Keynote address to the Dublin Economics Workshop

15th September, 2018


Good afternoon Ladies and Gentlemen. It’s a great pleasure to be here with you this afternoon, and to have the opportunity to address this Workshop again. I want to pick up on many of the themes that have been articulated there by Ciaran, but before I do that, I want to kick off with some words of recognition myself. I wanted to in particular recognise my former Lecturer and Colleague, Sean Barrett who is here today. Much of what I now believe in Economics, and many of the things which at times I’ve questioned, are in no small way due to him. I spent a year being taught by him when I studied Transport Economics in Trinity College, many many years ago.

I also want to acknowledge and thank all the staff from both the Department of Public Expenditure & Reform and the Department of Finance who are here today. I also want to acknowledge my friend and close political colleague, Minister Michael D’Arcy who is here today. We’re here in his constituency, I joked with him earlier on, that I seem to spend more time in his constituency these days than I do in my own. He replied back to me, he spends more time in Dublin Central than he does in his own! So it’s great to be here with you this afternoon. And to respond back to the agenda that Ciaran has talked about.

What I’m going to do, is I’m going to open up and tell you all about my week. The various needs that I’ve engaged with. The different forces that are there and relevant to our country. I’m going to bring that in then I’ll move into four thoughts that I have about how things are different now in 2018 versus where we were in 2008. I will then relate those four thoughts to four principals that are important to me as I frame Budget 2019 with the Government, and look to the implementation of Ireland 2040, which is our National Development Plan and Planning Framework for our country.

So to begin with my week. I’m sure that many of you who are here this afternoon, when you arrived into White’s here, you dI’d so with a small sigh of relief that the week was coming to an end. You’d be able to spend the weekend with friends and colleagues, discussing the finer details of economics over a drink or whatever you like, this evening. And as you were looking back into your week on the way here, I was having a look back at mine. Last Saturday morning, I was in Vienna, on the second day of a two day Informal Meeting of the European Ministers for Finance. Where we spent the morning dealing with two particular issues. The first issue was the future direction of European Corporate Tax Policy. The second issue was an intervention from the Chancellor of the Exchequer, Philip Hammond, regarding the proximity of Brexit.

In the first part of that meeting, we grappled with and debated the changing local and European economy within which Corporate Tax is being developed and the growing debate underway regarding whether those Tax Models are appropriate for the Digital Economy. And if they’re not appropriate for the Digital Economy, how they should be changed. Across that morning when many many Ministers spoke on the issue, we debated the differing views that exist, regarding should we levy taxes on turnover? Should they be levied on profit? If you do want to have a different Tax Model for the Digital Economy, where does the Digital Economy begin or end? Where does the rest of the economy begin and end? If you are going to make such changes in Digital Tax Policy, and do so in a way that’s independent of the direction of Global Corporate Tax Policy, what are the implications for Global Tax Cooperation? What are the implications for Global Trade?

So this was a debate in which there were many different sides. Myself, my Nordic, some of my Baltic Colleagues, advocated our point of view. But a number of other countries advocated a different point of view. That particular debate was bookended by Chancellor Hammond making the point that we’re now entering into a crucial period of Brexit negotiations. And asking questions regarding how key elements of financial risk need to be managed, as this negotiation continues, and hopefully concludes, and we look forward into a very changed 2019.

So that part of my week dealt with issues that are fundamental to our neighbourhood, and fundamental to a small open economy that has skin in the game regarding how trade is organised, regarding how trade flows, and regarding how trade is taxed. And in that whole debate, we can see views that are there, we can see potential changes, and some areas we can see where consensus exists. But this is a debate that is quite fundamental to many elements of our economic model.

Upon returning home from Vienna, and having a brief day of respite on Sunday, I then spent Monday and Tuesday meeting all of the Social and Economic Partners who have a view in relation to Budget 2019. I opened up Monday morning meeting all of the Farm Organisations. Tuesday afternoon I met all of my colleagues in the Trade Union Movement. The next day I met IBEC and the Community and Voluntary Sector. I made the point to each group that the broad theme that’s articulated in each Sector, tends to be the need for more investment or expenditure in their particular sector. And/or unchanged taxes or lower taxes for that sector as well.

