Employers’ group Ibec has backed Fine Gael in the developing row between Minister for Finance Paschal Donohoe and Fianna Fáil leader Micheál Martin over Government plans on tax rates.
Mr Donohoe has signalled that the Government will focus on widening tax bands while Mr Martin stressed reductions in the universal social charge (USC) were key to the confidence and supply agreement and failure to implement them would breach that deal.
Ibec director of policy and public affairs Fergal O’Brien said however that cutting the USC “is not the best use of our resources”.
The industry body also called for rapid expansion in capital spending and said the €400 million in “fiscal space” available was entirely insufficient for the needs of the economy.
Ibec director of policy and public affairs Fergal O’Brien said calling for fiscal expansion “is quite unusual for a business group for more expansive fiscal policy but we do very much to promote growing our productive base of the economy”.
He called for a €400 million investment each year for three years in Brexit mitigation measures , particularly for the regions which he said would be six times more affected than Dublin.
Speaking about the USC as he addressed the Oireachtas Committee on Budgetary Oversight, Mr O’Brien said “given the resources we have available, we should be targeting increasing that entry point to the top rate of tax and reducing the top rate of tax over time”.
He was questioned by committee chairwoman Josepha Madigan who pointed to Ibec’s pre-budget submission that international best practice advocated a broad tax based with a low marginal tax rate while in Ireland the situation was the reverse.
“You said the plan to cut USC would make this worse and remove Ireland further away from international best practice”, Ms Madigan added.
“That is clearly our view,” Mr O’Brien replied.
Overtime The reality from a business perspective “is that people on below average earnings of €34,000 are refusing to take up overtime because it means a marginal tax rate of almost 50 per cent”.
He said “we have a very high marginal rate kicking in at exceptionally low levels of earnings”.
Ireland had one of the highest proportion of workers of any OECD country not paying any income tax at all.
“By further reductions to the USC we are carving more earners out of the USC and further narrowing our tax system but we’re not addressing the economic disincentives of a very high marginal rate at an exceptional low earnings level.”
He added: “It’s harder to have a shift operator to become a shift manager because the salary increase, is predominantly going, or half of it is going in income tax.
Mr O’Brien said “focusing resources on reducing the USC can have other social objectives, we see that, but from an economic perspective it’s not the best use of our resources.”
Ibec also warned the Government it should not be like the generals who “always fight the last war” when it comes to economic development.
Rainy Day Fund
Mr O’Brien said a Government ‘rainy day fund’ is a premature measure when the greatest threat to economic competitiveness is a lack of capital investment.
He warned that “generals always fight the last war” and said the danger for the Government of “focusing excessively on the potential for economic overheating is that this leads to prematurely putting in place measures like a ‘rainy day fund’”.
He said the evidence was not there to show the economy was in danger of overheating again with loose credit or overconsumption like in the ‘tiger years’.
Ibec senior economist Ger Brady said the State already had €20 billion in liquid assets built up by the NTMA (National Treasury Management Agency) precisely for an economic shock.
Mr Byrne added “it’s not necessarily that putting money aside is a bad idea but we already do have €20 billion put aside”.
On Brexit Mr O’Brien said that “while the multinational sector accounts for 90 per cent of all our exports and the indigenous sector only 10 per cent, those 10 per cent of indigenous are providing the same amount of employment across the economy as the 90 per cent of multinational exports”.
Brexit would therefor have a much bigger employment impact on the economy than on the overall value of exports.
“Some regions would be six times more exposed to the impact of Brexit than Dublin economy,” he said. “So it is vital to take decisive steps in this Budget to offset risks” including a multianual framework for funding Brexit mitigation measures.
