Brian Keegan: Our misguided obsession with corporation taxes
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As with so many things in life, business has its own momentum and can be extraordinarily resilient. It feels inappropriate to reduce discussion about the consequences of recent human catastrophes — the covid pandemic, the Ukraine war and the war in Gaza — to purely economic or commercial terms.
Yet in this country, the recovery from the covid lockdown measures is almost complete. Decade-high inflation, primarily driven by disruption to the energy supply from Russia following the breakout of the Ukraine war, is largely back under control.
There will undoubtedly be economic consequences from the savage conflict in the Middle East during 2024 and supply chains involving the Suez Canal are already being hampered. Experience suggests that while we will all feel the impact, commercial life in this country will plough ahead.
However, what really harms economic activity long-term is poor commercial governance and regulatory decisions at the government level.
Students of history will point to the Economic War of the 1930s, where tariffs effectively crippled trade with our biggest trading partner, the UK. More recently it is reasonable to point to the banking crisis of 2009 as an outcome of poor regulation and decision-making. Even that example is being put in the shade by the Brexit referendum outcome in the UK, the egregious consequences of which are only mitigated by the reality that most of the barriers to trade which were created with the EU have not been implemented yet.
The impact of recent economic decisions already taken in this country will first be felt in the coming year.
We have, quite correctly, made significant improvements to parental leave entitlements, sick leave benefits, and supports in cases of domestic abuse which are either new or will take effect at various times during 2024. However, all of these create costs for employers, none more so than the increase to the minimum wage, from €11.30 to €12.70, which took effect on 1 January. While this increase will not have the dire consequences which some have predicted (as not all businesses rely primarily on minimum wage jobs to make their commercial model work) it does make trading more difficult.
There will be other government-imposed increases to the cost of doing business during 2024. The rate of employer PRSI will increase by .1 of a percentage point in October, to increase the social protection fund reserves for our ageing population. The increase doesn’t sound very much until you consider that employer PRSI is applied to all intents and purposes on the total wage bill and that there are some 2.5 million employees in this country.
We may also see in 2024 the introduction of a procedure known as auto-enrolment, which will necessitate many employers making contributions to employee pension funds. Again, while this is also a socially beneficial idea, it increases the cost of employing a worker. Pension changes occur at a glacially slow pace, so don’t be surprised if this particular change does not materialise in 2024.
There was plenty of discussion and concern during 2023, at least in official circles, regarding the volatility of the corporation tax take and its impact on the public finances. When we obsess about the level of corporation tax paid, we are looking at the wrong indicator. More importantly, the corporation tax yield is an indicator of the commercial health of the largest businesses in this country, and as a corollary is an indicator of the stability of our employment levels.
An increase in unemployment would be far more corrosive to the national finances than any surge in inflation. The concern should be more about whether companies are able to employ people, rather than merely be able to pay tax.
There will be European elections in June 2024. By tradition, nothing new will be put on the EU agenda between now and the elections, and even after the elections, it will take some time for the European institutions to crank up their lawmaking processes again. I think 2024 could be a quiet year for EU regulatory activity.
There could also be a general election in this country this year, and the composition of a future Irish government is fundamental to how businesses will fare in the medium term.
If even good regulation and governance can drive business costs upwards as we will see in 2024, the consequences of poor regulation and governance would be far more serious in the medium term. In the modern economy of Ireland, a democratic decision is also a commercial decision.
If we are to keep our momentum and resilience, we need politicians who know what they are doing and who won’t attempt to blame external factors if things go wrong.
- Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland