Speech
Towards a Model of Sustainable Substance - Speech by Minister for Finance, Paschal Donohoe T.D. to IBEC
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Introduction
Good morning.
Let me begin by thanking IBEC President Frank Gleeson for the invitation to speak today. I want to commend IBEC, Frank and Danny McCoy on your role during the pandemic, this organization played an important role at many difficult points. For this, I thank you.
Much of the economic discussion over the past two years has been taken up with the fall-out from the pandemic. And rightly so: this pandemic has been the single largest shock to the Irish and global economies, apart from wars, in over a century.
However, in my remarks today, I would like to move beyond the issues of the pandemic and offer some thoughts on the substantive nature of Ireland’s economic model. I know that you in IBEC have been to the fore in making the positive case for Ireland as a centre of investment, a centre of substance and a place to do business.
As I make the case for Ireland’s economic model being very much one of substance I will address:
Globalisation and the Irish economy
To set the scene, let me first turn to the issue of globalisation and Ireland’s place in the wider global economy.
For us here in Ireland, globalisation – and the risk of de-globalisation – matter enormously.
For over half a century, we have sailed on the crest of the various waves of integration: first in goods, then in services, in financial flows, and, more recently, in intangible capital flows. Each wave has paved the way for further improvements in living standards, for further reducing our geographical dis-advantage and for further de-coupling our economy from that of our nearest neighbor.
That our economy has benefitted from globalisation more than most is due to the ecosystem we have managed to create: a highly educated and flexible workforce, a bridge between the EU and US markets, with ease of access to both, a business-friendly environment supportive of collaboration and innovation. All of which are factors that underline the substantive nature of our economy.
Personally, I would also argue that this is due to the strength of the centre-ground in Irish politics.
Ireland has established itself as a destination of choice for investment, and we consistently punch above our weight in terms of the share of inward direct investment flows.
We see this, in the first instance, in the volume of exports from our shores, which are almost a third larger than GDP. To put it another way, the multi- national footprint now accounts for more than half of gross-value added in our economy, a figure that is truly unique.
GDP is one-third larger than GNP, highlighting the depths of Ireland’s integration in the global economy.
But it is important to understand that this integration also brings challenges, including an exposure to external swings in activity: we’ve benefited positively in recent years but some of these forces could move in the other direction at some stage.
In a similar vein, we have benefitted from sectoral shifts in global demand – the surge in demand for pharma products, for example. But it would be naïve to think that this could not happen in the other direction – the switching off of the Blackberry technology just a couple of weeks ago is a reminder.
On a number of recent occasions our national income significantly increased due to changes in investment flows. We need to ready ourselves for the possibility that some-day the ‘swing’ could occur in a different way.
Our economy has grown dramatically in a quarter. The opposite could yet occur.
So, from a policy perspective, it stands to reason – at least in my mind – that we must manage our economy and our public finances in a way that allows us to continue to pursue opportunities and to be aware of and to manage these risks.
A model of economic substance
Let me summarise the employment facts that point to substance:
˃ there are over a quarter of a million people directly working in the FDI sector;
˃ this is around 1-in-10 of our work-force;
˃ there are thousands more indirectly employed in Irish SME’s as a result of strong collaborations with the multinational sector;
˃ that these are high-paying jobs, with around one-third of the nation’s wages bill paid by the multinational sector.
The facts speak for themselves and confirm our business model is one of substantive economic activity. It is one where real value-added is created, distributed to Irish-residents in the form of wages and employment and to the foreign-owners in the form of profits.
Our living standards and the strength of corporate tax receipts in recent years support this narrative.
But, of course, and as this audience will fully appreciate, Ireland’s economic model is not all about the multinational sector. Our indigenous sector, the small- and medium-sized enterprises, remains the backbone of our economy, especially outside the large urban areas.
I am conscious that, for many of these SMEs, more-so than for the multinational sector, the pandemic has been incredibly challenging. That is why we in government have been resolute in our commitment to support the economy, including the SME sector.
Changing economic environment
While I am strongly of the view that Ireland’s economic model is one of substance and of further opportunity, it is also the case that the environment is evolving and I would highlight two key changes.
Corporation tax changes
Firstly, the changing way that corporations are taxed will be a key part of the post-pandemic economic landscape.
Digitalisation and globalisation in recent years have transformed how businesses operate. Policymakers across the world must ensure that the international tax framework keeps pace with these fundamental shifts.
The pandemic has provided impetus to the global change agenda. Governments across the world are seeking additional revenue streams in order to address the burden of public debt brought on by the pandemic.
