Neil McDonnell: Businesses can’t expect too much from a budget prepared with an election on the horizon

Labour cost attracts little attention from Government or unions, but is deeply troubling for small services and manufacturing businesses, which suffer from the Baumol effect, or “cost disease.” 

There isn’t a finance minister throughout the EU who would not donate a limb to be in the position Jack Chambers and Paschal Donohoe are in this year: having so much money to spend that they are limited only by the capacity of the domestic economy to absorb it.

Budget 2025 is pitched primarily at the punter and voter, through a large cost-of-living, welfare and personal taxation package. VAT, which has been a central plank for the hospitality and services industries, has not been touched. Our hospitality and services businesses face an existential challenge in 2025.

The spending package significantly breaches the 5% spending guideline, which we accept should not necessarily apply in an expanding economy. But we need to see value for money in State expenditure.

The 6.3% increase in the minimum wage will take the total increase in labour cost to 18.7% in 13 months, and will be followed in by auto-enrolment in September 2025, which will add another 1.5% to payroll cost. If the Government follows through with its proposals on a “living wage” we will see significant levels of business closure and job loss in services businesses.

Labour cost attracts little attention from Government or unions, but is deeply troubling for small services and manufacturing businesses, which suffer from the Baumol effect, or “cost disease.” 

The Baumol effect describes the impact on small businesses where revenues don’t increase by much (or not at all), while costs do (primarily through labour and regulatory cost). That is the situation facing thousands of hospitality, childcare, nursing home and leisure businesses. If customers are unwilling to pay the increased costs incurred, those businesses will die off.

Without breaking out of this cycle of increasing costs and static revenues, all businesses will at some point become insolvent. Their longevity is dependent on the state of their balance sheet and its ability to bear successive losses.

ISME welcomes the adjustments to employee tax credits, which at least partly address the “tax creep” due to increasing wages. There has been some effort this year to encourage entrepreneurial activity, though it is vital these efforts are not strangled at birth by ignorant or over-zealous intervention by the Department of Finance.

At a high level, what stands out from the Government speeches, and from the opposition speeches in reply, is that Ireland lacks an over-arching vision, policy or objective for indigenous enterprise. There is a perception that “steady as she goes” is the basis for future policy.

We in ISME, along with many others, have voiced concern for many years that the economy is dangerously over-dependent on a narrow band of businesses in the FDI sector which generate huge tranches of corporation tax, PAYE, PRSI and USC.

Budget 2025 makes no effort to redress this imbalance, and is seen as a serious disappointment. Let’s get the general election out of the way as soon as possible, and ask the legislators of the 34th to set a clearer path ahead for worried Irish business.

Neil McDonnell is Chief Executive of Business Group ISME.