Keynote speech by the Minister for Finance Paschal Donohoe to the Dublin Chamber Annual Dinner
By: Minister for Finance; Paschal Donohoe
Last updated on
By: Minister for Finance; Paschal Donohoe
Last updated on
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It is a great pleasure to be here this evening, and I would like to thank Dublin Chamber for the invitation to speak to you all.
Let me begin, by just picking up some of the points Mary Rose and Vincent have outlined in relation to Dublin Chamber.
In particular, I want to welcome the initiative that has been shown by the Chamber in highlighting the need for long-term planning to improve infrastructure development and assist entrepreneurship in the Dublin region. This is vital in order to ensure that our capital is a great place to work, live and visit, for this generation but also for future generations.
Tonight I want to expand on this theme of planning, the foundations of our economic planning to deal with the challenges of today and progress for the future. I want to highlight the importance of building up resilience in our economy, even as we respond to more immediate challenges.
Before I begin, I know we have many distinguished guests present, but I would like to particularly acknowledge, my colleague, the Minister for Public Expenditure and Reform, Minister Michael McGrath.
What do I mean by economic resilience?
In the context of economic development, economic resilience becomes inclusive of three primary attributes: the ability to recover quickly from a shock, the ability to withstand a shock, and the ability to avoid the shock altogether.
The first two qualities are particularly important to Ireland now. The best way of talking about resilience is the ability of the economy – that is our public finances and our labour market, of small- and medium-sized enterprises – to bounce back quickly after a shock to the system.
And as everyone in this room is aware, shocks to our economic system are becoming increasingly frequent. We’ve seen this with Brexit, a global pandemic and now an energy price shock – all in a few short years!
This more shock-prone world highlights why we must continue to build on, and to enhance, our capacity to absorb these shocks.
Our recent track record is positive. This is not to be complacent for the future – there is no reason to be – but it is to make the case for the importance of investing in resilience.
In the second quarter of this year, economic activity – modified domestic demand – was nearly 10 per cent higher than pre-pandemic. At the same time, the level of employment reached its highest ever – 2.55 million people at work in our economy. Unemployment fell to just over 4 per cent – on any reasonable definition this could be considered full employment.
So the ‘scarring’ effects of Brexit and of the pandemic have been minimised – testament to the resilience of our people and also, to the government’s economic policies during the pandemic.
Who would have thought that after the largest shock to the global economy since the Second World War, our economy would recover so rapidly – I think that we as a nation can take great strength from that.
And of course it is not just recent experience that highlights the shock absorption capacity of our economy. A decade ago – 2012 – we reached the low-point of our joint banking and fiscal crises. But look at how the economy has performed since then. Employment for instance was 1.88 million in 2012, this year it will average about 2.53 million. Unemployment was over 15 per cent a decade ago; this year it will average around 5 per cent.
- Half a million more people are employed today than during the GFC.
- Increased labour market participation particularly amongst females and youth workers.
- Resilience of income tax receipts during COVID.
But it is also fair to say that much more needs to be done to boost our resilience.
This brings me on to the public finances and the way that sensible management of tax and spending policies can contribute to boosting resilience.
Government responded to the pandemic by ramping up spending in critical areas – income transfers and firm supports to name just two. Our response was comprehensive and contributed, in no small part, to the rapid rebound in the economy once mass vaccination had been rolled out.
But intervention on the scale that we did was only possible because of the solid position of the public finances in the period before the pandemic. We balanced our books. We ran small budgetary surpluses in 2018 and 2019.We put our debt-income ratio on a downward path – in 2019, the ratio of debt to GNI* was just over 96 per cent, having peaked at 165 per cent in 2012.
These positive dynamics were reflected in external sentiment towards Ireland – our debt was rated as highly creditworthy by the various ratings agencies and the cost of borrowing was only slightly ahead of that of Germany.
So there is very simple, but also very important lesson in this – running budgetary surpluses in good times allows governments to respond in a pro-active manner in difficult times; this, I think, highlights the importance of “keeping your powder dry”.
And there is another budgetary dimension that has an important read-across to resilience – that is corporation tax receipts.
As you are all aware, we have seen a rapid jump in tax revenue from this source in recent years. To put some numbers on this: in 2019 corporate tax receipts were €11 billion, this year they will amount to over €21 billion.
