By: Minister for Finance; Michael McGrath
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Good evening to all and thank you to Pat O’Neill, President, Chartered Accountants Ireland, for the invitation to speak at your annual dinner.
It is a great personal honour for me to stand here as a Chartered Accountant and as Minister for Finance for Ireland.
At the outset, I would like to acknowledge my three Oireachtas colleagues who are present here this evening – all Chartered Accountants – I want to congratulate Sean Fleming on his excellent work as Minister in the Department of Finance since 2020 and to congratulate him on his appointment as Minister of State with responsibility for International Development.
Congratulations also to Kieran O’Donnell on his elevation as Minister of State with responsibility for Local Government and Planning. I also pleased that our colleague from the Seanad, Gerry Horkan, also joins us this evening.
I want to thank the Institute and all of its members for your work during COVID-19 to sustain business life during those dark days. The Institute’s advocacy and indeed its expertise during this time was vital in helping the government to share support schemes in the most effective way possible. In particular, I’d like to thank Brian Keegan and Barry Dempsey for all their support.
Pat’s predecessor as President, Paul Henry, deserves special mention for all his work on behalf of members at such a difficult time.
Pat, I know this is a big night for you personally. You are providing outstanding leadership of the Institute and I am delighted that our profession is now benefitting from the vast experience you have across so many parts of our economy, and I wish you every success for the remainder of your term.
Chartered Accountants Ireland is an influential contributor to public policy in Ireland. A great example of this is Barrie O’Connell – who of course happens to be from Cork – who represents the profession so ably on the Joint Committee of the Ireland for Finance strategy. Thank you Barrie, and all the Chartered Accountants, who help our public service and us as policy makers in the work we do on behalf of the country. I am certain that your collective input makes for better policy making. That collaboration is one of the real strengths of our approach and helps to underpin our pro-enterprise strategy for Ireland.
In my remarks, I will take the opportunity to briefly set out my economic and budgetary priorities for the year ahead.
The concept of ‘polycrisis’ is sometimes attributed to the former President of the European Commission, Jean-Claude Juncker: by this he was referring to an almost permanent set of economic shocks.
And sometimes it can feel like this in Ireland – in just a few years we’ve had:
The fall-out from these shocks is clear:
But despite these enormous challenges, the labour market continues to perform strongly. We now have more people working in Ireland than ever before – at over 2.5 million people. The official unemployment rate over the past year is likely to have been at its lowest for some twenty years. In many sectors, the demand for labour exceeds the available supply, with the vacancy rate at elevated levels. You know this only too well in your own profession.
Shocks of the magnitude we’ve experienced in recent years would have, in the past, triggered major disruption in the labour market – job losses, higher unemployment and outward migration.
On Monday and Tuesday of this week, I attended my first meetings of the Eurogroup and Ecofin Council of Finance Ministers in Brussels, where we discussed the economic situation – and I was struck that the tone of the discussion was more optimistic about the economic outlook in Europe.
Having said that, we were all conscious of the dangers that inflation poses. Ireland, is of course, no exception with an average inflation rate of just over 8 per cent recorded last year. To put this into perspective, this compares with an average inflation rate of around ½ per cent per annum in the preceding decade. We know that inflation hurts people, and businesses. We have done our best to respond to these pressured with a range of cost of living measures, and an energy support scheme for businesses.
On a positive note, the evidence strongly suggests that headline inflation has passed its peak and is now on a downward trajectory. However, the pathway back to 2 per cent is unlikely to be smooth with bumps along the way to be expected.
To avoid inflationary pressures becoming entrenched, Central Banks have brought the era of cheap money to a close. In the euro area, monetary policy is now rapidly tightening with an increase in the policy rate of 2.5 percentage points since July, the fastest pace in tightening in the history of the single currency. This is impacting on mortgage holders, on businesses and on government.
Against this backdrop, my department expects the domestic economy to effectively move sideways over the coming months, before a modest recovery takes hold in the second half of the year.
For the year as a whole, we are anticipating an increase in modified domestic demand – our preferred measure of the domestic economy – of just 1¼ per cent.
We would characterise this as a short and shallow downturn; that said, uncertainty is exceptionally high at the moment and this outcome is not guaranteed.
The relatively strong performance of the economy in the face of strong headwinds begs the question as to the source of this resilience.
It is undoubtedly the case that government support during the pandemic and in response to higher energy prices has played a key role. In respect of the pandemic, a total of €32 billion of direct supports have been mobilised to-date to support households and firms; more recently, approximately €10.5 billion has been deployed in response to the higher cost of living.
This pro-active budgetary policy highlights the importance of counter-cyclical policy – of ‘leaning against the wind’.
Of course, this is only possible if it is applied consistently – policy must lean against the wind in good times as well as bad times.
In truth there is no such thing as a fiscal free lunch. Public debt has increased sharply – we have added around €22 billion to the stock of debt relative to 2019, and total debt is now an enormous €225 billion.
I want to stress that this is a manageable amount of debt – but in saying this, I also mean that it must be managed! Government is not in a position to spend money to solve every problem – especially now that borrowing costs are on a rising trajectory.
At first glance, the fiscal picture appears to be very positive. Last year we recorded an estimated general government surplus of over €5 billion – equivalent to 2 per cent of our national income.
