A good minister or a great minister?

Jan 20, 2020

Business Post 19 January 2020

One of the easiest portfolios for a new minister to pick up in the next couple of weeks could be Finance and Public Expenditure and Reform. Compare it to the lot of the next housing minister or the next health minister, who are bound to pick up their portfolios with some trepidation.  True, we have an enormous national debt, but then international interest rates are at historic lows.  We no longer run a budget deficit and the main tax problem in the economy is that we collect too much tax from companies.  Unless the new finance minister goes on a spending splurge, there will be a budget surplus in 2020. 

Paschal Donohoe mastered two of the key requirements for the job of finance minister.  He was clever and he was lucky.  His period of tenure as a minister in the 32nd Dáil coincided with the global economic recovery gaining momentum.  In a small open economy such as ours, economic factors will always trump anything an individual finance minister does or doesn't do.  Our unemployment levels are at a record low mainly because of external factors and only partly because the minister did nothing to hamper employment growth.

Nor can any finance minister in any small country dictate the international consensus on cross-border taxation.  Ireland has benefited spectacularly from an unforeseen consequence of the changing international approach to corporation tax.  The so-called BEPS consensus led by the OECD drove income generating assets out of tax havens and into genuine low rate (rather than low tax) jurisdictions. 

I'm not aware that anyone predicted the extent of this effect on the Irish economy.  When the New York Times Columnist Paul Krugman sneeringly described the consequent boost to Irish GDP as “leprechaun economics”, he failed to realise that the leprechaun’s pot of gold is actually real and is located on these shores with little apparent sign of it moving anytime soon.  Was this just luck?

Donohoe and his officials detected very early on what way the international tax policy wind was blowing.  Although the government was criticised for what seemed to some to be a tardy approach, both Donohoe and his predecessor Michael Noonan eliminated some of the more egregious cross border tax planning schemes. 

Less prominent but perhaps as important was Ireland’s role in building a coalition of the cute within the EU.  Simon Coveney and Donohoe orchestrated the responses of the dozen or so smaller nations which became known as the New Hanseatic league.  These countries are linked by a shared alarm over some of the EU tax proposals driven by the larger economies.  Between them they managed to make life a bit more difficult for the EU Commission and sucked the life out of EU proposals for digital taxation.

This decisiveness was not always matched by measures on the domestic front.  At times it seemed that the finance minister was paralysed by the fear of doing the wrong thing.  His tenure marked a new way of defining “risk averse”.  Business concerns largely went unheard, and there was little or nothing in the way of new business tax incentives.  The “keep on saying nothing” approach taken by government in the face of Brexit uncertainty meant that many businesses simply could not plan coherently.   The Budget for 2020 was prepared on a worst possible case scenario.  Issues raised at the annual National Economic Dialogue, ostensibly an occasion for civil society to present its ideas to government, went unnoticed.

The minister will point towards the economic growth which transpired anyway as justification for this laissez faire approach.   That doesn’t answer whether more could have been achieved, nor does it excuse ignoring the tax system as a lever of policy.  How was it justifiable not to use the tax system to encourage housing development and rental supply to help provide accommodation at a time of crisis?  After all, we know that housing tax incentives are effective.  We even know what mistakes to avoid with them.

There were other problems too.  The focus remained on the multinational sector, with little tax support for indigenous industry.  The approach to carbon taxes was hesitant.  Local property tax is no longer fit for purpose.  The valuations are out of date and too many properties are exempt; at this stage LPT is borderline unconstitutional.  Inheritance tax is now largely a tax on Dublin households as the exemption thresholds have not reflected property price growth.  The 40% rate of income tax still applies at low income levels.

On balance, I think the history books will be kind to Paschal Donohoe.  It is in the nature of the economic cycle that the term of the next government is likely to span some economic slowdown, if not an actual downturn.  Nevertheless, whoever takes the portfolio next time will be taking it at a good time to become the finance minister.  He or she will have both the economic headroom, and plenty of untapped opportunities, to make a difference.

 

Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland