Subsidising companies which cut jobs to create jobs?

It gets this weird - the Government is subsidising companies that are cutting their own workforce, all in the name of subsidising job creation.  Nonetheless, the Government will eventually claim that it is a success. It is the classic three-card trick – and we end up getting fleeced. By Michael Taft.

In its Jobs Initiative, the Government cut the lower rate of employers’ PRSI in half – from 8.5% to 4.25%. It was claimed that this would incentivise job creation. This is a temporary measure up to 2014 and will cost €473 million.

Government subsidies to business to create jobs are nothing new but they usually take another form – providing a tax/PRSI break for any additional job created. This was the approach Fianna Fáil took and what the Labour Party proposed.  Whatever about the fault of these programmes, at least it aimed to ‘reward’ additionality - that is, an increase in jobs.

However, this Government’s approach - driven by Fine Gael's election promises - is to provide a cut in PRSI whether a business intends to create jobs, maintain its current level or even cut employment.

There’s another problem: namely, deadweight. Deadweight is the cost of subsidising firms for activity they would have engaged in without the subsidy. For instance, prior to the Jobs Initiative:

  • Tesco announced they would open seven new stores creating 750 jobs
  • Supervalu announced they would open two new stores and refurbish 34 others, creating 400 jobs

Would they have done this without the PRSI cut? Yes, of course, but they will benefit nonetheless. This is subsidising activity that would have occurred anyway; hence, deadweight. But wait for the Government to take credit for the jobs created this year – they will claim it is vindication of their programme.

Indeed, a number of large profitable firms will benefit from Fine Gael’s policy. The Irish Times recently published its Top 1000 Companies for 2010. In this list are 41 companies categorised as ‘Retail’. Of these companies:

  • 28 returned a profit
  • 11 filed a loss
  • 2 broke even

There are some questions. First, why are the Government subsidising large profitable companies? Second, will subsidising loss-makers induce them to create jobs, or repair their balance sheet? Since the Government has published no analysis of the impact of their PRSI-cut policy, we don’t know – but we can make an educated guess.

There are some companies that don’t make the Irish Time list because they are ‘unlimited’ companies which means they don’t have to file profit/loss accounts. There are some big retail players in this category: Dunnes Stores, Tesco, Superquinn, Heatons, Smyths Toys, etc. Are these in profit? Hard to say (but as we saw, Tesco is expanding). As for Dunnes, we know this much:

‘Dunnes stores directors Frank Dunne and Margaret Heffernan were paid a dividend of more than €14 million last year [end of January 2010], the accounts for their main company in Northern Ireland, Britain and Spain show . . . a period in which the company saw its pretax profits rise slightly to almost £28 million (€33.4 million). Dunnes Stores does not disclose any financial information for its 116 grocery and textiles stores in the Republic as they form an unlimited entity.’

Great. The Government is subsidising companies that are paying multi-million dividends to its directors.

Greater clarity could be provided if the Government published its departmental analysis of the amount of deadweight attached to its nearly half-a-billion Euro policy. How much will subsidise economic activity that would have occurred anyway? How much will subsidise companies that are maintaining or even cutting their employment levels? And how much will actually go towards creating jobs that would not have been in created in the absence of the proposal?

But don’t wait for the answer. It’s probably the case that no such analysis was done. Which means that the Government is throwing around a lot of money without any idea of how efficient it is.

So the next time you hear the Health Minister declare not-one-more-cent for hospitals – because he’s tough on spending – just remember: this is a Government that is throwing nearly €500 million at the business sector without any idea of whether it is getting value for money.

Five more years of this and we really will go broke.


Image top: infomatique.