The Merits of a Short-Term View

Dec 09, 2019

Business Post, 8 December 2019

Better to have five good one-year plans than one good five-year plan. 

It's almost 30 years ago since I was at the receiving end of this advice, from a person whose business success clearly showed it was the right approach.  While long-term planning has always been a good idea, back then strategy development for the medium term hadn't yet become the self-fulfilling industry it is today.

Yet, we all try to look a little further down the road than just the next few months, as indeed the Minister for Finance did this week in a speech to the Institute for International and European Affairs.  He identified policy responses to address some of the economic hazards he and his department officials foresee coming down the tracks.  It must be a frustrating business for any government minister to try to lay down plans which might only crystallise long after he or she has been voted out of office.  If a week is a long time in politics, then five years or more must be measured in terms of aeons.

In his analysis, the Minister identified 2012 as a nadir for the Irish economy.  He cited the fact that in 2012, unemployment stood at 16% and the budget deficit was 8.1% of GDP.  Tough times indeed, but how well it illustrates the futility of long-term planning.  Whose medium-term strategy formulated in 2012 would have correctly anticipated that long before the end of the decade, we might be back to full employment?  Or that by the middle of the decade, Britain would have decided to pull out of the EU?  Or that the biggest tax problem in 2019 might be a surfeit of corporation tax receipts?

Corporation tax receipts traditionally peak in November.  That's because most large companies must pay tax in two instalments and for various practical reasons, the second instalment typically falls due in November.  Not only that, while smaller companies make most of their tax payment in one instalment, that payment tends to fall due in November as well. 

The corporation tax receipts for November were announced last Tuesday and, true to recent form, they are almost embarrassingly large.  To put some context on the vast amounts of corporation tax collected, for every person in the country, companies have paid about €2,000 in tax this year so far.

The November corporation tax receipts reflect the dominance of the dozen or so very large companies who make the bulk of the corporation tax payments, and they also reflect the contribution of smaller companies within the economy.

There is a very simple way to reduce the dependency of the Irish exchequer on corporation tax receipts.  That would be to cut the rate down from 12.5% and thereby collect less.  However badly this might land in a domestic context, it would be totally unacceptable in the current international debate.  The rationale now seems to be that if you can't regulate the biggest tech giants, then at least tax them.  I'm reliably told that at a recent industry gathering in Paris to discuss the current OECD proposals on cross-border digital taxation, everybody in the room welcomed the proposed new rules.  Provided, that is, there were exclusions for their own particular industry.

Despite such cynicism it is impossible to disagree with the thrust of Pascal Donohue’s observations that the times are indeed changing for companies.  They need to.  According to a recent OECD report, tax receipts generally in that particular club of wealthy countries are beginning to plateau, and their growth in recent times reflects little more than the growth in their economies.  The inevitable consequence is that most developed economies are going to have to rethink the way they collect tax, not just from companies but also from their population at large.

Every time we undertake that kind of rethink in this country however, it falls flat.  There is compelling evidence that we have an ongoing problem with our water supply system, yet we rejected the introduction of water charges.  The funding problems for our national broadcaster (and more broadly the crisis for journalism in all shapes) are acute, yet we resist any notion of a media levy to replace the increasingly irrelevant TV licence.  Despite the introduction of local property tax in 2013, can it be correct that still only 10% of local government funding, according to Thursday’s Seanad Eireann debate, is provided directly by this tax?

These are not medium-term policy ideas.  I have some sympathy for a government which is so hamstrung by domestic political events and the risks from the political events across the Irish Sea that it can’t even change the rules of bingo, let alone signal significant tax reform.  Nevertheless, it is this type of single year issue which might change people's lives for the better far more rapidly than medium-term fiscal aspirations.

It is still better to have five good one-year plans than one good five-year plan.

 

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