Job Subsidies Plan Open for Business

The €250 million job subsidy scheme is open for applications from today until the 4th of September. I’m still not a big fan of this scheme, particularly given that it has to fit within overall budgetary parameters and thus necessitates €250 million of spending cuts and tax increases elsewhere. However, it is fair to say that some thought has gone into dealing with the deadweight loss element of the scheme.

Applicants for the subsidy will be scored out of 100 against the following three assessment areas: Credibility of restructuring plan (35 points), viability of the enterprise in the medium term (10 points) and the ratio of supported jobs to committed jobs (maximum score of 55 points).

This worst allowable score for this latter category is a score of 30 for a ratio of 1:1, meaning for each supported subsidised job the applicant would be required to commit to retaining another full time job for the duration of the subsidy (though how a struggling firm could really be made commit to this isn’t clear—what happens if they shut down?) 

The best score for this category of 55 is for a ratio 1:10.  If I understand this correctly, this means that the subsidy will not be allowed to apply to all employees in a firm and you will be more likely to get the subsidy if you only look for it to be applied to a small fraction of your employees.

In theory, this is good news if you’re worried about deadweight loss because the subsidy won’t end up being applied to all the employees of firms that are actually going to keep most of them on anyway. This element and the other two categories are also designed to avoid the jobs going to no-hope firms and pouring good state money after bad private money.

However, it’s pretty impossible to achieve both of these outcomes and as constructed, the scheme does seem likely to attract reasonably healthy firms, who may not really be planning to lay off many employees, to look for subsidies for a small fraction of their workers, knowing that this will give them a good score and make them more likely to obtain the grants. So one can still see plenty of potential for serious deadweight loss, which could blow up the actual cost of job saved well above the apparent level of €9,100 per employee.

The assessment process will involve Enterprise Ireland, IDA Ireland, Shannon Development and Údarás na Gaeltachta, and without doubt, will be a cheap and efficient process untinged by political interference or corruption related to existing relationships firms have with development agencies.

18 thoughts on “Job Subsidies Plan Open for Business”

  1. Perhaps, if it’s constructed to favour healthier firms over ailing firms, it’s really a secret plot by government to speed up the process of creative destruction.

    If so, we really haven’t been giving this Government enough credit!

  2. If policymakers believed that this scheme will have an impact, why is it announced so late into the crisis, as a PR filler during the holiday period?

    It will be Dec or Jan at least before first payments are made.

    Companies employing less than 10 employees are excluded.

    Coughlan said she is considering separate relief for the tourism sector.

    The hotels’ federation wants the State to intervene to restructure and rescue the sector. It says a substantial number of hotels will be transferred to “bad bank” NAMA, and it wants a say in how the National Asset Management Agency will deal with these businesses.

    Hotel bedroom numbers jumped from 26,000 in 1996 to 64,500 in 2008 – a surge of 150% – while tourist numbers rose just over 70%, boosted by McCreevy tax incentives.

  3. 250 million is a gross figure,so anyone have a back of an envelope as to the net cost to the Exchequer..i.e less taxes paid,prsi,vat/excise etc.on discretionary spending. Basically Im looking for the net net.Also when this true net figure is added to the deadweight losses will the job saving exercise have that much of an impact on the overall Economy or put another way “what bang are we getting for our buck here”. My gut feeling is 250 million is either a pilot scheme or an exercise to give Mary a bit of peace during the Holidays.LOL.

  4. I wonder if this is geared toward bigger (mostly international) firms as a subsidy to keep them here to prevent headline grabbing layoffs rather than stop the drip-drip of small closures?

  5. Why is it that Small businesses (10 employees or less) and Businesses who have made someone redundent in the last 6 months excluded.

    Are these not the type of companies that need this most?

    If I have 100 employees and I made 2 redundent in the last six months I would be fairly annoyed that I was excluded.

    Larger firms are already given massive advantages in an industry due to economies of scale and the easier access to IDA/Enterprise Ireland funding.

    Why governments always seem to have far less safety nets for small firms is hugely anti competitive.

  6. I don’t think it’s that big a deal. €250m is a lot of money, but unlike most other current government expenditures, it’s one off. Relative to other *temporary* expenditures associated with the current crisis, it’s small change.

    The most important feature of the scheme is that it is limited to internationally traded businesses.
    – This largely rules out the big displacement effect it would have if it were applied to domestically traded industries.
    – Regardless of its impact on job numbers, it will ensure that Irish industry is better positioned (more competitive and productive arising from the restructuring element of the scheme, and also better capitalised) to take advantage of the eventual market upturn.
    – It will almost inevitably save some exporting businesses that are fundamentally sound, but have been caught out by very unusual market and funding conditions.
    – Where agency-supported overseas-owned businesses can avoid cutting jobs at times of crisis, they have a strong tendency to maintain employment numbers by gradually substituting higher level jobs over time. But, once jobs are cut they are far less likely to be replaced.
    – Strong growth in exporting industries represents pretty much our only prospect of climbing out of the real economy hole we have fallen into within a reasonable time, so anything we can do to keep what is sustainable, and build a platform for growth, is worth considering.
    – Whatever faults they have, the development agencies are the instrument the Government has to deal with exporting industries, and they do have considerable expertise. We already trust them to disburse a considerable amount of money to industry. For example, EI disbursed €220m in 2008 according to its accounts.

