A time to shelve, a time to refrain from shelving

Feb 12, 2018

Sunday Business Post, 11 February 2018
We are all used to government commissioned reports and consultations being produced and then quietly shelved if they don't suit the political priorities of the day.  This habit can generate a degree of cynicism, but sometimes shelving a report is exactly the right thing to do.

It seems that shelving is what Social Protection Minister Regina Dorothy proposes to do with last week’s report from her department concerning the future PRSI treatment of the self-employed.  She was right to do so.  The report is poor, not only when judged in the context of what might be politically possible, but in its response to the nature of the self-employed sector in this country.

PRSI looks like a tax, is collected like a tax, but is not in actual fact a tax.  It is instead a form of insurance, “Pay Related Social Insurance”.  All PRSI payments go to the Social Insurance fund, rather than directly into the exchequer like other “tax” receipts.  According to the January Exchequer returns, which describe the totals collected for the full year, PRSI came to €9 billion.  It accounted for 14% of all government receipts during 2017.  By contrast, income tax (which includes USC) accounted for 31%.  €9 billion is a huge sum of money, and about half of that comes from employers PRSI contributions.

Safety Net

PRSI is simultaneously a contribution to a state run pension scheme, to a state run permanent health insurance scheme and to a state run income protection policy.  PRSI benefits ensure that there are safety nets for workers who could become unemployed, or who fall ill, or who eventually retire.  The safety net is not the same however for all workers.

In common with every insurance scheme ever devised, the more you pay, the more you should get.  While both employed and self-employed workers pay PRSI at a rate of 4%, for employees this is just part of the story.  Employers pay an additional contribution, this year at 10.85%, on top of the payroll cost of their employees.  It is this additional contribution that provides the additional benefits which employees enjoy over the self-employed, notably unemployment and health care benefits like the jobseekers benefit and occupational injuries benefit.

The self-employed are acutely aware of this discrepancy.  In 2017, the Department of Social Protection carried out a survey of mostly self-employed people paying PRSI.  Respondents rated cover for long-term illness, short-term illness and unemployment as the most important extra benefits to them.  Almost 4 out of 5 said they would be willing to pay a higher headline rate of PRSI in return for extra benefit coverage.

Some type of a problem

The lack of emphasis on this linkage between PRSI payments and PRSI benefits makes the current report poor.  The initial consultation document which canvassed observations and comments (I was involved in one of the consultation responses) seemed to regard self-employment as some type of a problem.  Its purpose was, in its own words, to "invite submissions from interested parties on possible measures to address the loss to the Exchequer".  Self-employment, and intermediary structures involving self-employment, were seen as vessels for what is at best tax avoidance, at worst tax evasion.  Self-employed status was seen as a way of avoiding the high 10.85% employer contribution.

While evading or avoiding tax does indeed contribute to a loss to the Exchequer, the position is not nearly as clear when it comes to PRSI avoidance or evasion.  If there are fewer PRSI contributions, there are fewer benefits to be paid out so who is really at a loss?  Is it the Exchequer, or the worker?

The report is useful in that it clearly identifies that Ireland is not an outlier when it comes to the proportion of self-employed people in the Irish economy, and the proportion is comparable to EU norms.  It notes that over the past 20 years or so the ratio of employees to self-employed has been remarkably stable at approximately 7 to 1, a ratio that persisted even through the great recession.  That kind of stability suggests that the proportion is driven by economic realities rather than by widespread attempts at bogus self-employment for the sake of saving PRSI.

Resilient

It also suggests that the self-employed are a remarkably resilient bunch.  While most of the 300,000 self-employed people work on their "own account" as the report has it, almost one third of them have employees of their own.  That makes the self-employed sector, most of which is paradigm indigenous SME, a particularly important driver of job creation within our economy.

Which is why this time the Minister's response is exactly right.  Rather than blindly adopt the report's recommendation to reduce the differential between employers and employees in the total PRSI paid, she has been reported as saying that she is more concerned about extending rights to self-employed people under the social insurance fund. 

While the money to extend those rights will have to be found somewhere, this particular line of thinking should not be shelved. 

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland