Good morning everybody and thank you for the opportunity to speak here today to frame what I believe, and know, will be an important policy conference, as you deliberate on one of the key political and economic fields that our country will have to deal with across the coming period.
In my opening words, what I want to do is place globalisation and what it means for our country in a political context. It is important to frame the discussions that you’ll be dealing with across today. Then when having done that, I want to move on to some key policy areas that the Department is currently engaging with which we are aiming to bring to a conclusion across the coming months, to close the loop on what I believe is a key national challenge, and then to signpost pieces of work that we have underway, regarding how we would respond to that national challenge.
I will open up with the nature of globalisation and what it means for Ireland, and what it means in particular for a small open economy. Over the last number of years, particularly in the context of Brexit, one of the key issues that our country has grappled with is what is our relationship with Northern Ireland? What is our relationship with the United Kingdom?
We’ve grappled with challenges of borders, national self-determination, of the trade-offs between sovereignty and interdependence. This is a question that successive economic and political policy making civil servants and politicians have grappled with over many decades in our State.
In grappling with that, and in grappling with it successfully, what happened across the period is politics, State craft and policy making were re-imagined. We came up with new possibilities. We came up with new concepts, new definitions, that managed to allow our people and our neighbours to navigate our way through what was then described as `The National Question’.
It falls to us as a generation of politicians and policy makers, to reflect on the fact that I now believe we will be re-engaging and engaging with two national questions, as opposed to just one. We’re re-engaging again through the prism of Brexit, with issues in relation to political definition. With issues in relation to what orders mean. With questions in relation to the nature of citizenship. But in addition to this, we have, I believe, an additional national question that is going to require careful imagination and very deliberate work.
That national question centres around what are the options to a small open economy, if you’re highly integrated with a globalised world, if you’re deeply plugged into globalisation, and globalisation is changing, and there is a shift in what globalisation means?
Across the period, we plugged ourselves most deeply into economic and political integration. It was at a time in which those processes of economic and political integration, and in particular economic Integration, was going in a particular direction. It had its roots in what Paul Krugman referred to as `The Great Moderation’. That has fundamentally changed. It has changed in front of our eyes.
Anyone who thinks that the global economy is going to go back to the kind of consensus that we saw during President Obama’s term, during even George Bush’s second term, during the kind of consensus that we saw in relation to these issues, across the 1990s and the early part of this century, is underestimating the nature of change that’s pulsing through our democracies at the moment.
So the nature of globalisation is changing. You’re hearing many different debates in relation to what that looks like. Is it slow globalisation? Is it deglobalisation? These are all issues that I know you’re very well equipped and experienced to be able to reflect on. But my key point is, that nature of globalisation is changing. And that is a question that really matters to us, because of how open our economy is, and how integrated we are into the global economy.
So having framed, the nature of the new national question, this is an issue that I’ve asked the Department of Finance to work on. The theme of this conference follows on from the workshop that we organised a number of months ago in relation to small open economies and the success of small countries. Having framed that kind of a challenge, I want to inject what I believe is a justified note of confidence in our ability to manage this kind of change.
It is my belief that small countries and particularly small countries with strong institutions, are better equipped to respond back to this kind of change than other economies and other countries. But just because we have the equipment, just because we have the institutions, shouldn’t necessarily give us the confidence that we are able to use them in the best way at all times. But I believe we do have the capacity to do it. And I believe we have shown, even recently, our metal in being able to do it.
That then leads onto three themes that are important for the kind of work that you’re considering across today and beyond. I note the particular theme of today is in relation to tax policy. But you will forgive me, I hope, if I reflect on a couple of broader issues, given my role as Minister for two Departments. So I’ll say a word about budgetary responsibility, a word about corporation taxation and then a word about the importance of net government investment, in responding back to the second national question that I touched on a moment ago.
So if I begin with the first area, in relation to budgetary responsibility and our ability to manage, in particular, our expenditure well, and look at the challenges we are facing. I concluded a moment ago, that I believe we do have the institutional framework to understand these matters well. That we have an institutional framework and a consensus within our country that has recently allowed us to make some good choices in this area.
The question is, what are going to be the choices in the future? So when I speak about an institutional framework, what do I mean? Well actually I mean many of you.
