Eleven employer organisations, led by ISME, Restaurants Association of Ireland and Retail Excellence Ireland have set up a new group: SaveJobs. It purports to represent small and medium-sized businesses and comes with a set of demands. First, these employer groups want the state to subsidise their profit margins and, second, they want the wages of the lowest-paid to be frozen. This would be extremely costly and economically degrading.
Subsidising Profit Margins
Let’s first look at the employers’ demands for increased state subsidies:
- Reduce the standard VAT rate from 23 percent to 21 percent
- Permanently establish the 9 percent VAT rate for the food service and ‘grooming’ sectors
- Increase the employer low-rate PRSI threshold by over €50 per week
The cost of three measures would be significant.
Nearly €2 billion – that is the price tag (the estimated cost of VAT cuts can be found here and here). There are a couple of things to be said about this.
First, these demands are not targeted at businesses struggling and in danger of closing down. It is a general tax cut benefitting many companies that are doing fine. Why cut taxes for profitable companies? What is the logic of giving highly profitable companies a windfall tax-cut subsidy?
Second, this could either blow a hole in our public finances or drive inflationary pressures. The Central Bank projects a budgetary deficit for this year (once excess corporation tax revenue are set aside) with barely a balanced budget over the next two years. So what taxes would the employers raise or what spending would they cut to recoup the €2 billion in VAT and PRSI cuts?
Or, maybe, the employers want to subsidise their profit margins with the ‘windfall’ corporate tax revenue, relying on income that is not generated by the Irish economy. This would risk driving inflation back up again.
Re-inflation, tax rises, spending cuts – this is what the employers’ programme risks.
Freezing Workers’ Pay
In addition to demanding state subsidies, the employers’ have workers’ wages in their sight.
‘Future increases in the NMW (National Minimum Wage) must not exceed CPI (Consumer Price Index)’
This would tear up the Government’s commitment to raise the minimum wage to 60 percent of the median wage. It would mean that low-paid workers would fall further behind general wage growth in the general economy, increasing inequality.
Most of all, it would mean that in the future, low-paid workers (i.e. workers on the minimum wage or just above it) would receive no real pay increases. Pay would stagnate regardless of the profitability of their employers or the increase in national income. In truth, targeting the economically weakest is particularly nasty.
What’s This All About?
According to SaveJobs website:
‘The increased cost of doing business will lead to a tidal wave of business closures and job losses unless government act NOW!’
What evidence do they put forward for either this claim? None.
We discussed this issue previously but let’s do a little of updating.
(a) Employment
If jobs are at risk, if shops and restaurants are closing down with no replacements starting up, we should see some evidence of this from employment data. We don’t. In fact, just the opposite
Over the last year employment rose in the total economy by 3.5 percent. In the wholesale and retail sector employment grew by over 6 percent while in hospitality, employment growth was nearly twice the national rate. This doesn’t suggest sectors in crisis.
Of course, the crisis might have only become apparent in the latter part of the year. But when we look at employment growth over the last quarter (2023 Q3 to 2023 Q4) we find total employment increasing by ½ percent, while wholesale & retail increased by 6.9 percent and hospitality increased by 3.8 percent. If anything, employment growth in the alleged ‘crisis’ sectors was gaining momentum.
(b) Growing Profits
What about the profitability of these sectors?
Profits in the distributive and hospitality sectors continued to show strong increases over the last year, well above the domestic sector as a whole which flat-lined (but only after a 30 percent increase in the previous four years). Again, this doesn’t suggest red flags.
There is evidence of a softening in profit growth from last summer in the hospitality sector and for both sectors volume turnover is struggling (through seems to have bottomed out last year). But there is little in the data to point to a pending crisis.
* * *
The evidence doesn’t suggest a crisis. Neither, in a strange way, does the employers’ new campaign. If they believed there was a real crisis then they wouldn’t have suggested spreading the tax cuts to sectors and businesses which are doing ok. They would have focused on sub-sectors and businesses which are having genuine problems and concentrated a much smaller amount of subsidies on these areas to much greater effect.
And they wouldn’t have had a go at the lowest paid workers since we have experience of temporary wage subsidies for vulnerable firms. They could have made this argument, too. But they didn’t.
They didn’t even bother suggesting that VAT reductions could reduce prices. Instead, they stated these would be used to ‘reduce costs’ (i.e. increase business revenue).
Here’s the bottom line: the Department of Enterprise identified €20 billion in Brexit and covid pandemic supports for the business sector. In the last two years:
‘. . . a total of €12 billion was provided in cost of living and business supports, comprising a mix of permanent and one-off measures, to absorb some of the impact and ease the burden of inflation on both households and businesses. In supporting households, this has also indirectly benefited firms by maintain consumer consumption/demand.’
Nearly €40 billion in direct and indirect subsidies. Now that these subsidies are being withdrawn, now that the era of ultra-low interest rates is over, many businesses are finding it difficult to adapt and compete in the marketplace. The new employer group could have identified the pinch points, sitting down with employee representatives to discuss productivity-enhancing solutions, and putting together a programme that can lead to sustainable and resilient businesses. They didn’t.
Instead, they are using the difficulties of some firms to demand the government subsidise profit margins while turning low-paid workers into the ‘enemy’ of enterprise.
When we understand that this is just a plain ol’ money grab, it starts to make sense.
The reduction of VAT to 9% on certain labour intensive activities was funded by a €1 increase in excise duty on wine. Despite the return to the previous rate, excise duty has not been reduced.
Posted by: Niall | March 20, 2024 at 10:32 PM