    I have very little idea of how many jobs the scheme will actually save, and how big the deadweight issue will be. A lot will depend on whether there are many cases where the subsidy will make a real difference at the margin, and whether those operating the scheme are obligated to spend all the money they have available. So there may be a lot of deadweight or very little deadweight.

    But to the extent that it avoids deadweight, the net cost of the scheme will be low or even negative. The subsidies are close to the level of social welfare payments that would be required if jobs were lost, and a stream of taxation will be preserved. There are complications around falling labour market participations rates, migration and self-employment, but the idea that one lost job means one more unemployed is close enough to being true for purposes of this discussion.

  7. Hi all
    Another factor here is the queue that will form from every sector/ Lobby/ etc pleading their cause, and the possible domino effect with further tax revenue.
    Listening to it on the evening radio shows, it looked like a bone thrown to the IBEC/ICTU crowd that demand welfare from Govt, each side half welcoming the move.
    It would also be worth factoring in the cost of processing this scheme?
    Maybe it will keep all these Govt agencies busy too!
    Al

  8. And the further question of how the scheme will be ended/ distortion minimised???
    I can imagine the beal bocht corus’es singing about its importance for the next decade.
    A Job Subsidy Opera!!

  9. As a Self Employed person with less than 10 working within the business I find this scheme a Joke. Like most people in S/E we have struggled to keep our staff group together all of whom are Third Level and higher. It is actually easier to make staff redundant under this Government than to keep businesses operating. When I see the motley bunch that the Department of Finance (recent report here) has working for them on ridiculous salaries/perks and pensions it just makes you feel like throwing the towel in. I have never asked for or got Government Assistance for the business but I did expect that we would have people running the Government at Political level and Civil Service level who would steer the ship of state on an even keel. No such luck ……..

  10. Hello there.
    I must agree with Al’s and TRP’s posts. I suspect the good professor is being sarcastic when he states “The assessment……. will be a cheap and efficient process untinged by political interference or corruption…”
    In fact, I’m sure he is being sarcastic!

  11. from the IT website, it appears as if Element6 are using this as part of their plan to “save” 240 out of 370 jobs.

    “Importantly, Government have committed additional support in the form of training grants and temporary wage subsidies to support the Plan for which we’re extremely grateful. Hopefully all parties can now work closely together to agree and implement the Plan quickly over the next few weeks to avoid the wind-down scenario,” he ( Ken Sullivan, general manager at Element Six in Shannon) added.

  12. @Tony (“I wonder if this is geared toward bigger (mostly international) firms as a subsidy to keep them here to prevent headline grabbing layoffs rather than stop the drip-drip of small closures?”)

    If you listen carefully, you can hear the sound of a nail being hit on the head. Although I could also believe the earlier comment about it being a good way of giving Mary a bit of peace and quiet over the summer.

  13. @Tony/Joseph
    The limit per company/group of €500k and 55 subsidised jobs is probably too low for the scheme to be much use in preventing headline grabbing layoffs.

  14. @Con,
    Thanks I wasn’t aware of the limit – should really have read the terms….
    so it should help a minimum of 500 companies then (250m/500k)

    [Seems it is aimed at the maximum firmsize allowable – “to protect up to 27,400 vulnerable jobs in the productive sector of the economy” may be 55jobs*500companies =27,500?]

    I see a condition is that the company “Can demonstrate that the enterprise has sufficient cash taking into account this employment subsidy to trade up to 31/12/2010 and beyond”. Are many companies that are in difficulty likely to have access to cash given the relative unavailability of credit?

    I’m a little unclear on the aim of the subsidy though, is it to help companies affected by the unavailability of credit? if so the fact its paid 3 months in arrears may be a slight problem. If it’s to help companies facing lower demand then subsidising a factor to maintain production seems strange to me.

  15. Karl, you note that, given the presumably binding fiscal targets out to 2013, all new spending initiatives must be construed in a balanced-budget-multiplier framework. I’m putting words in your mouth, but this is what you seem to be saying. Add in deadweight losses and the scheme’s impact must therefore be nugatory.

    What’s the point? Every scheme of this type tried in the 1980s has been unfavourably evaluated, so this does not pass the ‘only new mistakes’ test either.

    Fine Gael have criticised the scheme, depressingly, because it does not go far enough.

  16. Colm

    Where did you see or hear a criticism from Fine Gael that the Government’s did not go far enough?

    FG’s critique is that the Scheme is that the Scheme, by relying on bureaucratic selection of “deserving cases”, could create competitive distortions by sustaining poorly managed companies.

    In contrast, FG has proposed a more broadly based PRSI exemption for expanding firms, which, as a general tax scheme, does not suffer from these flaws.

    Leo Varadkar’s criticism may have been that the policy does not go far enough in addressing the real competitiveness problems facing Irish firms, notably the high costs of doing business.

    Andrew

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