Fine Gael PRSI Reduction Proposal

Fine Gael’s PRSI reduction proposal is linked here

As part of their ongoing commitment to focus on job protection and creation Fine Gael have announced plans to reduce the upper rate of employer’s PRSI by 20% and the lower rate of employer’s PRSI by 50% as part of a €900m pro jobs tax cut for December’s budget. The proposal, which will benefit 175,000 employers and their 1.7m employees, was announced in the Dáil today by the Fine Gael Deputy Leader and Spokesman on Finance Richard Bruton T.D. The €900m tax cut for jobs plan will be financed by the broadening of the tax base to include a carbon tax (480m), a windfall levy on power generators (200m) and the abolition of the PRSI allowance and the ceiling on employees PRSI (470m) while contributing €250m to deficit reduction.

Also, a simplified explanation of the job sharing incentive scheme referenced by Krugman is available from the author Dean Baker of CEPR in Washington here

20 thoughts on “Fine Gael PRSI Reduction Proposal”

  1. I think that its admirable to put any idea forward but as an employer i won’t be taking on people due to a prsi reduction, it’ll probably be a nice kicker for people who would be hiring anyway though.

  2. @Liam
    I welcome this. It shows they are thinking along the right lines. But given we are in an employment crisis why not abolish it entirely for lower paid workers? The fiscal crisis needs to be solved but we also need to stop high unemployment from becoming permanent.

  3. @E20Bn
    Stopping it entirely would give lower paid workers and their employers no stake in the system.

    Still, three years into the crisis and we finally have one costed proposal aimed at jobs. In another three years we might even see something implemented…

  4. If one wanted to be a smart-arse one might say they are advertising what is wrong with the policy. By this I mean the conventional argument against such policies is that there is a big deadweight loss as you are paying people to do what they are going to do anyway. I think this is what they are referring to when they say ” The proposal, which will benefit 175,000 employers and their 1.7m employees”.
    Happy to be corrected on this. Its the marginal guys not the infra-marginal ones that matter. In other words I do not think we want to help 1.7m employees just the ones at risk of being laid off and the unemployed who are just priced out of the market.
    Of course in the absence of labour demand elasticities etc its hard to know what the margins are but that is the point of the policy: changing decisions at the margin. Maybe someone with some models to hand could simulate this policy?

  5. @yoganmahew
    “Still, three years into the crisis and we finally have one costed proposal aimed at jobs. In another three years we might even see something implemented…”
    It’s astounding isn’t it. It looks like we will end up with permanently high unemployment by default.

  6. @E20Bn
    Astounding isn’t quite the word I’d use. I’d use “abrogation of responsibility”, if it wasn’t a phrase. Silly might even cover it.

    It’s not even a new idea. It has been blogged about for at least two years in pretty much this format – graded reductions in rates depending on total earnings. Mr. Lenihan even announced he was going to do something about it last February, but, in his rush to save property investors, it must have slipped his mind.

  7. The “windfall tax on power generators” seems completely misguided – we should be trying to drive down energy costs, not give companies cause/excuses to increase them further.

  8. Am I the only one here who is shocked at the irresponsibility of proposing tax cuts, given the current budgetary climate?

    We already have low taxes on labour and high taxes on consumption, so the proposed rebalancing is probably moving us in the wrong direction.

    Last time I looked, the State was teetering on the edge of sovereign insolvency. Surely not the time to be fighting fire with fire….

  9. @yoganmahew,

    You’re right. It isn’t a new idea. The galling thing is that something like this should have been implemented at the first hint of the economic downturn. Most other Eurozone countries, in particular, Germany, beefed up, modified and expanded existing arrangements to maximise staff retention across the board and to prevent unemployment becoming entrenched. We could spend our lives searching for the margins to ensure we minimse deadweight losses.

    It might upset economists, but most firms do not operate at the margin (in economic terms). At the outset of this recession I suspect most firms were focused on cash flows turning red and anything that eased that pressure might have eased job-shedding. It is probably necessary to balance the deadweight losses of any scheme of this nature against the counterfactual of a huge increase in UB and UA payments to people to do nothing and allowing unemployment to become entrenched.

    I’m not sure if it strikes anyone else as odd that, 14 months after the Lehman collapse, we still haven’t a functioning bank resolution scheme and are only now seriously considering job protection policies – while most other developed economies are pulling themselves out of the mire (having already taken the actions to foster this recovery).

    @Dave,

    The ESB has been making a windfall gain (upto €300 million a year) on some of the free EUAs it receives under ETS II as the cost/value of these EUAs is included in final prices. For the year Oct. ’08 to Sep. ’09 the ESB offered (and the energy regulator then grabbed) this €300 million to reduce electricity network tariffs. The ESB knew it was milking the system beyond the point of consumers’ tolerance. However, the ESB is no longer willing to forgo this windfall and there are no statutory provisions to compel them. It makes sense to tax this away. However, from 2013 under ETS III the ESB (and all other power generators) will not receive free EUAs – so the windfall will disappear.