My job and the job which I have done, and the job which the Government will continue to do in Budget 2019 is to look to how we move beyond an individual need or a sectoral need, into what the collective journey is for our country and for our society. Across the rest of this week, in between Cabinet, and a number of meetings in relation to Ireland 2040 and the Land Development Agency which we launched yesterday morning, on Tuesday evening I met Kevin Hassett, the Chairman of the Council of Economic Advisors to President Trump. I’ve just come this morning from a meeting with Governor Mark Carney of the Bank of England. Each of those meetings underscored to me, two things. Firstly, the remarkable progress and indeed economic stability at a macroeconomic level that has been secured here in Ireland. And also the horizon of change that lies in front of us. That change consists not just of potential difficulty, but also of great opportunity. It’s a panoramic horizon of change, much of which our country can prosper from. Other elements of which we will need to confront and deal with and look to how we make ourselves secure.

So I say all of that, just to frame the engagement and the challenges that are underway, as we move to Budget 2019, and as we look at making decisions that will influence 2019 and beyond. The reconciliation of the individual of a sectoral need with that of the collective. The reconciliation of an open economy, an open society, which sees openness as a source of strength, while globalisation is changing in front of our eyes. Sizing ourselves as a country anchored in the Project of European Political Integration and Global Integration, each of which is now going through a period of change.

That’s the horizon within which this Government is working to secure and try to represent those who we are privileged to lead. But it’s also the framework within which public debate needs to happen. It’s also the framework within which we have to tease off that which we did not confront when we were in a similar period of economic growth, and that’s the concept of Trade Offs. It’s the concept that you can only spend €1 of the taxpayers’ money once, and the concept that opportunity cost is real. But when we do have an opportunity cost, you’re also doing something else, that has the potential to serve the State and do a good.

So then I relate that to where we are now, to if I look briefly, sketch out some of the things that we have to deal with, with where Ireland stands now in 2018 with where we would have stood a decade ago. And what I’m going to do is outline four areas of change. Some good, in fact mostly good. Some that would be a challenge of which we need to be conscious.

I’m going to touch on where we are from a Tax and Expenditure point of view. Where we are from a Debt/Banking Regulation perspective. Thirdly the composition of our economy. And then fourthly the Institutional Framework within which political and public policy decisions are being made.

So let me open up with the first point in relation to Tax and Expenditure, or in other words, budgetary choices that have been made or will be made across the coming period of time. Let me compare and contrast two different sets of figures. One in relation to Taxation, the other one in relation to Expenditure. If I look at the three year period in the run up to the crash, across that period, we saw public expenditure here in Ireland, increase from €23 billion to €36 billion, across a three year period, a 57% increase. Across the three years in which Ireland has looked to secure itself in the aftermath of the Bailout Programme, the same rate of public expenditure or growth has between 13% and 14%.

If I compare the Taxation and Social Welfare changes, that I have made as Minister for Finance and Public Expenditure and Reform, and the Government has made, over the last three years versus the three year period between 2004 and 2007. Over the last three years, the combined total of Tax and Social Welfare packages in any given year, have been between €600 million to €800 million per annum. In the period between ’04 and ’07, they began at €1.6 billion, they ended at €2.6 billion. So that’s the quantum of change that is taking place, within the two key parameters of budgetary policy, in terms of how we are spending the country’s money, and then in terms of the combined value of Tax and Social Welfare changes.

If I then lead onto a second area of change, in relation to Debt. And if I observe where we are with levels of Public Debt and levels of Private Debt. At the highest point of our Private Debt Cycle, before the crisis period, Private Debt as a percentage of household income stood at 213%. Most recent figures show that now, this stands at 133%. In terms of public debt we’re between the  third most indebted county per head of population within the Developed World. So we’ve seen a remarkable change in the composition of debt. We’ve seen a decrease of it at a private level. We have seen a significant increase of it on a public level.

