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IBEC Warns Against Irish Labour Tax Hikes

by Jason Gorringe,, London

24 October 2012

"Anaemic" economic growth in Europe and heightened consumer worries have caused IBEC to lower its Irish growth forecasts, warning that the government must be careful not to hike taxes on employment.

IBEC, the Irish business group, has revised downwards its 2012-2013 growth forecasts in its new Quarterly Economic Outlook. The Irish economy itself is performing relatively well, IBEC says, in the context of slowing demand in export markets. However, the ongoing problems in Europe and issues of consumer confidence have led IBEC to expect GDP growth of 0.8% this year, down from its previous projection of 1%. The 2013 growth figure has been lowered from 2.3% to 1.8%, and IBEC says strong growth remains elusive.

IBEC is concerned that some government proposals are at odds with its claim to support job creation. IBEC calculates that labour costs have risen by EUR660m (USD860m) as a result of government initiatives, or 1.4% of total labour costs. Pointing to OECD analysis which shows that a 1% increase in labour taxes reduces the employment rate by 0.4%, IBEC argues that the employment rate in Ireland is 0.6% lower than it would have been had labour taxes not been increased. Plans to introduce a statutory sick pay scheme or hike pay-related-social-insurance should be avoided, IBEC says.

IBEC Chief Economist Fergal O'Brien explained: "Companies are putting together budgets and business plans for 2013, if employment costs rise they will be much less likely to take on new staff. Some will be forced to downsize or go out of business. The focus must be on cutting public expenditure and raising revenue. The most damaging thing government could do in Budget 2013 would be to add to the cost of employment."

According to O'Brien, the Budget must instead focus on supporting activity in the domestic economy. IBEC forecasts a 2% drop in consumer spending, warning that domestic demand remains fragile. For O'Brien, "austerity alone is not the answer". What is needed is "an ambitious growth strategy that supports investment, addresses the weakness in the domestic economy and rebuilds confidence," he concluded.

Finance Minister Michael Noonan will unveil his Budget in December.

TAGS: tax | economics | business | Ireland | fiscal policy | gross domestic product (GDP) | budget | social security

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