What’s the Savings? The Real Savings?

There was an interesting exchange on the Pat Kenny show yesterday with economist Jim Power over the Government’s proposals to cut Sunday premium pay.  The Government has claimed this cut would ‘save’ €170 million.

Pat Kenny:  I would presume that when they talk about saving €170 million, it is a net €170 million.  Not a gross €170 million.

Jim Power:  It’s a gross savings of €170 million.

Pat Kenny:  so when you add in the pension levy and USC and income tax and all that, it amounts to far less.

Jim Power:  It amounts to far less in real savings.

Yes, that’s correct.  The headline figure produced by the Government is ‘gross’ and the real savings will be far less.  How much less?  Let’s look at some numbers by using an example of a worker earning €500 a year from working Sunday shifts.

  • If the worker is on the standard rate tax band, then they will be paying a marginal tax rate of approximately 35 percent (20 percent income tax, 11 percent USC/PRSI, and 4.2 percent pension levy).  This means that 35 percent of the reduction will be lost in lower tax revenue.  So the after-tax saving is 65 percent.
  • If the worker is in the higher tax band (and a single person reaches that at €32,800), then they will be paying a marginal tax rate of approximately 57 percent (40 percent income tax, 11 percent USC/PRSI, and 5.6 percent pension levy).  This means that 57 percent of the reduction will be lost in lower tax revenue.  So the after-tax saving is 43 percent.

If the numbers of workers affected are split evenly between standard and higher tax rate, then the average after-tax savings will be 54 percent.  So a gross savings of €170 million turns out to be a net saving of €92 million.

But there’s more.  The ESRI shows that for every €100 cut from the public sector payroll consumer spending falls by €73.  This is not just the loss in consumer spending from the particular worker affected.  As they spend less, businesses receive less money and, in turn, reduce their employees’ income which results in further loss in consumer spending.

So the €170 million cut could reduce consumer spending by approximately €125 million.  This will reduce VAT revenue for the Government.

And if the reduction in consumer spending results in lower incomes in the private sector, it could contribute to business closures and job losses.

It would be helpful if the Government provided their own model of the real ‘net’ savings and the economic impact of these cuts.  That’s what UNITE has specifically requested last Friday but so far there has been no response from the Department.

But we do know that the savings will be, at best, half of the €170 million.  And that doesn’t count the economic damage this cut will do.

So when you hear some number thrown out by the Government – some savings they are seeking – just cut that number in half.  And even then, you’ll probably on the high side.

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