Thirdly, if you look at where we are from an economic composition point of view, in terms of the shape of our economy. We have an economy that now has a very different composition to where it was across the pre-crisis period. If you compare where we are now versus where we were then, you can see for example an economy in which we need the Construction Sector to continue to grow. and while this is happening, we have an overall economy that now has many varied different sources of growth. If you compare us to where we were, and the pre-crisis period, we all know we became too reliant on two sectors of economic growth. And even when you peel back where we are, in the international and globally traded parts of our economy, that sometimes just captured under the broad heading of FDI, within that FDI acronym, we see a gigantic variety of a multiplicity of sectors and different forms of economy, all integrated into many many different global supply chains, active in many different parts of the Global Economy. From Pharmaceuticals to Tech, from Services to an increasingly high valued Food and Drink Sector. So we’ve seen an economy that has a very very different composition to what we would have seen a decade ago.

If you just look at the most recent economic indicators, some of which Ciaran touched on a moment ago on, in his introduction, we’ve seen a different level of growth, a different pacing of growth, to what we had seen back then. For example, we’ve seen the rate of full time employment growth, now stands at approximately 4%. We’ve seen consumption growth across the first half of this year, on average around 4% to 4.5%. And if you look at where we are with Tax Receipts at the end of August, we’re up 5% versus the same time period a year ago. So we are seeing a different composition to that economy, and greater diversity in the economy to what we had seen before.

Now the final area of change that is very different, is the institutions within which economic and public policy is being made. The institutions, the processes are fundamentally different to what they would have been a number of years ago, and before the crisis period. For those of you who have read `Why Nations Fail’ by James A. Robinson and Daron Acemoglu, for those of you who have read books like Francis Fukuyama’s  `The Origins of Political Order’, all of those make the point that Institutions matter. If you look at where we are institutionally now versus where we were pre-crisis, we have seen a really considerable change. What are those changes? Institutionally we now have the Department of Public Expenditure & Reform, working alongside the Department of Finance. Different and significant Government Departments with a sole focus on things which can make a fundamental difference to how our economy performs. In addition to the Central Bank, we now have the Irish Fiscal Advisory Council, commenting on performance, offering critique, offering advice, offering rigorous and independent evaluation. And this is before I even begin to get into, fundamental changes of process and fundamental changes at institutional level, within the European Union. If you look at where we are from a Banking Regulation point of view, in addition to the Fundamental Changes of culture and process, that have happened at a national level, we now have institutions such as the Single Supervisory Mechanism, and we now have a completely overhauled, scrutiny and resolution framework, at European Level, that was completely absent in the pre-crisis period. Running alongside this, is a budgetary process, which at European level is more transparent, more meaningful and which has a level of rigour and political profile to it, which it has acquired since the crisis period.

And this is real. This matters. This means that when I’m representing Ireland, at our monthly meetings of Ecofin and Eurogroup, on a regular basis, I have to update my colleagues on the economic performance of Ireland. It means that when we are having discussion on Banking Union, you have the Single Supervisory Mechanism, you have the European Central Bank, all participating in those debates, with the full weight of their Regulatory and Sanction power, and each Member State, having to talk about how their system is performing, and interconnectedness of their Banking Systems, with the European public. So these are all fundamental changes. A process at economic performance level. And then at Institutional level versus now against where we were in the pre-crisis period.

So that then takes me through to where we are now, Budget 2019, three weeks to go next Tuesday. If you look at those four areas of change, how do I relate that to my approach and the themes of the Government as we look to frame the approaching Budget. Well let me begin with point number one. And point number one is, and again has been acknowledged by Ciaran in his introduction, when I spoke to you here last year, and answered your questions, and gave my address, I spoke about the need to increase capital investment in our economy. What needs to be factored into the debate now, is that’s not just being announced anymore, it’s happening, it’s underway. Levels of capital investment, in the economy this year, funded through the Exchequer, have increased by €800 million, in nominal terms versus where it was last year. And for next year, we have already pre-programmed in, and announced, an increase of €1.5 billion in capital investment. And importantly, that level of investment was announced between 12 and 18 months ago, to give Agencies, to give Government Departments and to give the Private Sector, the time and the capacity to organise themselves in response to that higher level of capital investment. So a defining theme of Budget 2019, and the Budgets after that, won’t be about looking to make further changes to capital expenditure, given the level of profiling that we have now announced. It would be making sure that expenditure is used in the proper way. And to that point, in the coming weeks, the Department of Public Expenditure & Reform will be publishing a Project Tracker, to outline Project by Project how that €1.5 billion is being used and where it is going.

