Thought leadership

Originally posted on Business Post 3 December 2023.  Nobody wants to be seen to profit from the housing crisis, but everyone loses out if we insist on retaining the tax status quo. You cannot profit from the housing crisis. This seems to be the guiding principle behind the reported resistance by Fine Gael to introducing any form of tax relief which might help address the property supply problems. This aversion to property tax incentives is a consequence of the great recession a decade ago. It doesn’t seem to be the amount involved that presents the problem, as much as the very notion that a property incentive could be part of a solution to a current market failure. Big income tax reliefs for rented residential accommodation, renewal projects for cities and towns, holiday cottages and student accommodation contributed to the property boom and subsequent crash. Many houses and apartments derived their value not from their location or the accommodation they offered, but from the attractiveness of the tax relief on their purchase. As a 2006 review of property tax incentives by Indecon, the economic consultants, put it, in addition to increasing investment in projects, “the tax incentives had led to an increase in site prices, financial returns to promoters and property prices”. That Indecon report was one of a number of reviews into tax incentives commissioned by the government in 2005, amid alarm that Ireland had (yet again) overdone the whole property tax break thing. The reversal of the tax reliefs agenda started in 2006, but by that time it was too late to manage the popping of the property bubble in an orderly way. The chaos that ensued in the following few years has eclipsed another memory: that these property incentives contributed to improved housing supply. Analysis by the Economic and Social Research Institute found that persistent increases in supply and demand from the early 2000s resulted in housing supply averaging 84,000 units per annum between 2005 and 2007. Think of how an average supply of 84,000 units per annum now would help the current situation. Of course, it is too simplistic to attribute supply levels of this order solely to a favourable tax regime. In the previous decade when government got nervous about the housing market, the 1998 Bacon report identified that the key drivers of the housing market were economic growth, demography, cost of finance and the speed of the supply response. Now the problem driver is the lack of speed of the supply response, despite the recent interest rate rises. Unlike government interventions in the property market over the last 40 years, the tax system is not currently being used as a lever of government policy. While there have been adjustments to the stamp duty regime in favour of residential property development as compared to commercial development, and in recent weeks some tinkering with the refurbishment rules for landlords, there has been no broadly-based incentive introduced which might foster property supply. The Department of Finance’s own guidelines on tax incentives say that any new relief must be prompted by market failure, time-bound and re-evaluated on an ongoing basis to ensure that they continue to fulfil their intended purpose. How much more does the market need to fail by before tax reliefs are put back on the agenda? Previous tax reliefs have primarily been directed towards the buyer by granting future tax deductions from the purchase cost. Now the priority should be for measures that reduce development costs, ease cashflow concerns and make investment more appealing. During the pandemic we warehoused tax debt effectively to promote business survival. The same could be done for the construction sector by offering PAYE and Vat payment deferral associated with wages and materials costs incurred as units are built. Arrears would be collected when the housing development has been completed and sold. Another possibility would be to provide enhanced tax deductions for the cost of training workers in the construction industry. Boosting allowances for investment by builders in heavy plant, machinery and safety equipment could accelerate the supply of high-quality, affordable homes. Any such allowances should be time bound, and linked and targeted to the type of high density affordable housing most needed. The great advantage of tax incentives is that they can be delivered quickly. Yet we seem to be closing off any reasonable political discourse on approaches of this type purely on ideological grounds. Well publicised fire safety and structural safety construction defects in some existing developments don’t help the case for more incentives for developers. When interest groups put forward ideas for tax breaks, the most fervent advocates are usually those who will benefit most. Yet builders and developers are not the only ones who would benefit from reducing tax costs and barriers to residential property supply. Families need homes, and employers need their workers to have decent accommodation convenient to the workplace. It is politically difficult to get away from the notion that no one should profit from the housing crisis. But it is only the exchequer that profits if we insist on retaining the tax status quo. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 5 November 2022.  Conditions may be chaotic, but the outlook for the Irish exchequer is not necessarily bleak. We live in very strange times if a key determinant of economic success is whether or not the weather will be cold in Europe over the winter. Yet that is the unavoidable consequence of the illegal Russian invasion of Ukraine and the chaos it has created. Chaos is contagious, and dealing with it saps resources, but at least last week’s exchequer returns showed yet another bumper tax harvest in Ireland. It used to be the case that tax yields could be predicted fairly accurately by reference to GDP. If GDP increased, say by 5 per cent, then tax yields would also increase by about 5 per cent. This year at budget time, the GDP growth forecast was 10 per cent – but the tax yield growth forecast, at 19.2 per cent, is almost twice that. A few factors have put the sums askew in our favour. One is timing. A higher proportion of income tax and corporation tax gets collected in the last quarter of the year. Now that budget day routinely falls in October – and it was even earlier this year – predictions of the trend are more complicated. Another factor was the pandemic, which threw all forms of straightforward comparisons with previous years out the window. Thirdly, successive tax policies over the past ten years have narrowed the income tax base, meaning that fewer individuals pay the highest proportion of income tax. That makes calculating a reliable average tricky. As well as all this, we taxed our way out of the great recession mainly