Good morning everyone.
I am delighted to tell you that this is actually my second trip to the Model County in the last few weeks.
Previously, I addressed the Kennedy Summer School where I quoted JFK himself and cited comments he made about change and progress and the need for both.
I won’t quote the former President now but when I sat down to think about what I might say to you this morning, and when I thought of all the comments and considerations I have made about tax in recent weeks, I did consider the very telling exchange between Michael Faraday, the British scientist, and William Gladstone, who was Chancellor of the Exchequer, at the time the two met.
Faraday was demonstrating to Gladstone his latest discovery in the field of electromagnetic induction when the elder statesman grew impatient and asked what use all of this new technology was to him.
Faraday, without missing a beat said;
Why, sir, there is every probability that you will be able to tax it.
The response from Mr Gladstone was not recorded, unfortunately.
But I digress.
What I want to do this morning, if I may, is to talk a little about the fundamentals of our economy and the progress we are making. I will then discuss with you my approach to the Budget which, is but 17 days away. I will then conclude with how we intend to rise to the challenges we face as an economy and a society.
OUR ECONOMY
As everybody will be aware, it was this time ten years ago that the first tremors of the global financial crisis were being felt.
In August of 2007, the French bank – BNP Paribas – was forced to suspend withdrawals from three of its investment funds linked to the US sub-prime mortgage market while, a month later, the Bank of England had to step in to provide emergency liquidity after Northern Rock became the first UK bank in 141 years to suffer a ‘run’ on its deposit base, not long after Faraday and Gladstone had their exchange of views.
As the crisis deepened, and following substantial upheaval in global financial markets, Ireland would find itself at the epicentre of the crisis, with the Government of the day forced to guarantee the liabilities of the domestic banking system.
The rest, as they say, is history.
Or rather, it is for some.
For others in our society, the scars of the Great Recession have yet to heal.
We have not yet replaced all the jobs lost in the crash.
Many of our young people forced to emigrate have still yet to come home.
And although we are making progress, the crisis in our housing sector persists.
So it is with that in mind that we continue our work in repairing the economy.
MEASURING PROGRESS
Of course, measuring that work is harder than it used to be.
Earlier this month, I had the pleasure of launching the 13th edition of John O’Hagan’s excellent book “The Economy of Ireland”; a book which I’m sure many of you here today are familiar with.
This took me back to my own time as an undergraduate in Trinity where we were taught that GNP – because it effectively excluded the activities of the multinational sector – was a better measure of economic trends and living standards in Ireland.
But, today, even GNP is a concept that conceals a high level of complexity for Ireland.
We have, for instance:
- ‘contract manufacturing’;
- re-domiciled PLCs;
- balance-sheet relocations; and
- depreciation of foreign-owned, Irish-based capital assets
all of which are complex economic ideas and all of which make measuring and understanding the economy somewhat more difficult.
This complexity stems from, in the main, the mobility of capital and the increasing fragmentation of global value chains.
In short, the openness of our economy is an extraordinary strength.
But it is also a source of complexity.
And these complex investments bring huge benefits to Ireland.
For example, we have seen how, over time, clusters in the area of fintech, pharma and software companies have developed with further benefits, such as firms partnering with universities in areas such as research and development, bringing an even greater gain to our country.
But, more recently, it is not the movement of physical capital that has been prominent.
Rather, it is the movement of intangible capital, mainly in the form of intellectual property rights, that is the focus of attention.
The trigger for this has undoubtedly been the outcome of the OECD’s Base Erosion and Profit Shifting –or BEPS- work which has prompted many multinationals to ‘on-shore’ their IP rights.
That is a good thing.
Nevertheless, it poses policy challenges for people like me and my officials in the Departments, as we must work harder to ensure we have the full picture.
We need to focus on a wider range of indicators in order to get a better assessment of what is really going on.
A RECOVERING ECONOMY AND SOCIETY
Those other indicators, I am glad to say, paint a positive picture.
Look at jobs.
Just yesterday the Central Statistics Office published figures showing that total employment rose by 2.4 per cent on an annual basis in the second quarter of the year.
What is even more encouraging is the shift from part-time to full-time work, with the number of those now in full-time positions increasing by 77,800 or 5 per cent, year on year.
The same data show that the unemployment rate has fallen to 6.1 per cent; the lowest it has been since 2008.
More broadly speaking, for every 10 jobs lost during the deep recession, 7 have now been replaced.
If current trends continue, the level of employment in a year-or-two will be back at pre-crisis levels and on a more balanced basis.
And in what would be considered an extraordinary thing to say just a couple of years ago, the economy could once again move towards full employment next year.
This will be an important consideration in the macro-economic choices for Budget 2018.
PUBLIC FINANCES
This is why I will do nothing in next month’s Budget to endanger the hard won gains of the last few years.
I have said many times before that sustainable public finances are a pre-requisite for improvements in living standards.
The turnaround in our economic fortunes would not have been possible without the difficult choices and sacrifices made by the Irish people.