The second point that leads into then is the Budgetary Framework for Budget 2019. This relates back to the changes that I touched upon earlier on in terms of what’s happening with Bodies like IFAC and then how this is a consequence of the European Budgetary Framework. I have made the point on many many different occasions that Fiscal Space for me or the Artist Formally Known as Fiscal Space, has now evolved into Budgetary Stance. We have to look at what is the right thing for our economy, at the point in which we find ourselves in the economic cycle. And where we stand now, as I’ve already indicated in the Summer Economic Statement, is that we have a broad Budget Day Package of €3.4 billion, out of which €2.6 billion has already been invested or allocated. So if we want to go beyond that further €800 million in engagement that I will have with Government and with the Oireachtas, we will be required to make changes elsewhere. And that will be the Guiding Framework for this Budget, as was the case with my last two Budgets. Which means that this will be a Budget, which comes on to the next point, a Budget that looks to make gradual and affordable changes. When I’ve been making this case in the past, I’m often then faced with the charge that if you’re making change that is gradual, why bother making change at all? And to which I would ask you to think about, what are the alternatives to that? If we’re saying we’re not going to make the change at a gradual level, or in a way that is affordable, does that then mean we do nothing? And if doing nothing isn’t acceptable, does that mean then we look to make massive increases all in one give and go. Well we tried that before, in the figures that I referenced earlier on, and look how that turned out.

So what that means from a Tax point of view, is the objectives that I have for making changes in the Standard Rate Cut Off point, at which earners move into the higher rates of income tax. Changes that we want to make in Social Welfare Packages, or the implementation of the USC. Expenditure changes that I touched on earlier on, all of those will be, and I’m aiming to deliver it, at a rate that is affordable to the country. And by affordable, it means I can’t do everything at once. And by it being affordable, means I cannot meet all the needs at once. Choices have to be made. And if we are, and as we spend the money of the State, we have to do so in a way that is careful and affordable.

And that leads onto a final point in relation to Fiscal Policy overall. And this is one of my personal learning’s from what we went through in the crisis period, and what it means now for future choices. And at the heart of this, is the contention that in the period leading up to our fall, Ireland didn’t give enough contemplation or recognition to what it means to be inside a Single Currency Zone. We were happy and wanted to take trading benefits of having a stable currency, in the Euro, but the flipside of that, of the responsibilities, and also what’s not available to you if you’re inside a Single Currency Zone, perhaps did not get the recognition and focus that it deserved. And that means as we move and come into the next phase of our economic policy, a greater realisation that if we don’t set our monetary policy, if we don’t determine what is the value of our shared currency, it means that Budgetary and Fiscal Policy becomes even more important. And means you have to take even greater care, for ensuring that changes you make in Budgetary Policy are right for the economy at any given point in its economic cycle.

So they’ll be the four thoughts that will be guiding me, as myself, Michael, all of my Colleagues in Government and both my Departments look to frame this Budget. We’ll be embedding all of this in a longer term analysis regarding where we believe our country needs to stand; that there are benefits in consciously being an open economy and an open society. That there are benefits in offering key areas of certainty in really important policy areas, when so much else is in flux. That there are benefits in making clear to people who are creating jobs here at home, and to those who are looking to come to Ireland to create jobs, and being unambiguous and clear regarding our role in the European Union, and our role in the Eurozone. And amidst the horizon that I touched on earlier of change, of opportunity, of some difficulty, I continue to remain very optimistic about our ability, if we make the right choices, to navigate our way towards an even more secure and even better future.

Thank you.