I mean the work that you do. I mean the organisations that you work in. I mean the Department of Finance and Department of Public Expenditure & Reform that has a far higher level of economic capability than we’ve had in our recent past, and a transformed level of specialist knowledge.
I mean organisations like the Irish Fiscal Advisory Council. I mean the work and legislative work that we have done such as the Fiscal Responsibility Act. And I mean processes such as the Summer Economic Statement, such as the National Economic Dialogue, such as the engagement that I have regularly with the Budgetary Oversight Committee. So from an institutional framework I believe the case can be realistically made, of great progress in that area versus where we were in recent years.
But a further question then, is what effect is it having? And I believe we can make the case, that it has had a better effect than we can sometimes, and sometimes do make the case for. So for example, if you look at where we are from an expenditure point of view, and if you use as a benchmark the last five year period, and compare it to where we were a decade ago. If you look at current expenditure growth across that period, and if you strip out of the effect of inflation, so you look at real expenditure growth, to have a more calibrated way of comparing where we stand now versus where we stood then. Between ’04 and ’09 we saw real expenditure growth per year of 7%. In the last five years, we’ve seen real expenditure growth, on average, 3%. Those figures speak for themselves.
I want to acknowledge the many areas in which we have to do better. The many areas in which we have to learn from. I am aware of what they are. But taking a step back, and looking at a sweep of where we have been, with real expenditure growth over those five years versus where we were a decade ago, the figures do indicate a material shift in our ability to manage expenditure.
If you also look at how those figures have stood across the last five years, they have broadly, though not always, I acknowledge, met the requirements and the spirit of the requirements that are upon me. But what I’m conscious of, as I make that point, is to say that we are better than we were in the past. To say that we are meeting requirements that are upon me legally, isn’t actually enough. It’s not just enough to say we’re trying to avoid making mistakes that we are familiar with.
The challenge upon you and me, is bigger. The challenge is, how are we going to avoid and how are we going to better manage new issues and new opportunities, as opposed to being able to prove to ourselves that we are better at managing the issues and opportunities of the past.
We have to have a more demanding measure for what you’re able to do from a policy making point of view, and from what I’m expected to do from a political leadership point of view. That’s why conferences like this are important. And what John McCarthy and his team and I are working on, is in context of our Summer Economic Statement. We are aiming to land it in a different way for this year.
What we are reflecting on now, is; what is the Expenditure Framework that is appropriate to our economy, given where we stand now? How we can inject into debates happening today and in the future, some thinking regarding what is now appropriate for our country.
The second issue I want to touch on is where we are from a corporate tax policy point of view. I’m sure many of you in the room are familiar with the book `Capitalism Without Capital’ by Jonathan Haskel and Stian Westlake. For those of you who aren’t familiar with it, I’d really encourage you to read it. It’s a really interesting book, because it poses the question of the Great Vanishing Act.
It asks; what does capitalism look like if the nature of capital itself changes, and more and more capital becomes intangible? It points to many different companies, whose balance sheets are now mostly absorbed in the value of intangible assets. It paints a really interesting picture of a kind of change now that’s underway in the nature of global capital. That is a really big factor in what is happening in the global economy. It is a contributing factor to some of the work and some of the issues we’re going to have to reflect on in our country.
If you look at where we are from a corporate tax point of view, and look at the changes that you are all familiar with, in terms of the significant change that we have had in the collection of corporate tax receipts, there are many factors at play.
My own Department and other bodies and commentators have offered some thoughts in relation to it. The recovery in corporate global profitability, the effect in the washing through of losses from the Great Recession, Ireland’s increased share of Foreign Direct Investment and the nature and the change in capital itself, are all factors in this. We are currently concluding work, to identify processes that we think will be appropriate to better understand the future of how we collect that tax.
It is clearly now a deeply material matter from a policy making point of view. And we are going to be doing that in a tax landscape that is experiencing change. We saw the last period of change that we went through in the recent American corporate tax reforms. We saw a big debate then regarding what that meant. But we are entering into another period of at least debate, and very likely change. And that’s going to have two different sources within it.
