSI, suggesting that the Minister could look at raising more money by increasing the current rate - 4 per cent for the private sector - in line with inflation.

Dr McLaughlin also suggests that the 2 per cent health levy could be raised. "I wouldn't be amazed if he touched that," he says, arguing that it might be linked to improvements in the health service.

Mr Robbie Kelleher, chief economist with Davy Stockbrokers, agrees that employees' PRSI might be a target, but again focuses on the ceiling rather than the rate.

"My own instinct is that the Budget will be a relatively dull one," says Mr Kelleher, who foresees little movement beyond a social welfare package, some benchmarking awards and excise hikes on tobacco and alcohol.

As for the business community, the Chambers of Commerce of Ireland, a body that has recently increased its public voice, says it would be prepared to accept some tax increases but is concerned that "the burden should not fall disproportionately on the business sector".

The Chambers believes the cost of doing business in the Republic is already as high as it should be and warns that competitiveness should be closely guarded. This caution makes sense when viewed alongside a report produced by the National Competitiveness Council last week, which shows that the Republic's overall business appeal is falling on a number of fronts, notably wage growth.

The Chambers also says it supports the more general application of user charges for the services provided by infrastructure, such as roads and bridges.

IBEC, the mother of all business lobbies, displays a few nerves in its pre-Budget submission, warning that increasing taxes on business could "undo" much of the progress seen in the past 15 years. Just in case anybody needs reminding, IBEC tells us that taxes as a percentage of GNP have fallen from 47 per cent in 1988 to 37 per cent in 2001. "There should be no increases in taxes," the submission bluntly states.

IBEC argues, however, that tax bands and tax credits should be increased by the expected rate of inflation. Perhaps optimistically, the employers' lobby is also hoping that there will be "no increases in indirect taxes, including VAT and excise taxes on petrol".