Good evening and let me begin by thanking you for the invitation to speak here this evening.
In my remarks, I will discuss prospective economic developments – those that the next government will have to contend with.
I do not propose to go through the ins-and-outs of the short-term outlook; instead, I will focus my remarks on the medium-term: that is, the economic challenges and opportunities that lie ahead over the coming decade and even beyond.
GOVERNMENT RESPONSE TO ‘CORONAVIRUS’
Before progressing, however, I need to address what is rapidly becoming the single-most important near-term challenge facing the world economy.
I am, of course, talking about the Coronavirus. As you might expect, this was discussed at length yesterday by Government and I participated in a Eurogroup teleconference convened earlier today with this as the sole item on the agenda.
While primarily a public health and well-being issue, the outbreak has already caused severe disruption to economic activity in China. Because of its sheer size – China accounts for nearly one-fifth of world GDP and, crucially, because it is deeply integrated into global supply chains, the economic fall-out is no longer confined to China.
It is, of course, impossible, at this stage, to accurately predict the economic cost of the outbreak. However, it is safe to say that global GDP growth will be impacted in the first quarter of this year.
The actual cost – in terms of lost global GDP – will depend on the duration of the outbreak and the containment measures put in place. But many, including the OECD, outline that this outbreak has the potential to slow global growth to its lowest rate since the financial crisis just over a decade ago.
But what does this mean for the Irish economy?
The first point I would make is that our openness and integration into the global economy means that we will inevitably be impacted by the global slowdown. To what extent, it is still too early to say but, it follows that weaker growth will affect our short-term outlook and my Department will update its projections in April through the Stability Programme Update.
Secondly, it is important to recognise that the public finances are in a strong position to cushion whatever impact may arise. This is because we have eliminated the deficit and have run surpluses for the past two years.
Because of this, we can allow budgetary policy to play a counter-cyclical role in the event of a large pass-through to the Irish economy. The best way of doing this is by allowing the surplus to fall through taking in less tax revenue from a lower level of economic activity and paying out more by way of social transfers to those who may be in need.
Maintaining control of current expenditure and running a surplus means we have been able to maintain a high level of investment in capital projects, such as schools, hospitals, public transport and broadband. This investment will also increase demand in the economy in the event of a downturn.
This Government has been using fiscal policy proactively, successively increasing capital spending year on year. For example, in 2013 capital spending was €3.4 billion, this year is will be over €8 billion, more than a twofold increase.
In 2019, capital spending was around 25 per cent higher than 2018.
Investing in this way ensures our productive capacity does not fall behind, as it did in the aftermath of the financial crisis.
Moreover, I will continue to monitor the situation and will work with my Government colleagues on appropriate responses.
WHERE ARE WE NOW
Turning now to medium-term challenges and opportunities, it is important to take a step back to see just where we have come from.
By any measure, the transformation of the Irish economy over the past decade has been phenomenal.
A decade ago, we were dealing with the fall-out from the global financial crisis. This crisis exposed home-grown macro-economic and budgetary imbalances that ultimately lead to the loss of our economic sovereignty.
Since then, we have made huge progress in addressing these legacy imbalances and our economy has now been completely transformed. Living standards have recovered and measures of well-being have improved.
After almost a decade of continuous expansion, the Irish economy continues to grow at a robust pace, with GDP growth somewhere in the region of six per cent last year – the precise figure will be published on Friday.
I would stress that while the headline GDP figure can be exaggerated in an Irish context, other indicators such as real consumer spending per capita, employment and unemployment trends, along with taxation receipts confirm robust growth.
To put this in context, there are now well over 2.3 million people at work in Ireland, surpassing the pre-crisis peak of 2.2 million seen in 2007.
Crucially however, unlike in the pre-crisis years, growth remains well balanced and broad-based.
During the pre-crisis period, the construction sector crowded out the exporting sectors – the resulting loss in our external competitiveness meant we were running a balance of payments deficit.
