Realistic budget will reinvigorate economy

 

OPINION:State can trade its way out of crisis if the Government supports business, spreads costs fairly and prioritises jobs, writes DANNY McCOY

THE CREDIBILITY of how we are managing our economy is being tested again. Ireland’s financial situation remains precarious, and our reliance on international funding to run the country on a day-to-day basis means that investors are keeping a very close eye on the decisions we are making.

The serious questions that have been raised about the financial positions of Dubai and Greece in the last week serve to remind us about how important credibility is to the international markets.

The right approach is to garner a sense of reality and have a budget next week that shows the world that the Irish are serious. This is the way to restore much-needed confidence in the economy and to reinvigorate spending and investment.

Enterprise must be allowed get on with what it does best: creating jobs and wealth. It is vital that the budget does not stifle business by raising taxes; instead, the country needs an ambitious stimulus package to address the jobs crisis.

Budget 2010 must cut €4 billion from the public finances just to stabilise the deficit at 12 per cent of GDP. The international money markets will punish us severely if there is any softening by the Government of efforts to reduce expenditure.

The correct approach is to place the greatest effort on reducing current spending rather than hiking tax rates or slashing productive capital expenditure. This leads to hard choices, but ones that cannot be dodged if we are serious about recovery.

It is encouraging to see that some trade union leaders are now acknowledging that the public sector pay bill must be reduced significantly and productivity increased. But changes in working practices were promised as part of the benchmarking process, and despite the best efforts of public sector managers, little has changed.

Now the suggestion is that the necessary savings in the public sector pay bill for 2010 could be achieved through mandatory unpaid leave, without impacting negatively on service provision. What is being proposed is less work for unchanged pay terms.

The key test will be if the proposal amounts to a credible, permanent and sustainable reduction in the pay bill, and whether any transitional measures in arriving at that point will adversely affect service provision.

If this test is not passed, the public and international opinion will view it with scepticism.

To restore our reputation, hard decisions are needed to regain competitiveness and make Ireland once again an attractive place to do business. Falling prices should make it easier to get our pay costs back in line with those of our competitors without a serious loss in living standards, and this needs to be reflected in pay expectations.

The price of a job is not arbitrary: it should be linked to the pay rates in those countries with which we compete. We now need to get back in line, particularly with economies in Europe. There is a choice between pay and jobs. It is time to put jobs first.

It not just our labour costs that need to be sustainable; it is also our tax base. Despite the view that high earners are not paying their share, the facts are somewhat different.

OECD data show that effective tax rates for high-income earners in Ireland are higher than those in many European countries, including Germany, France and the UK. A fact rarely acknowledged is that many lower-income earners pay either no or very little income tax. This is not a sustainable practice, and the tax net will have to be widened to include more people.

Additionally, it is crucial that the Government does not strangle enterprise with exorbitantly high marginal tax rates. High rates do not generate more revenue for the state. They reduce it.

Despite the significant increase in PRSI, income tax rates, and the introduction of income levies, the actual amount of money collected in income tax is in freefall.

In 2007, the State collected €13.6 billion in income tax, and despite significantly increasing rates, this figure is likely to fall to €11.6 billion this year.

Increasing marginal tax rates has a very damaging impact on Ireland’s ability to compete internationally. Top companies here are struggling to attract and retain international talent.

Important export sectors, such as financial services, food and drink, ICT, pharmaceuticals and medical technology, are entirely dependant on skilled labour that can locate anywhere in the world.

One or two highly skilled people in a company may be the anchor that keeps a team of hundreds working in Ireland. If that one highly skilled person decides to leave, the rest go too.

As recommended by the Commission on Taxation, some increases in the tax burden are required to fund the high-quality public services that must be provided in an advanced economy. There is also scope to reduce a significant number of tax reliefs. However, a number of key reliefs should remain, as they encourage enterprise and support Ireland’s emerging smart economy.

The biggest challenge facing the country as we move into 2010 is getting people back to work. The Government needs to follow other major economies and put jobs at the heart of its economic strategy. The budget can address the unemployment crisis by reallocating the resources that the Government is already spending in the social welfare system to support people in employment.

It should reduce employers’ PRSI for new jobs and introduce a targeted suite of measures to address youth unemployment.

We must face reality and trade our way out of this crisis. We will succeed if we support enterprise, spread the cost fairly and put jobs first. The Irish people are realists and are proud of how our country was transformed in a generation. We know the hard thing is the right thing to do – let’s not fudge it next week.


Danny McCoy is director general of employers’ body Ibec