  10. @Dave – as Paul has pointed out, the power generators already charge consumers for the value of their carbon permits, even though they get the vast majority of them for free from the Government, leading to a huge unearned windfall profit of about €200m per year at current carbon prices – one of the great unreported rip-offs of our time. (Let me declare my interest at this point – I work as FG’s Director of Policy and Economic Adviser)

    @Paul

    You’re right that the windfall will disappear in 2013 when full auctioning kicks in, at which point revenues from the windfall tax will be replaced by the auction proceeds, with a neutral effect on the public finances.

    @Kev

    The concept of deadweight is not relevant – we are not proposing a subsidy. We are simply proposing a restructuring of the tax system to lower employer taxes on labour, while also making a contribution to deficit reduction. This is entirely logical at this point in time. Now that the debt-financed property bubble is burst, and without the options of a currency devaluation, we need to accelerate the downward adjustment of labour costs to restore international competitiveness and drive export-driven jobs recovery. But nominal wages will only adjust slowly, particularly at lower levels. This policy is intended to help the process. In a sense, we’re trying to mimic the effects of a currency devaluation.

    Andrew

    Andrew

  11. One of the reasons given for a reduction in employers PRSI is that the minimum wage can remain untouched.

    A mistake I think as it still does not address the need for a reduction in wages across the board in this country.

    We have to make ourselves more comptitve in all sorts of ways, wages, local council charges and energy costs.

    But it is a start and maybe it is just political that they are not addressing the minimum wage as they would not want to scare the voters with an election looking more and more likely.

  12. @Andrew McDowell
    FF’s solutions to our employment crisis are FAS and Mary Coughlan. Keep reminding them of this. All they can do is attack your proposals. They have offered nothing new themselves except token gestures. They have taken years to get to grips with the budget deficit. It will take years longer for them to take serious measures on unemployment.
    Their glacial approach, punctuated by gigantic errors, is driving this country into an economic ice age.

  13. @Andrew McDowell

    Well at least you and your party are showing some signs of critical thinking. I just hope that more carefully thought out ideas can be created from all sides for the rest of the €4billion that needs to be raised in the december budget.

    @ M.B.

    I think a reason why the minimum wage is not/can not be touched in this budget is the fact that there would equally need to be a similar reduction in unemployment benefit, so that there is still an incentive to work on the minimum. For anyone earning the minimum presently and working the average 39 hour week they are gaining just over €130 more than they would get for signing on.

    And thats before you get into the politics of it all. If only we could print our own money like Zimbabewe, all of our problems would be solved!

  14. @Paul Hunt, Andrew McDowell

    Thanks for the clarification – I saw something to that effect in the explanatory memo but it was very vague.

    My concern would still be along the same lines. The Energy Regulator has allowed prices to spiral well beyond the other countries in Europe while also allowing them this bizarre windfall – how can anyone have faith they’ll resist energy company pressure to allow them to pass the 200m on to the consumer?

  15. @Dave,

    Your concerns are justified. I tackled these issues in this post: http://www.irisheconomy.ie/index.php/2009/11/04/the-benefits-of-increased-investment-and-efficiency-in-public-infrastructure-and-utilities/

    To a large extent, the ESB determines energy policy. This has been the case for some time and BGE is learning to motor along in its slipstream. For a variety of difficult to justify reasons successive governments and the CER have applied policy and regulatory arrangements that support this and consumers have ended up paying through the nose. In addition to the position of influence it has secured, ESB management is able to rely on political fear of the reaction of the ESB’s group of unions to stymie any meaningful structural reform of the electricity industry.

    Households and businesses can no longer afford these excessively high prices (in effect, they include a tax to support the ESB and BGE), but there seems to be little interest in tackling this rip-off.

  16. @ paul m

    I agree. I think social welfare needs to be looked at too. FF thought increasing social welfare when we had full employment was a great idea because it bought votes at little expense. Now the chickens have come home to roost.

    Problem is to make it fair you have to decrease all costs across the board and that is going to involve some sort of debt forgiveness package for mortgage holders.

    Big problem for our already bankrupt Banks. Big problem for our already bankrupt Government.

    Expect Europe to take more transparent control within 6-12 months.

  17. @Andrew McD and Kevin D,
    Abolishing the ceiling and lowering the rates will obviously work in opposite directions in terms of effects on the wage bill.

    Obviously Kevin is right in terms of employment: far cheaper to focus on the marginal. Layard and Nickell et al. in the early 1980s proposed marginal employment subsidies, or marginal payroll tax reductions: i.e. lower payroll taxes on any increase in a firm’s employment level above let’s say November 1, 2009. I wrote papers on this at the time, applied to Ireland (never published them, but must dig them out again!). This has the added benefit that it incentivises the sectors of the future rather than of the past.

  18. Frank

    You write that abolishing the ceiling and lowering the rates will “obviously” work in opposite directions in terms of effects on the wage bill. Can you explain why that is obvious? Do you really think in the current labour market that the incidence of abolishing the PRSI ceiling will fall on employers rather than employees?

    My sense is that abolition of employee ceiling and allowance will have a negigible impact on the pay bill for employers, and will come nowhere near to offsetting the reduction from the cut in employer PRSI rates.

    Andrew

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