Today the economy is much more balanced between domestic demand and the exporting sectors. Of the 2.3 million currently in employment, nearly 2.2 million of these are employed outside of the construction sector.
Furthermore, there is no evidence of the credit bubble that characterised our economy in the mid-2000s. Credit growth is increasing very modestly, in part due to macro-prudential tools aimed at preventing excessive household leverage. In addition, the Central Bank has introduced counter-cyclical capital buffers to curtail excessive lending by the commercial banks.
Finally, we are now running a balance of payments surplus.
This is the starting point for any new Government.
THE CHALLENGES OF AN ECONOMY AT FULL EMPLOYMENT
So the challenges that we are dealing with today are very different to the challenges a decade ago. Today our economy is operating at close to, if not at, full capacity or ‘full-employment’.
There is evidence that wage pressures are picking up, with private sector pay increases now running at around 4 per cent, and capacity constraints are increasingly binding.
This is particularly the case in the construction sector, where employment growth has slowed sharply in recent quarters and there are clear signs that we are reaching capacity boundaries.
The issue of the economy operating at full capacity is no-where more evident than in the housing market, where supply is still insufficient to meet demand. Having said that, there is additional supply in the pipeline which, in the coming period, will provide a better balance between demand and supply in the housing market.
However, this will also require a much greater focus on construction costs, on greater productivity and innovation in the construction sector and on measures to stabilize and reduce the price of development land.
Overall the increasing constraints the economy faces, whether it be in housing, labour, affordable and serviced land or congested roads will require both the next Government and stakeholders to make choices and to priotitise.
As such, it is important that we avoid actions that further over-stimulate the economy. We, in Ireland, know to our cost that this short-term gain approach involves long-term pain.
Instead, the next Government should decide on a small number of key priorities, for example housing, healthcare and climate action and focus relentlessly on delivery.
BUDGETARY POLICY AT FULL EMPLOYMENT
What does this mean for budgetary policy?
In order to support economic activity, budgetary policy must must smooth, not amplify, the economic cycle. As I mentioned, the Irish economy is already close to full-employment and budgetary policy must be cognisant of this. Too often in the past, we have had to respond to economic downturns by cutting public expenditure, including public investment. We now know the cost of this approach.
But to be able to continue spending in a downturn, it is important to build up resources in good times.
This is why we will run a surplus of €2.4 billion this year (0.7% of GDP).
In addition to the risk of overheating the economy by further inflating periods of strong growth, it is worth restating the other fundamental reasons I believe achieving a fiscal surplus is the right one to take at this time.
Firstly, surpluses are a way of managing risk. Although the public finances are in a healthy position — due to a strong economy — there are a number of domestic and international risks that could quickly lead to a deterioration.
Surpluses act as a buffer against such risks so that if, or when, one or more of them materialise the Government can avoid cutting spending or increasing taxes in response.
Indeed, I mentioned earlier the possible impact of the Corornavirus – we can respond if necessary because of the appropriate budgetary policies implemented in recent years.
Secondly, one of the main risks to the public finances is already well understood. We know that windfall corporate tax revenues will not continue forever. An agreement at OECD level through the BEPS process will impact on these receipts.
However, it is not inevitable that agreement is reached at the OECD. There is always the risk of a breakdown in negotiations, which could lead to uncoordinated, unilateral measures which are likely to lead to greater uncertainty, double taxation and growing global trade tensions.
Equally, the focus to could also shift quickly to the EU.
Should the OECD work fail to reach agreement, the new EU Commission roadmap on Business Taxation in the 21st Century due to be published this year is expected to leave no doubt that measures to address both the taxation of digital companies and separate proposals on minimum taxation will be tabled.
While these are challenging debates for Ireland, our interests are best served by trying to influence the shape and design of any potential agreement. But this is why budgetary surpluses will be needed.
