You’d have to have sympathy for this government which is increasingly straitjacketed by the bailout deal with the IMF/EU. As promised, there was the unveiling of a jobs initiative today (available here) which
(1) Reduces employers’ PRSI on low paid workers and is intended to deliver a competitive boost. You’ll recall the minimum wage was cut in January from €8.65 per hour to €7.65 per hour to boost competitiveness in line with commitments given in the IMF/EU Memorandum of Understanding. The incoming government promised to reverse this cut but has now cut employers’ PRSI so the cost of employing someone on the minimum wage is effectively cut by €1 per hour compared with last year. PRSI was also abolished on payments in shares. If we’re more competitive, there should be more investment which should boost employment.
(2) VAT will be reduced on certain tourist and “real” economy services (restaurants, hairdressing) with the intention of reducing prices by 4% and boosting demand and consequently employment.
(3) Air passenger tax will be abolished on condition the airlines get more bums on seats and the hope is that tourism and visitor numbers will increase which will boost demand and consequently employment.
(4) There is a range of training, education and internship projects which will help deliver a better trained workforce, better able to secure employment and will hopefully attract investment and consequently boost employment.
(5) There will be a range of labour intensive capital projects for which €135m of new money is being made available.
The above are a commendable set of measures. Set against unemployment of 300,000 representing 14.6% of the workforce, it is debatable whether these measures will make a significant dent in that army of unemployed. But, as we are straitjacketed by the IMF/EU bailout deal, the above measures which will cost the best part of €2bn will need to be balanced with income found elsewhere.
And the government is finding that revenue through raiding the private pensions of the citizens. A 0.6% levy is to be imposed on the pension assets of Irish residents. This will contribute €470m per year for the next four years. Again, you would have to have sympathy for the government but at the same time, this seems like a massively unfair charge which is estimated to cost €500 per pension per year. Some of the cost will be borne by pensioners in receipt of pensions, others who are not yet drawing the pension will see the value of their pension pot reduced.
There is a generally accepted principle with any tax that it should be timely, efficient to collect and fair. This levy meets the first two criteria which are quite objective. But when our president earns more than the US president – USD $418,000 compared to USD $400,000 at today’s exchange rate applying to €292,500 – and with correspondingly high salaries throughout the upper echelons of our public sector, it is hard to see how the pension levy meets that third (subjective) criterion. Lastly let’s remind ourselves of the bondholdings in the State-guaranteed banks (though most of the bonds themselves are not guaranteed).
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UPDATE (1): 11th May, 2011. There has been a predictably critical response to the pension levy from the pension industry. The Irish Independent cites various representatives of the industry and we have claims that the levy will mean “an average of €500 a year coming out of the pension savings of 750,000 people”. It seems clear at this stage that this levy will not affect public sector workers. However it is unclear how it will affect spending by those in receipt of reduced pensions as that will tend to reduce demand for goods and services which will tend to reduce employment. Of the 750,000 people with private pensions, it is not clear how many are actually of pensionable age and how much this levy will take out of the real economy. Bizarrely, Enda Kenny has claimed that the pension industry can soften the effect of the 0.6% levy by reducing its administration costs which would surely mean less employment in the industry.
UPDATE (2): 11th May, 2011 Parallels are being drawn today between our own government’s proposed action and the actions of Argentina in 2008. And we have some closer-to-home examples of tampering with private pensions in Hungary , Poland, Bulgaria andLithuania which have all been aimed at bringing private pensions back under state control, generally so that the state can use the funds to pay running costs of the state.
In Ireland we doing something different, we’re expropriating 2.4% of all private pensions over a four year period. There would appear to be some €80bn in private pensions (if 0.6% = €470m). And this move to impose a levy for four years at a rate of 0.6% of the fund’s value is worrying. The government has denied that it is the thin end of the wedge and that a levy will be applied to savings or that the pension levy will be increased or its 4-year term extended.
Argentina has had two raids on its private pension funds in the past decade. In 2001 the state confiscated USD $3.2bn in a last ditch (and unsuccessful) attempt to stave off default and then in 2008 the Argentinian state nationalised some USD $30bn of funds managed by private pension providers to help compensate for a shortfall in tax receipts.