through higher Vat rates, but we have forgotten to reduce them. The standard Vat rate of 23 per cent in this country is among the highest in Europe, so a surge in price inflation also means a surge in Vat receipts. Corporation tax yields dominate the exchequer returns. Government never misses an opportunity to tell us how fragile that high yield might be, though there are good reasons for it. Many of the major companies established in Ireland are from the ICT or pharmaceutical sectors, which have shown extraordinary growth and profitability over the past several years. International corporate tax reforms since 2012 have restricted or eliminated opportunities for multinational corporates to locate profits in very low tax regimes, resulting in more tax being paid in this country. In some cases, capital allowances to encourage companies to establish here have expired, leaving more profits within the annual charge to corporation tax. So how might the current chaotic conditions really impact on government capacity to tax, and then spend? During the pandemic, those on higher wages were less likely to lose their jobs. However, this time there are clear signals that some jobs in the ICT sector are vulnerable. Twitter is letting staff go – as is Stripe, which has openly admitted it got it wrong on economic growth and cost management. There are also legitimate fears that some jobs in the lower-end services sectors and hospitality could go, as inflation, higher fuel bills and higher interest rates squeeze consumer spending. This month’s exchequer figures neither confirm nor challenge consumer spending trends, as Vat is paid every two months – and this wasn’t one of them. Despite this uncertainty, it does not automatically follow that the outlook for the Irish exchequer is bleak. International tax rules have not changed and are less likely to do so in an increasingly protectionist world. That is important for any small economy like Ireland’s that is dependent on foreign direct investment. Any disruption to our reliance for tax revenue on the corporate sector, high-income individuals or consumer spend will most likely be caused by poor domestic political decisions, rather than by outside influences. In a period of inflation, there tend to be greater opportunities for employment. It is counterintuitive, but there is an inverse relationship between inflation and the unemployment rate. Higher inflation leads to higher wages, leading to more attractive working conditions. This reality is borne out by a shortage of staff being felt across almost all sectors. It is not going to be easy to get through the current inflationary, fuel security and monetary crises, and it is right to highlight the risks that are not of our own making. But it is not right to identify these external risks without acknowledging that we would do most harm to ourselves with domestic policy mistakes. If we can improve our accommodation, health provision and migrant policy without recourse to increasing the national debt and without damaging confidence in the corporate and consumer sectors, we should be able to manage through the current chaos just fine. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 22 October 2022.  Last week’s budget correction in the Finance Bill means that trades, manufacturing and services are now treated equally in terms of tax and supports, but landlords and tenants need more. Budgets are tricky things, as the British have recently discovered. They are not merely about balancing the national books. They are about ensuring there is a business environment which can fund national spending aspirations while providing decent levels of employment, wages and spending power. They are also about convincing investors that your country is a safe place to put their money. This is a critical consideration for Ireland, given that about half of our national debt is owned abroad. While there is a high element of drama around budget day, the publication of the Finance Bill last Thursday was a far more mundane affair. If budget speeches are poetry (at a stretch), finance bills are most definitely prose. A finance bill provides the detail of the Budget Day adventures, but also corrects its mishaps. Given that Budget 2023 had involved spending so much money to deal with the cost of living crisis, mishaps such as the concrete levy were inevitable. Far more important than correcting the concrete levy was the change to the Temporary Business Energy Support Scheme (TBESS). The scheme, announced on Budget Day, was for tax-compliant businesses that experienced a significant increase in their natural gas and electricity costs. The mishap here was that the announcement confined this support to businesses taxed under “Case I”. This Case I moniker is jargon which not even tax students remark on, as there is no difference between trades and services when calculating profits. It’s a relic inherited from the 19th century, yet it was the term which the Minister for Finance used in his budget speech to exclude professional services businesses from the TBESS. In practice, it would have meant that the high street convenience shop would get some help in paying for the electricity used by the soft drinks cooler, but the doctors’ surgery next door would get no help to pay for the electricity used by the vaccine refrigerator. Official Ireland has long been suspicious of the services industry when it comes to business supports and tax incentives. Schemes such as the Employment and Investment Incentive Scheme (EIIS), whereby investors can get a tax deduction to buy into a business, are not available to services companies. Start-up services companies are not eligible for a corporation tax holiday, but trading and manufacturing companies are. Owner-managed trading and manufacturing companies are allowed to retain profits to reinvest, but profits retained by owner-managed services companies are subject to a corporation tax surcharge. More troubling, however, is the idea that services are in some way inferior to the more traditional trading and manufacturing activities. Such an idea does not make for good policy. The category of “professional, scientific & technical activities” accounts for over 10 per cent of all taxes collected, and 20 per cent of all self-employed income tax and universal social charge, according to recent figures from Revenue. That’s a big sector to overlook when it comes to providing state supports, yet that was the original premise of the budget statement. It has now been corrected in the Finance Bill. Perhaps the real surprise was that TBESS overlooked the services sector in the first place. An important policy aspect of the pandemic supports like the EWSS and the pandemic unemployment payment was that they were agnostic as to the nature and size of the business being helped, where it was located or its legal