For our part, the Irish Government has been constructively engaged in this work at international fora, where we have consistently sought to ensure that the necessary changes are implemented in a way that provides for certainty and predictability.
As everyone involved in business knows, certainty and predictability are fundamental to informed investment decision-making; this is why I worked so hard to ensure maximum certainty for taxpayers in the OECD process.
I believe that the agreement we achieved at OECD level gets the balance right between the necessary reforms to the international corporate taxation framework on the one hand, and the need for certainty and predictability on the other hand. In this context, I am engaging positively in the discussions at the EU on the Minimum Tax Directive.
This Directive will be significant in ensuring that there is a consistent application of the OECD agreement on the minimum tax across all Member States, and thus play an important role in safeguarding our competitive tax regime.
But it is important to acknowledge that a minimum effective tax rate, applicable in all jurisdictions, does change the global competitive environment, and means Ireland must continue to pursue a broad set of policies to remain competitive.
Globalisation
The second key change relates to globalisation, the nature of which is changing.
We have seen, over the last two years, how the interconnectedness of the flow of goods and services globally was impacted by disruptions to supply chains. Post-pandemic we may see some shortening of supply chains, as firms put a greater premium on security of supply than on just-in-time cost efficiency.
International mobility of workers may also change as companies rethink the traditional office workplace. The move for many employees in developed nations to remote working will raise questions for how Government’s tax income when a person’s home and workplace are potentially located in different countries.
The technology that supports remote working is part of a wider digital shift for business, driven by greater levels of automation and the continued growth of disruptive technologies such as AI. While the nature of free trade continues to change with one example of the UK – for centuries a leader in global trade – exiting the EU.
There are many different views about how globalisation will evolve in the future.
It is important to acknowledge that some predictions about this future are very positive. Harold James, Professor of History and International Affairs at Princeton University, recently argued in the journal ‘Foreign Affairs’ that:
‘The truth is that historic ruptures often generate and accelerate new global links. Covid-19 is no exception. After the pandemic, globalization will come roaring back’.
Whether it will roar back is a debate for another day. But my point today is that globalization will continue to be a decisive force in our economic future.
However: the nature of this force will change due to 3 factors:
The message of history is clear. A pandemic can change everything. In our era this impulse of change is converging with two other inexorable forces – technology and climate.
We are in the early days of great change. We must be ready.
The national response
So this brings me to the issue of how we manage the economy in a world of such change. While I am addressing this as an economic challenge, I do so because this is critical to how we create the resources for a better future for our society.
The answer lies, I believe, in the four economic pillars that will drive our competitiveness and support our economic success in the future.
These pillars are the four ‘S’, underpinning Substance.
So, some observations on each of these pillars. All pillars need a foundation, in this case the foundation is a continual monitoring of our competitiveness and a renewed determination to respond to any issues that undermine it.
These ‘4 S’s’ include many of the issues that impact our competitiveness. Our investment in housing and role of our planning processes are clearly critical to our competitiveness. As I have done on many occasions I want to again emphasise the importance of marginal taxation – particularly in world of high levels of worker mobility and movement.
These priorities exist in the National Economic Plan recently published by the Government.
Sustained Public Capital Investment
The financial crisis had a huge impact on our ability to invest in our public infrastructure; an impact that this Government is addressing through the National Development Plan.
When I began as Minister for Public Expenditure and Reform, 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.
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.
This is critical to support Government’s commitment to transitioning to a low carbon and climate resilient society, will support the realisation of our climate ambitions and targets, and underpin our journey to net zero. It is a plan that provides for the development of a compact, connected and sustainable Ireland, ensuring the decarbonisation of society, while meeting the needs of a population that will be 1 million larger by 2040.
The Government is fully committed to maintaining a high level of public investment for a sustained period of time, to boost the economy’s stock of infrastructure and, in doing so, to support – or ‘crowd-in’ – private investment.
On the private side, it is worth pointing out the ever-increasing role of investment in intangible assets, which is changing the way we think about investment.
Intangible capital is driving economic activity, not just in Ireland, but around the world. In setting out a framework for thinking about how intangible investment operates, Haskel and Westlake in their book “Capitalism without capital” point to the importance of four factors, three of which are particularly relevant to Ireland: scalability, spill-overs and synergies.
Scalability speaks to the possibility of multinational firms making international use of the intangible assets that they have located in Ireland. Synergies point to the increasing returns from clustering and network effects when knowledge and expertise is centred in a geographical location. Finally, spill-overs, while less desirable at a firm level, can provide a positive input to growth within an eco-system.
All of these factors point to the potential benefits to Ireland from the intangible capital being located here – in other words, I see it as part of our economic model of sustainable substance.
