Five priorities for tomorrow’s Spring Statement
Ibec, the group that represents Irish business, has identified five key priorities for tomorrow’s Spring Statement, including cuts to the marginal tax rate for all workers and ambitious investment in capital projects, education and innovation.
Ibec Head of Policy and Chief Economist Fergal O’Brien said: “The Government should commit to reducing the punitive marginal tax rate for all workers, actively encourage entrepreneurship and invest much more in the future of the country. This can be done while also reducing the deficit and debt levels, and prioritising a balanced recovery across different sectors and regions. Strong growth can be maintained if we manage the recovery sensibly.”
Ibec’s Spring Statement priorities:
1. Income tax:
According to the OECD our income tax system is the most progressive in the developed world. There is, however, a clear trade-off between this redistribution, people’s incentive to work and companies’ ability to attract and retain high skilled staff. The case for reducing marginal rates of tax is clear. High marginal rates of tax dis-incentivise people from taking on extra work, from increasing their skills and from working in Ireland at all. In this context, it was disappointing that the Government created a third higher rate of tax for workers in Budget 2015 by retaining a higher rate of USC for those earning over €70,000. Putatively this caps the ‘gains’ which would go to higher earners, in reality though it is damaging companies’ ability to attract and retain high skilled workers. In a new post-BEPS world it is by creating an attractive country for high skilled workers from home and abroad that Ireland will increase its productivity and subsequently grow its economy. There is no economic justification for maintaining penal income tax rates on these workers.
2. Taxation of entrepreneurship:
Policy-makers over the past decade have often lauded entrepreneurs as being central to developing indigenous firms which can compete globally. The signal we send through our tax system, however, differs greatly from the rhetoric. The Taoiseach in his recent speech at Ibec’s CEO conference acknowledged as much by referring to the higher rate of tax for the self-employed as “discriminatory”. With the higher rate of USC, the lack of an equivalent to the PAYE credit and the higher rates of CGT introduced in recent years our tax system has gone in the opposite direction to much of enterprise policy. If we are truly serious about creating a high skilled entrepreneurial economy these issues should be central to future taxation policy.
3. Capital expenditure:
We need to dramatically rampup capital spending if we are to avoid the mistakes of the past, when significant infrastructure gaps constrained growth and created bottlenecks. At the moment, however, we’re not investing nearly enough. Record low interest rates offer a once in a generation chance to invest ambitiously in the country’s future. The Government should commit to spending 4% of GDP on infrastructure by 2020. Housing under supply in key urban centres has the potential to undermine competitiveness and make it more difficult to attract and retain talented workers. The Government needs to do much more to address supply shortages. Our transport network is also far from complete. During the boom years we successfully connected Dublin to the other main cities, but there is still a job to do to better connect all of our major cities to each other. Significant infrastructure gaps also exist in health, education, energy and environmental services sectors, which should be addressed as a priority.
4. Education and research investment:
The education system has an essential role to play in supporting economic growth through the development of new knowledge and the provision of skilled workers. Unfortunately Ireland has reached a tipping point in terms of the impact of recent cuts on quality in key areas and the process of reversing these cuts must begin:
- An increase in resources to support ongoing school reforms such as the literacy and numeracy strategy, changing the junior cycle and transforming maths and science curricula
- An ambitious programme of continuous professional development for teachers in recognition that teaching quality is the greatest influence on student outcomes
- A robust financing model and a process of reversing recent cuts in higher education funding to address quality and future demand • A rebalancing of investment priorities in the forthcoming National Skills Strategy towards in-employment development programmes (e.g. Skillnets) and training programmes with demonstrable labour market outcomes (e.g.apprenticeships)
- An ambitious long-term vision for science, technology and innovation funding by resetting the R&D intensity target to 3% of GDP in line with the Europe 2020 strategy.
5. Public sector pay:
Public sector workers have made a central contribution to Ireland’s fiscal recovery through pay reductions, productivity and their ongoing commitment to the delivery of public services. As economic circumstances improve it is appropriate that public sector pay rates should be reviewed. The process must take into account the following factors:
- the State’s limited ability to finance pay increases, despite the emergence of economic recovery
- relative pay levels in the public and private sectors, and international competitiveness issues
- the need for pay differentiation within the public sector which reflects labour market circumstances
- the need to deliver OECD recommended pension reforms.