The first one is the work that is underway in the OECD, which the Department and I are participating in. This is in response to the increasing digitisation of the global economy. We are seeing work underway that will conclude in 2020, which will be offering pointers on a new Framework for Corporate Tax Policy on a global basis. That will mostly have allied where we are with the digital economy. But will of course have very, very strong consequences for other parts of tax policy.
If as a country you can offer certainty in key areas, and tax policy is one of them, this does offer an opportunity for a country to do very well, at least from their share of global FDI. One of the areas that we will have to navigate our way through, across the coming year, is how all of that will develop and where we will stand in relation to it.
From my point of view, Ireland has always been a very constructive contributor, not only from a European point of view, but locally through the OECD, and we will be playing our role in this debate. But again, it has policy consequences that matter here today. It affects, for example, and it frames what we’re going to do with the Rainy Day Fund, where we will be making a deposit of half a billion euro, in addition to the one and a half billion euro deposit from ISIF. How we look at the development of that in the future will be crucial.
The second area that will be crucial, is how we ensure that we run sustainable surpluses. And how we can relate that in to what is happening in a global tax environment. Again we have work underway in relation to that, which is now appropriate to conclude in 2019.
Finally, where we are from a Government investment point of view. How we invest in people’s homes, in their schools, how we invest in their children’s future, is an indelible part of the Social Contract for maintaining the support of democracies, for participating in the global economy that we are debating here today.
If you look at where we were in 2012, our net Government investment in our public capital at that point was 0.3% of our national income. We weren’t even spending enough to maintain what we had. That is an incredibly important starting point, for then understanding what has happened since. If again if you look at where we are in the last five years versus the five years of a decade ago, our capital expenditure across that period, has grown on average by 13% versus where we were a decade ago, where it grew by 5%.
If you look at where we are this year, Capital Investment through the Exchequer in our economy has grown by 24%, a €1.4 billion increase. And it’s not just the case in the choices that we will be making soon, about looking at expenditure in its totality, it’s looking about the composition of that expenditure, the mix between current and capital.
As somebody who is deeply involved in the democratic process, we have to be able to show our citizens, that we are making progress in investing in their future, if we are going to maintain support, for the kind of Economic model and the kind of political model that’s appropriate for Ireland.
I’ll conclude on that point, if I opened up by talking about the kind of change that’s underway, and then signposting the different pieces of work that my two Government Departments are involved with, what is the broad response back to the level of change that I’ve touched on? I’m convinced that it’s making the case for openness.
Making the case for economic openness. Making the case for political openness. Whether it be our role in the European Union. Whether it be the openness of our society, through our labour market. Whether it be trying to make the case for a trans-Atlantic relationship that can work for both sides of the Atlantic. That has been the essence of our economic model now for four decades, but for the last two decades in particular.
But we need to make the case for it. We need to renew it and we need to look at what is the new political and policy thinking that will equip policy makers and equip political leaders to make that case. But if the values are there, and the political values are there, I believe in making the case for openness, we have to look at what is the policy response back.
That’s why sessions like today are very important. That’s why the signposts that I’ve laid out, that we’re looking to bring to conclusion across this year really do matter. I believe policy certainty externally, in some key areas, will allow our country to navigate its way through the kind of change that I’ve referred to, the kind of new national question that I touched on. But crucially I believe it’s also vital for the kind of Social Contract that we need to maintain with our citizens.
The political debate that I’m engaged in, and the policy challenges that you’re all dealing with, would be very, very different if we were still in an economy that had a level of capital investment that is in line with where we were in 2012 and 2013. The argument for making and moving to surpluses, for example, would be a very different argument if we were building less than 10,000 homes in our country.
We have made choices to get to this point. These are choices that I believe have been the right ones, while always acknowledging there are things that we could do differently or better. But we are now moving into a different phase, because of the change that’s surrounding our democracy. And this is one of the latest seminars to provide the thinking for all of us, to help our country to respond back to it.
I’m very confident that we can, I’m very confident that we will, I look at what we have risen to over the last number of years, and we have it well within our grasp to respond back, not only to the new challenges that are on the way, but to the many many wonderful opportunities that are there too.
So I wish you all a good day’s deliberation. Thank you all very much for the contribution that you all make, to helping us understand how we can better serve our public. And I hope you have a productive and enjoyable day.
Thank you.
ENDS