Secure national finances
This brings me to the public finances, where the post-pandemic world will be quite different.
I see fiscal sustainability as a pre-requisite for growth and competitiveness.
The approach the Government has taken during the pandemic is one where we’ve allowed an increase in public indebtedness in order to absorb the fallout from the pandemic. The prudent management of the public finances in the years preceding the pandemic facilitated this.
However as we look beyond the pandemic, we need to balance the books over the economic cycle and put the debt ratio on a downward path.
In last year’s Summer Economic Statement, the Government set out a pathway consistent with investing in our economy and society while, at the same time, reducing the budgetary deficit over time.
Our medium-term budgetary strategy is now anchored to an expenditure rule, whereby core expenditure growth is fixed at just over 5 per cent per year. So as well as setting the parameters for Budget 2022, Government has fixed the fiscal parameters for the next few years.
The public finances have out-performed our expectations; last year the deficit came in at around 4 per cent of GNI*, around half the level we expected it would be last spring. Most of this improvement was due to revenue improvements and committing any additional revenue, not to increased spending but to deficit reduction.
We do know that the concentration of the corporate tax base in Ireland undoubtedly represents a very real risk, with just ten firms contributing around half of total receipts – a fact that I have highlighted on many occasions.
So there is a premium on caution; our recent history reminds us of this. A premium on caution is also justified by the extreme openness of our economy, which means that cyclical swings in economic activity can be very large.
Skilled human capital
Our competitiveness is also hugely driven by our social and human capital –investment in skills and education at all levels is critical.
Our further and higher education and research systems represent a critical national asset which can be an engine for economic growth and support the future success of our citizens.
The Government has recently set out a strategy for Ireland to become a leading knowledge economy, with recognition internationally in the areas of higher education, research, and innovation.
Investment in research will be a critical driver of innovation providing the foundation for Ireland’s future economic growth and societal wellbeing. Research that is grounded in a framework of collaboration between educational institutions and enterprise, something I am sure IBEC and your members will recognise the benefit of and support.
The establishment of new Technological Universities across Ireland will act as anchors for regional and national innovation and growth, developing clusters of technology and expertise, and opening up business opportunities regionally and nationally.
Stability in our policies and politics
A final element of our economic foundation for the future is stability – business needs certainty to recover and grow. Certainty on industrial policy, on planning, and on data rights amongst others.
Irish planning legislation has become somewhat complicated and difficult to navigate, sometimes impacting the delivery of necessary infrastructure. That is why the Government has undertaken a comprehensive review of our planning laws, to be overseen by the Attorney General and a dedicated working group of professionals with planning law expertise.
The outcome of this review will improve the government’s ability to implement major programmes, including the National Development Plan and Housing for All Plan, as well as improve Ireland’s national competitiveness.
Clarity and stability of regulation will also play a vital role in our climate and renewable energy efforts. For example, this is why the passage of the Maritime Area Planning Bill last year is so important.
In addition, the Government will shortly launch the next phase of the National Digital Strategy which emphasises inclusiveness, security and transparency, underpinned by a coherent governance structure and a modern, cohesive and effective regulatory framework. The overarching objective in the Government’s digital strategy is to create an economy, and a society, that has fully embraced technological change and the range of opportunities and challenges that it presents.
The Political Centre
In our time this morning I have spoken to our economic opportunities and challenges. It is important to emphasise that the purpose of all this effort is to create the resources for a better society, for a better Ireland.
My contention is that the political centre has served Ireland well through the transformation of our living standards in recent decades. But no political cause can depend entirely on what it has delivered in the past. The political centre must demonstrate again that it can deliver a better Ireland in a world changed by the pandemic.
Conclusion
Ladies and gentlemen, we must do so, because it has been an exceptionally difficult two years. But businesses have played a key role in ensuring that the shock to our incomes, our employment and our living standards has been minimised.
It is also an economic shock in which fiscal, monetary, financial and other policies have been acting in-sync and have helped to limit the short-term economic fallout and the longer term scarring effects.
Of course, as the worst of the pandemic recedes, fiscal trade-offs will once again re-emerge, and it is necessary to exit the various policy supports.
But the last two years have also demonstrated a resilience in our economy. A decade ago would the closure of the Irish domestic economy have co-existed with the resilience of income tax receipts of the last two years? Clearly – No.
This points to real substance and real benefits. At the same time there are risks, there are new vulnerabilities. Today I have acknowledged both and argued how we can reduce the risks while pursuing the benefits.
So there are lots to be done in the weeks, months and years ahead, but with our substantive economic model, I am confident that the opportunities will exceed the challenges.
Thank you.