OPINION: It is not possible to close a €1.8 billion hole in social welfare without the sort of reforms proposed by Burton

THIS AFTERNOON sees the first part of the Budget 2012 double act, with the Minister for Public Expenditure and Reform, Brendan Howlin, revealing his plans to shave €2.2 billion off Government spending.

The second act, the Minister for Finance’s tax measures, come tomorrow, but have been thoroughly trailed at this stage.

The taxation strategy is clear and a sort of pro-business argument can be made for it. Anyone involved in retail will of course disagree, as they will home in on the 2 per cent rise in VAT, which is the centrepiece of the tax plans.

What they have to ponder – and time will reveal – is whether the benefits of not going after people’s take-home pay will deliver an upswing in consumer sentiment that will outweigh the impact of the VAT rise.

If it does the Government will no doubt claim this was the plan all along. although one suspects it was more a case of trying to honour their election commitments not to put up tax or cut core social welfare rates, while keeping our external paymasters on side.

Based on what has been revealed to date, it really does look as though political expediency rather than economic reality has won the day on many of the more controversial revenue raising proposals that emerged into the public domain.

Take for the example the plan to introduce statutory sick pay. The proposal – which has now been shelved, according to weekend reports – would have seen employers pick up the bill for sick pay for the first four weeks of illness (excluding the first three days).

The saving to the social welfare fund is estimated to be €150 million, which is obviously significant.

Joan Burton, the Minister for Social Protection, is understood to have made the case for the change on the back of OECD research which shows that when employers foot more of the bill for sick pay, they manage absenteeism more closely.

The most commonly quoted case is the Netherlands, where absentee rates fell from 10 per cent to 4 per cent after statutory sick pay was introduced.

The flaw in this argument is that Irish absenteeism rates are already comparatively low. According to PwC, Irish people take an average of 6.4 days of unscheduled leave, compared to 10.1 days in Britain and 9.7 for Europe as a whole. The US rate is 5.5, so the room for improvement is clearly limited. Sickness accounts for around 80 per cent of absenteeism, according to PwC. The rather limited scope for the introduction of statutory sick pay to deliver a boost to the the economy makes the initiative look more like a tax on jobs than an economic win-win, and presumably this is why the idea has been shelved. But that does not mean it was a bad idea in the current circumstances.

It is interesting that one of Burton’s other PRSI reforms seems to have stuck and today will reveal the fate of the third.

It seems almost certain that PRSI will be extended to unearned income such as rental income and dividends, while little has been said recently about the proposal to cut redundancy rebates for employers who are currently refunded 60 per cent of the costs of making staff redundant.

The argument put forward by the Minister is that the State should not be borrowing money to help companies – and profitable companies in particular – shed jobs.

Both of these measures can also be characterised as a tax on work – or anti-job – in the way the sick pay measures have been. Reduced redundancy rebates will no doubt result in some companies folding completely with the loss of every job, because the sums involved in a restructuring simply do not add up without the State contribution.

Likewise, the charge on unearned income such as dividends will no doubt affect the finances of many owner-manager businesses.

The difference between the three measures – all of which have been well flagged – seems to be not that one is anti-jobs and the other two pro-jobs. One measure provoked concerted lobbying from business bodies via backbenchers and two didn’t.

Such plasticity does not bode well. The current Government may not have created the current mess, but they got elected to sort it out. And that you cannot do without taking a lot of unpopular decisions. It simply is not possible to close a €1.8 billion hole in the social welfare fund without the sort of reforms proposed by Burton. Particularly if you want to leave the headline PRSI rate at the internationally competitive level of 10.75 per cent.

If a similar lack of political courage is manifested in the spending cuts announced today then the Fine Gael and Labour coalition will have rightly left itself open to the charge that they just don’t get it when it comes to the size and nature of the economic job that has to be done.