Notes on the Front

You know they don’t have a clue; you know they are thrashing about the place grabbing on to any old piece of driftwood in the raging tide; you know we are in more trouble than we can imagine if the Government is seriously cutting employers’ PRSI as a means to save jobs. It’s the type of lazy, knee-jerk, ill-informed measures that will surely do us in. Cutting PRSI will have little effect in saving jobs, will subsidise profits and worsen the fiscal deficit. All you have to do is do some math.

Of the many benefits Irish business has historically enjoyed is a low – ultra-low – PRSI rate. We’re rock bottom in the EU-14 (Denmark doesn’t operate a contributory social insurance system as such). We’d have to double the employers’ rate (currently 10.75 percent) just to reach the EU average.

So cutting Employers’ PRSI is cutting from an already low base. But let’s say the Government cuts the rate from 10.75 percent to 8.5 percent (it doesn’t seem much but wait until we get to the fiscal fallout). What would be the effect?

First, it would be an extremely blunt instrument benefiting all companies whether they need help or not.  For instance, Sean Quinn stated on RTE’s Six-One News:

'Our company makes €400, €500 million profits per year and we probably would be making €600, €700 million except that we are in the middle of a recession.'

Given that Quinn’s company employs 5,500, a PRSI cut would come to millions – to a company that already earns millions. This subsidy would merely pad the profits.

Even for companies in trouble, the effect would be extremely limited. Using the CSO's Annual Services Inquiry, let’s take an average medium sized company in the non-financial service sector, where PRSI cuts would have a greater impact given the greater labour intensity. 

An average company in the 20-49 employee range would employ 27 people, with average personnel costs of €33,600 (salaries, PRSI, other payroll contributions). Cutting Employers’ PRSI to 8.5 percent would save this company approximately €17,600 – less than a half-percent of operating costs and less than 2% of the entire payroll. This drop in the ocean would barely recoup the cost of half-a-job. In the real world it would have almost no effect at all.

This ineffectual measure would carry an enormous price-tag. Admittedly, the cost would not, in the first instance, be a charge on the Exchequer as it would be subsidised by the Social Insurance Fund. Currently, the Fund is in surplus, but this is being whittled away daily with rising unemployment costs, loss of PRSI revenue (both employees and employers) and long-term demographics (e.g. increase in the number of pensioners) making ever greater demands.

So, what would it cost to implement this PRSI cut for, say, a year? On the basis of the 2007 Social Welfare Statistical Report, a cut to 8.5 percent would cost the Fund over €1 billion. This hit would send the Fund dangerously close to deficit in the short-term. And any deficit would have to be met by the Exchequer – adding to the fiscal deficit. How in the world is all this worth the cost?

There is a better way to help companies in trouble, save jobs, and maintain income and demand. Already, many employers and employees are coming up with creative schemes. Permanent TSB, for instance, announced it would pay employees €35,000 to take an unpaid career break for three years, with a guarantee to return to their job after the period. This would appeal to many – who might return to education, take up part-time work somewhere else, start a business or just travel the world.

Another, more difficult option, is for the workforce to voluntarily take part-time work to avoid redundancies in their firm. This would see a severe reduction in income and living standards. However, were the state to top-up anyone’s wages who took part-time work to avoid redundancies, this would greatly ease the situation. Let’s go back to our average firm.

Let’s say the firm needed to reduce payroll by 20 percent. This would result in five job losses. However, were hours reduced by 20 percent for all employees, the State could top up everyone’s wage to their former level. This would cost over €150,000 in gross terms – but we have take into account a number of factors. First, when workers short-time, they are entitled to unemployment benefit on a pro-rata basis anyway. Second, tax and PRSI revenue is maintained (whereas when 20 percent is laid off, this revenue is lost, never mind the cost of the dole). Third, demand is maintained. And most importantly, people remain in work and avoid the dangers of long-term unemployment.

Such an approach would have the great benefit that it is directed to companies in need. And if it were paid out of the Social Insurance Fund, it wouldn’t be a direct charge on the Exchequer. Of course, such a programme would have to be carefully monitored to ensure it is not exploited.  But this would be made easier through a partnership approach at firm level – with employers and employees with their trade union representatives jointly implementing and monitoring it.

Such programmes – incentivising career breaks, topping-up wages for workers on short-time – these alone won’t turn the tide of rising unemployment. But, in tandem with other measures, it can help slow that tide. That is the first step.

What is absolutely sure is that if employers’ PRSI is cut it will be one of the strongest signals yet (as if we really need one more) that an absolute poverty of imagination and ideas has taken firm control of Government Buildings.