Our first priority was to correct the excessive deficit – that is to bring the deficit below 3 per cent of GDP – which was achieved in 2015.
The next requirement is to eliminate the structural deficit and broadly balance our books.
We will achieve that next year.
Debt reduction continues and it was very encouraging to see the credit rating agency Moody’s upgrade the Irish sovereign last week.
However, an issue of some concern is the fact that actual public indebtedness continues to increase.
Moreover, other metrics such as the ratio of debt-to-GNI-star show a much less rapid reduction in the public debt to income ratio.
For these reasons, the Government will continue to place a premium on debt reduction.
It was also for this reason that the €3.4 billion raised from the disposal of almost 29% per cent of AIB is being used to retire debt.
THE BUDGET
All of this relates to the first principle for Budget 2018 that I have articulated in recent weeks, namely that we will balance our books to keep Ireland secure in a risky world.
That means paying our way and cutting borrowing, so that we can be more prepared for the risks that we face, not least of which is Brexit, which is the greatest economic challenge we currently face and brings huge levels of risk and uncertainty.
Budget 2018 will see, for the first time in over ten years, Ireland achieve a balanced budget.
This means that money coming into the State’s coffers in tax will match the amount we are spending on vital public services like education, health and social protection.
But it also means that we must make choices.
Which leads me to the second objective that I have discussed in recent weeks, which is to use our recovery to invest in the change and the supports we need for better opportunities for all.
That means investing taxpayers’ money carefully and with continued reform to deliver the best capital projects, services and targeted income supports.
To deliver more for vital infrastructure like roads, energy and communications.
Or to deliver better health services, faster broadband and a more efficient public transport system.
And to deliver on our promise of more housing, both public and private.
I want to put particular emphasis on capital investment in my remarks this morning, particularly in a Brexit environment where investing in our social and economic infrastructure will help us compete for investment and shield us somewhat from what may lie ahead after Britain leaves the EU.
Budget 2018 will see an additional €4.1 billion for capital investment across the next four years.
This will see public capital expenditure increase by over 80% by 2021 to €7.8 billion and will position Ireland above the long-term EU15 average of 3% of GDP by 2021.
My third objective next month is to make steady and affordable progress in reducing high rates of tax for low- and middle-income earners.
I have said much on this already, particularly around the need to affordably and sustainably move away from a system of personal taxation where those on average incomes pay the top rate of income tax.
And as I said earlier this week, I will, in the coming weeks speak to my colleagues in the Government and in the wider Oireachtas about how we can move, in the spirit of consensus, towards progress in this area, while also ensuring our other commitments in terms of tax and spending, as set out in the Programme for Government and the Confidence and Supply Agreement, are met.
The fourth objective I have in Budget 2018 is to support businesses and families to plan for the future.
This means having a long-term vision for this country, not just one that focusses on the short-term.
For that reason, the Government will be publishing a ten year capital plan for our country not long after the Budget which will seek to address the investment, housing and spatial planning issues that we must address if we are to be fighting fit for the future in the decade to come.
CORPORATE TAX
I have spoken this morning and on many other occasions about the impact of Brexit.
But Britain’s withdrawal from the EU is not the only development at EU level of interest.
Last weekend, for example, I attended the informal Ecofin meeting in Tallinn where issues around corporation tax were discussed.
Ireland remains committed to global tax reform and believes that global solutions are needed to ensure tax is paid by companies where value is created.
That is why Ireland has been a committed participant in, and strong supporter of, tax reform efforts led by the OECD through the BEPS process.
The OECD is already carrying out important research into the digital economy, with the publication of its interim report expected in Spring 2018.
This will provide important input into the ongoing consideration of where value is created in digital business.
I said last weekend and I say now that it would be best to take action having considered that OECD analysis as a consistent global approach is needed.
Any solution must build on a shared understanding of where value is actually created by digital business.
Because we can no longer speak of “the digital economy”.
Instead, we can speak of an entire economy that is “digitised”.
Applying different rules within the EU to what is being applied globally is likely to result in double taxation and greater uncertainty.
It is also important to note, I hasten to add, that there is no official proposal currently for a change on the way tax policy decisions are taken in the EU.
Under the EU Treaties, for the European Council to move a policy area such as taxation from unanimity to qualified majority voting, it would require a unanimous decision to do so.
The support of the European Parliament would also be required and the Irish Government will not support any change to existing EU voting rights on corporation tax.
CONCLUSION
So that is a whistle-stop tour of some of the issues that are under consideration at the moment.
Some domestic, some international.
Some taxation-related, some not.
But all absolutely vital to our country’s future.
There is a rather unfair saying attributed to George Bernard Shaw that:
if all the economists in the world were laid end to end, they’d never reach a conclusion.
This is often also said of politicians, and I hope we are all proving Mr Shaw wrong this weekend.
Thank you for your time, thank you to the organising committee and to Aebheric for the invitation to address you, and best of luck with the rest of the day’s events.
ENDS