Running surpluses now will allow the State to absorb this loss in revenue without resorting to additional borrowing. They also prevent a situation developing in which ongoing and long-term liabilities are funded through short-term revenue sources.
Thirdly, as a small open economy we are particularly exposed to international risk factors such as trade tensions and the prospect of greater de-globalisation.
Trade tensions, we know, can escalate quickly and are, for the most part, beyond our control.
I made a commitment last year that, if in Government, I would implement a policy of running surpluses of at least 1 per cent of GDP from next year and to pay down our debt to 85 per cent of GNI* by 2025. I still believe that this is the right course of action to take.
The debate on the wisdom of running and maintaining surpluses has to be seen in the light of the post-crash expectations of the public, as expressed in the recent general election.
For while there was a broad acknowledgement that the government had delivered a strong economy, there was a much stronger sense that the Government had not adequately delivered on services like housing and health, as would be the norm in most rich countries.
Having come through the dark days of the economic crash, the people expected us to better meet social needs. I think the dynamic is captured best by Livy in his History of Rome, where he said:
“For a people may endure an almost incredible series of the darkest failures without breaking; but give them respite and some hope for the future, and they may not endure an unexpected denial of that hope."
However, as Minister for Finance, for every voice who told me that the surplus was too low , I was met by another equally vocal group who continually advised me that we were not spending enough.
There is an unwillingness to recognise political constraints among the former, while there is an equal unwillingness to recognise economic constraints among the latter,
No Minister for Finance can fully accommodate both sides. The essence of doing the right thing by our citizens is to strike a balance between prudence and ambition for our country and its citizens. I have done this.
CHALLENGES AND OPPORTUNITIES
I would now like to turn to more medium-term challenges and opportunities.
As a small open and adaptable economy, our resilience and strength comes from our openness to trade and investment. This has been proven to be the strength of the Irish economy over recent decades and will continue to be our strength in the future.
While the post-Brexit world also presents significant challenges, if managed correctly, our reputation as an open, adaptable yet stable economy also presents opportunities. The debate on change needs to recognise that stability does have some value too.
Establishing Ireland as a calm port in turbulent waters can only enhance our reputation as a preferred location for inward foreign investment. So while the world changes rapidly, it is critical that it co-exists with a form of stability and an investment climate that provides certainty on tax, the availability of talent and the governance of data.
As this audience knows well, international investors look to avoid uncertainty and instability. Ensuring policy certainty and stability will, therefore, facilitate and encourage additional investment.
Post-Brexit, how Ireland positions itself will be vital in maintaining our ability to influence the economic policy direction in the EU and, more generally, to have our voice heard in the international arena.
In that regard, cooperation with other like-minded EU Member States through informal fora like the ‘Hansa’ group of Nordic-Baltic States and the Netherlands is one way to address the absence of the UK from the EU.
Ladies and gentlemen, my objective this evening was to give you a flavour of my and my Department’s thinking on the challenges and opportunities facing our economy.
I would like to conclude by offering some observations on the political centre in Ireland and the challenges it faces.
The centre has served Ireland well, from a closed economy to an open one; from the middle income trap to one of the flourishing countries; from an oppressive place to a progressive one. All of these giant steps have largely been achieved from the centre.
As I have said previously, the centre is not the same as the status quo. However because it is often viewed as such, it is vulnerable to competition from the extremes and to widespread disaffection and apathy. As the recent election demonstrated, such frustrations are prevalent not just among those of our citizens experiencing severe disadvantage but now within our broader society. We must offer solutions for both.
For the centre to reassert itself it has to offer more than just compromise and pragmatism. Instead it needs to be as the great American political historian Arthur Schlesinger said, a “fighting faith,'' capable of answering questions vital to the needs of society.
So to my mind, the anthem of the centre must be to offer achievable solutions to the social needs of our citizens in an increasingly complex world, while always challenging the convenient utopias, quick fixes and disingenuous plans of those on the extremes.
This is a task and purpose in which I will play my full part.