Perhaps not surprisingly, there have been numerous calls to spend these receipts. Government has resisted – we felt it would be inappropriate for public spending to deviate from existing plans. The key factor behind this approach is the uncertainty regarding future tax receipts from the corporate sector – it is absolutely imperative that Government does not build up permanent spending commitments on the basis of revenues that may prove transitory.
I acknowledge the concerns regarding the use of these receipts in recent years. Critically, as the recent shift change in corporate tax receipts occurred, these receipts were used to fund our response to COVID. But as COVID lifted, we used very little of this money to fund new and permanent expenditure. This is one of the reasons we now have a budget surplus – and not a higher level of permanent spending that is even more reliant on taxes that could quickly change in the future.
And, of course, Minister McGrath as the minister responsible for expenditure was, and is, central to this.
In the recent Budget, I went further – allocating €2 billion of corporate tax receipts to the National Reserve Fund this year, with a further €4 billion to be transferred next year. This policy instrument is aimed at further enhancing the resilience of both the public finances and the economy more generally.
The Budget also contributed to resilience in several other ways.
Income transfers to those most exposed to the energy price shock will help maintain demand in the economy;
Increases in the standard rate cut-off point will ensure that workers don’t pay more income tax simply because of inflation;
Grants to firms to help them meet their energy bills will help with profitability.
But – to restate my earlier point – Government can only do this because of the healthy position of the public finances.
Ladies and gentlemen, I now want to turn to what the future might bring and the importance of resilience.
To set the scene, I strongly suspect that the pandemic and war on European soil will be catalysts for major structural changes in the economy.
What do I mean by this?
Well – while globalisation may not go into reverse, I think it will change. For instance, “just-in-time” supply chains may be replaced by “just-in-case” supply chains as firms place a greater emphasis on security of supply than on cost efficiencies.
The shift in fossil fuel prices is unlikely to be transitory.
Digitisation – which increased so rapidly during lockdown – is unlikely to be reversed; to put it simply, will we all begin using cash again for our morning coffee?
So there are fundamental changes underway and it is critical to understand the impacts on our economy and to make sure that we have the tools to respond.
In other words, resilience is not a static concept – it is a dynamic one; in other words, we in Ireland must remain flexible so that we can absorb future economic shocks as well as future economic shifts.
And I want to stress that point that while economic shifts create challenges, they also create opportunities. From a policy perspective, the key is to ensure that we in Ireland are well placed to minimise the challenges and to maximise the opportunities.
There are many dimensions to this but let me name just a few.
The 3 Cs:-
Eliminating capacity constraints and bottlenecks is, and must be, a priority. Here I’m talking about the need to boost housing supply, the increase healthcare capacity, to add to the stock of roads and other public capital – all of which are vital to our economic resilience.
And Government recognises this – we are spending around €12 billion this year on capital projects and we’ve made a commitment to keep a very high level of capital spending out to 2030.
When I become Minister for Public Expenditure and Reform in 2016, the average level of public capital investment in our economy was under €4 billion; this year, Government will finance over €11 billion of capital spending. We have protected capital investment in Budget 23.
The NDP sets out the government’s strategy for continued public investment over the next decade with total public investment of €165 billion planned over the period 2021-2030. This will bring public investment to 5 per cent of modified gross national income, well above the recent EU average of 3 per cent of GDP.
In Dublin, we have seen the opening of a second runway at Dublin airport, delivering greater access to our island. In my constituency of Dublin Central, the Grangegorman Campus is a shining light of education and innovation as well as a valuable community resource. Quarter 2 of this year saw 2,279 new homes completed in Dublin, the highest number in a single quarter in over a decade.
All examples of our commitment to investing in infrastructure for the future. I know we need to build more homes, I know we need to do more but progress is being made.
To take advantage of opportunities, we need certainty.
That is why, last October, Ireland joined 136 other countries in reaching an agreement on the OECD two pillared solution to address the tax challenges arising from digitalisation of the global economy.
The decision to join the global agreement was not taken lightly, however I firmly believe this agreement brings a unique opportunity to reframe the international taxation architecture which has largely remained in place for almost a century. This agreement will bring certainty and stability to the global trading environment and move away from the risk of trade wars, the impact of which would be amplified at a time of economic challenge.
