Over-caution in investment won’t get business restarted in 2021

Oct 04, 2020
Originally posted on Business Post 4 October 2020.

Paschal Donohoe is not known for a tendency to exaggerate, and this is why his description of “truly horrific” economic figures was notable last week.

The Minister for Finance was outlining his government’s budget strategy to the Budget Oversight Committee where one figure in particular stood out – the unemployment rate of 16 per cent.

Putting aside any economic considerations, such a level of unemployment in any country is a national blight and resolving it must be a priority. There are real people behind this particular economic statistic.

That's not the case for much of the other economic paraphernalia which gets cited as the government attempts to manage our expectations. The wealth of the nation was traditionally expressed in terms of gross domestic product. Because of the degree of inward investment to this country, that figure became unpopular because it made our books look too good and our relative borrowings too small.

According to Donohoe last week, our preferred measure now of economic activity is a yardstick called modified domestic demand which strips out the influence of foreign investment in the country and items peculiar to our economy like aircraft leasing – maybe we are doing a little bit better economically than it suits us to pretend?

The exchequer receipts throughout the pandemic, most recently those published last Friday, have consistently borne this out. As the Irish Fiscal Advisory Council noted in its pre-budget 2021 statement, this is due “to continued outperformance in corporation tax and the progressive nature of the income tax system”. In short, the multinational sector kept performing while the higher-paid, who pay the bulk of income tax by and large, held onto their jobs.

None of this is to underplay the serious social and economic impact of the coronavirus, but rather to point out that, in formulating the budgetary arithmetic, things are not as bad as they could have been. Many finance ministers in other countries would gladly swap their position for that of Donohoe and his colleague, Michael McGrath, the Minister for Public Expenditure and Reform. Not least Rishi Sunak, Donohoe’s opposite number in Britain.

Last month, the British chancellor cancelled his autumn budget altogether on the basis that no one wanted to hear long-term plans. Instead, he set out a winter economy plan which in essence is a spending programme.

While some suspicious minds have suggested that this British manoeuvre was part of their Brexit negotiation strategy and a consequent unwillingness to show their economic hand, cancelling a budget under any circumstances would not be permissible for the government here due to the eurozone rules.

Yet rarely have the eurozone rules been applied with such a light touch as this year. As we are not under any specific fiscal requirements for 2021, the Irish government has a free hand in setting its deficit targets for the first time in a long time.

The government's plan for the 2021 budget is similar to that for the 2020 budget in that it is designed with a no-deal Brexit in mind. We won’t know the final trade talks position by budget day, but there may be grounds for cautious optimism. Even the decision by Ursula von der Leyen, the European Commission president,to seek a legal remedy (rather than a political remedy) for the British riding roughshod over the Northern Ireland Brexit protocol is positive. Legal action doesn’t create a new political or negotiating deadline, valuable in itself as time is short.

Current concerns over the future of the increasingly important corporation tax yield may also be overstated. It seems that the OECD blueprint for the future taxation of multinationals, designed to the detriment of smaller markets and lower rate jurisdictions, lacks detail in the critical areas of scope and scale.

It is due for presentation in a few weeks’ time to the G20 finance ministers, but I gather that the Treasury officials of some of the major capital exporting countries are already battening down the hatches, having plenty to contend with from the pandemic without countenancing major revisions to their corporation tax regimes.

Some developing countries are also running the numbers and realising that there may be very little for them in terms of additional tax revenue. Changes in the short to medium term which would prejudice Ireland’s corporation tax take are looking less likely now.

Perhaps the greatest risk facing the two Irish ministers in ten days’ time is that, despite all these positive signals, they become overcautious. The national debt spiralled after the last recession not just because of the cost of the bank bailout, but because in successive years we did not have enough people employed to support our social services and too many others in need of welfare supports. That meant we had to keep borrowing to meet day-to-day costs for the best part of a decade.

If we fail to invest sufficiently in 2021 and the promised national recovery fund is too small, we won’t get businesses reopened and people off subsidies quickly enough as the pandemic recedes. That would not only prolong the misery of high unemployment over several years, but also add even more to the national debt. Such a scenario could truthfully be described without exaggeration as “truly horrific”. 

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