This was driven mostly by very strong growth in tax revenues. In part this is due to the robust economic recovery post-pandemic. But it is mostly a function of exceptional growth in corporate tax receipts.
These receipts are predominately paid by a small number of highly profitable multinationals, meaning that the tax base is extremely narrow. This poses a serious vulnerability to our public finances.
Certainly, these receipts are welcome, and this government is committed to ensuring we remain a top destination for multinational investment: but we know that corporation tax is subject to exceptional volatility and cannot be relied on to fund permanent expenditure.
My department has adopted a new metric – GGB* – which sets out the fiscal position if estimates of windfall corporation tax were excluded. Last year, over €10 billion in receipts are estimated to have been ‘excess’. This means that, when these volatile receipts are removed, we reveal an underlying deficit of around €5.25 billion: this is a more accurate representation of the underlying state of the public finances.
Against this economic and fiscal backdrop, I have a number of key priorities.
Firstly, in relation to budgetary policy as a whole, the interventionist approach of the last few years was appropriate, given the scale of the shocks.
With the impact of the pandemic now receding and inflation on a downward trajectory, Government will revert to its policy of linking spending growth to the trend growth rate of the economy. This will allow for continued improvements in public services as well as ensuring sustainable public finances.
The second priority is to re-build our fiscal buffers. Maintaining sustainable public finances takes on an even greater importance given the vulnerabilities I have mentioned in our public finances.
We are actively working to mitigate this risk. Last November, we transferred €2 billion in excess corporate tax to the National Reserve Fund. This year, we will transfer a further €4 billion.
This will enable us to avoid these volatile receipts becoming part of the permanent expenditure base while rebuilding our fiscal buffers, ensuring that we are in the strongest possible position to face the fiscal challenges of the future, such as pension needs and climate change.
Third, while acting to restore our fiscal buffers, Government will also continue to build upon the progress we have made.
The government has committed to €165 billion in capital investment through the National Development Plan (NDP). As a percentage of national income, annual capital investment is now among the highest in the European Union. In 2023, over €12 billion will fund vital infrastructure in areas such as housing, transport, education, enterprise, sport and climate action.
My fourth and fifth priorities relate to international fiscal developments – namely the development of new European fiscal rules and international corporate tax policy changes.
In relation to the fiscal framework, our fiscal requirements, as set out in the EU’s fiscal rules, were temporarily suspended over the last three years.
The European Commission has indicated that the rules will apply again for next year. As a result, we will once again face the constraint of binding fiscal requirements from next year.
The existing rules are not perfect and the Commission has outlined detailed proposals for potential reform. Both I and my officials will continue to engage in technical discussions over the coming months.
Finally, this year will also be pivotal for international taxation.
The ongoing work on finalising the OECD Agreement will conclude and the focus will shift towards legislating for and implementation of these new rules. As you will be aware the EU Minimum Tax Directive has now been agreed politically and I will bring forward legislation to deliver these new rules in the Finance Bill this Autumn.
Stakeholder engagement will be an important element of the implementation process. I know that the Chartered Accountants members have provided detailed submissions to my department’s many consultations in recent years, and I look forward to continued engagement over the coming year.
While Pillar Two is largely settled, there are elements of Pillar One still under development.
My officials are engaged in all aspects of these discussions to ensure that the rules are agreed in a fair and balanced manner and ultimately support long-term certainty and stability.
This clarity is so important to both business and Government when it comes to making future investment decisions and future policy decisions at a time of such change.
The Multilateral Convention, which is the instrument planned to deliver the Pillar One rules, is due to be open for signature from the middle of this year and will take effect once a critical mass of countries has ratified the convention.
It is important to me from a level playing field perspective, and in terms of maintaining competitiveness, that all countries move together globally to ensure these rules can apply consistently.
As a small, open economy, adaptation has been key to Ireland’s growth and success for decades, and central to this has been our unwavering belief in free and open international trade and cooperation. We will continue to strengthen and enhance our economic and trade relationships with international partners, and we will do this through our EU membership, helping to shape and influence for times ahead.
I know many of you work directly in the FDI sector or in firms that provide professional services to multinationals.
As one of the fundamental strengths of our economy, the FDI sector will play an important role in our future success and I want to emphasise again that the government greatly values the contribution of FDI to Ireland’s economy. Government colleagues and I look forward to continuing to work closely with IDA, to ensure that Ireland remains a competitive and attractive location for inward investment. We also look forward to working with you to ensure greater synergies between the multinational and indigenous sectors.
I returned from the World Economic Forum in Davos last night where I had an opportunity to engage with a large number of business leaders across a range of sectors. My main takeaway from those discussions is that Ireland is viewed very favourably by the international business community. Ireland always delivers was repeated time and again.
Despite all the challenges we have faced in recent times, the Irish people and businesses continue to show enormous resilience.
I know the theme of this event is ‘Difference Makers’.
I am so looking forward to the chat we will hear later with two inspirational women, Rachael Blackmore and Anne Heraty, who have set the bar of achievement so high in their respective fields of endeavour.
By working together, I know that all of us we can collectively be a force of real and positive change in Ireland.
I greatly look forward to being on that journey with you.
I wish you all an enjoyable evening.
Thank you.