That certainty and stability in the international tax framework is essential for both business and Government when it comes to making future investment and policy decisions.
We know that an essential element of economic resilience is energy security. That is why the government published the National Energy Security Framework, earlier this year. The Framework provides a single overarching and initial response to address Ireland’s energy security needs in the context of the war in Ukraine.
However it is also essential that we also reduce our reliance on fossil fuels for the future. This year we will connect more renewables than ever before and we’re also creating certainty for investment in offshore wind with the first Marine area consents issuing in the next few weeks, and the auction opening at the end of the year.
Of critical importance to creating opportunities for the future are the skills, knowledge and talents of the workforce – what economists call ‘human capital’. Also of critical importance is the entrepreneurial environment – the institutional ecosystem that encourages, enables and rewards business formation and risk taking. Government creates the conditions for employment creation by the private sector.
Let me briefly highlight one area that I think will be fundamental to driving living standards into the future and that is the importance of strengthening linkages between the multinational sector and what might be termed the SME sector. In Ireland we have a strong track record in attracting inward investment, usually in high value added sectors. We also have a good record in domestic entrepreneurship. Where we are lagging is in deepening the links between these two broad sectors. If we can generate a more symbiotic relationship between these sectors I think it will greatly enhance our capacity to absorb the economic shocks and shifts that are now underway.
We also need politicians who can protect and preserve our economy. I believe that the political centre has served Ireland well through the transformation of our living standards in recent decades. Our economic resilience is due, in no small part, to the strength of the centre-ground in Irish politics.
Let me now turn in more detail to the measures which we are taking to support the economy and help businesses to become more resilient in the face of current challenges.
As business leaders you know that domestic enterprises are the bed rock of our economy, and that is why Budget 2023 has sought to deliver a comprehensive response involving multi-layered supports.
A key pillar is the new Temporary Business Energy Support Scheme, to help SMEs and other business to get through this energy crisis.
This scheme will be open to businesses that have experienced a substantial increase in their energy costs, providing them with up to 40 per cent of the increase in their bills.
This is a significant intervention by the government in the Irish economy to protect employment. This support scheme also forms a large part of our once off package.
We must weaken the ability of a shock to income becoming a loss of jobs. This new initiative will help employers with their rising bills, and help save businesses.
To support employers and employees in Budget 2023 I also announced an income Tax package to the value of over €1.1 billion, including an increase to the Standard Rate Cut Off Point to €40,000, while raising main tax credits by €75.
To support business, the government is also extending the Knowledge Development Box - which encourages companies to develop Intellectual Property in Ireland - for a further 4 years.
Finally, let me once again underline that the scale of our action has been made possible by the recovery and resilience in the public finances. This has allowed us to respond to the current cost of living crisis in a timely and decisive fashion supporting households and businesses, particularly the most vulnerable.
The sustainability of our public finances provide the foundations for us to continue to provide the necessary supports as this crisis evolves, to future-proof our economy in terms of the twin transitions of digitalisation and climate change and to prepare for longer-term challenges such as an ageing population.
I would like to conclude on an optimistic note, and that is because despite the challenges facing our country, I am confident that our future is bright.
This confidence is based on the fact that we approach this test from a position of strength.
We have a record number of people at work, we will have a budget surplus, we are reserving money for the needs of the future, and we are intervening to help households and businesses with rising costs.
We know there are challenges. Not enough people have access to a home to buy or rent. Many are feeling the impact of the cost of living. The fall-out from the war in Ukraine continues to reverberate. We can, we have and we will respond. I know this is felt acutely in the city I love and live in.
We also know that the path to future prosperity will have pitfalls. However, we have shown in recent years our capacity to respond decisively to emerging challenges, and we are committed to doing so once again.
That is why, in Budget 2023, this government delivered on its commitment to continue to maintain a broad and stable tax base, while ensuring that spending is both sufficient and sustainable.
By doing so, I believe that we are striking the appropriate balance between responding to the needs of the present, while putting in place the necessary foundations for a successful and resilient economy in the years to come.
And with that I will thank you for your time, thank Dublin Chamber for the invitation to address you, and I hope you enjoy the rest of the evening’s events.