form. Companies, partnerships and the self-employed were all treated the same way. While ‘trickle-down’ economic policy is increasingly discredited by no less a person than the American president, a ‘rising tide’ economic policy which attempts to support all industries in equal measure seems to have something going for it. In this country it may help explain the remarkable fact that the nation does not have to borrow to provide the cost-of-living supports promised in the budget. If trades, manufacturing and services are now receiving equivalent policy treatment in the budget and Finance Bill mix, the missing piece is the private residential sector. There were modifications to the tax rules for landlords and tenants in the bill, but they don’t go far enough. A change to the way rental income is taxed to reflect all of the business circumstances of landlords and not just their rental business would help keep smaller investors in the market. A system of tax debt warehousing for builders – like the system in operation during the pandemic – to defer Vat and PAYE bills until houses are completed and sold would make a significant difference to the financing of property development at very little cost to the exchequer. Taken together, the budget and Finance Bill package demonstrates policy maturity and competence. Service business is being accommodated in tax and support policy which too often in the past was restricted to manufacturing, foreign direct investment and exporting activity. The next urgent step is to include the property sector. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 27 September 2022.  Paschal Donohoe and Michael McGrath have managed a careful balancing act, but the capacity issues that have caused problems in many sectors remain Like the last two budgets, this one was a response to a crisis. Instead of the pandemic, however, it sought to address a cost of living crisis created largely externally. Introducing significant fiscal initiatives can be tricky, as the UK government has learned in recent days. This Irish budget, however, has a good chance of keeping the national finances stable while improving the lot of most citizens. Paschal Donohoe, the Finance Minister, and Michael McGrath, the Public Expenditure Minister, avoided three potential pitfalls. First of all, the measures they announced should not disrupt the existing tax base. Finance ministers, like doctors, should above all else do no harm. The exchequer is funded primarily by corporate activity, consumer activity and the income tax paid by higher earners. None of the tax measures should disrupt any of these three key sources. In common with individuals, businesses are receiving assistance with spiralling energy costs. While we are often reminded that 50 per cent of the corporation tax yield comes from just 10 companies, it remains the case that 50 per cent of the corporation tax yield comes from the rest of the profitable companies operating in this country. Many of these smaller firms will be a direct beneficiary of the 40 per cent energy cost rebate scheme. The sizeable grants and social welfare payments will go towards sustaining people’s purchasing power and therefore help sustain Vat receipts. Higher energy costs also result in higher Vat yields. When petrol prices jumped from €1.40 per litre to around €1.90 per litre, for example, the government’s share rose by €0.11. The increase in the 20 per cent rate band will directly benefit approximately 1 million taxpayers who will see a greater portion of their income taxed at 20 per cent rather than 40 per cent. This is not so much a relieving measure as a preservation of the status quo, because incomes are also increasing in response to inflationary pressures. The change in the rate band should be seen as preserving and securing the high proportion of income tax paid by higher earners, rather than giving anybody a tax break. Secondly, the government has avoided borrowing for its tax and welfare measures. That’s a good call given that euro interest rates are on the increase, but it is also an important signal to potential investors in this country that the national finances are stable. Avoiding borrowing has only been possible thanks to an exceptional corporation tax yield, but as most of the tax bounce seems to have been diverted to one off measures, applying the budget surplus in this manner is a good use of available funds. Many finance ministers across the world would be envious of the Irish surplus available coming into this budget. Thirdly, while some of the additional welfare payments such as the increase in pensions and unemployed benefit will be permanent fixtures, the ratio of enhanced long-term welfare payments to once of reliefs seems to me to be about right. The gamble here is that the inflationary surge – and in particular the energy costs surge – will be short lived. There is of course no guarantee when, or even if, the pressures will abate and not all prices will ever revert to their pre-2022 levels. The mistake that may have been made in the budget is that much of the budgetary emphasis has been on an ability to purchase rather than on an ability to supply. A lack of capacity is a huge problem in our economy. It is encouraging to see an increase in the number of doctor only medical cards, for example, but it will increase the pressure on GPs. It should be a matter of national pride that our third level system is so accessible and after today even more affordable, but are we investing enough in our universities and colleges? It is also excellent to provide €500 in an annual tax credit for hard-pressed renters, but is the €6.2 billion of funding promised to the Department of Housing, Local Government and Heritage going to improve the supply of accommodation quickly enough? Overall, the government has done a good job. If capacity issues in the economy are addressed with the additional spending, it could even be an exceptional job. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 10 September 2022.  The findings of the current Commission on Taxation and Welfare come at a moment where inflation is rampant, and they could well prove to be a harbinger of impending economic mayhem.  What is the best early predictor of economic chaos? Is it a slump in GDP, or a surge in inflation or interest rates, or perhaps a dip in the purchasing managers index? In this country, it may be the establishment of a Commission on Taxation. While the findings of the current Commission on Taxation (and Welfare, to give it its full title) have been seeping out in the press in the past few days, its report will land at a time of inflation not seen since the 1980s, and of energy chaos not seen since the 1970s. Its predecessor commission, the second of that name, was announced in early 2008 when we still thought things were booming, but published in 2009 when it was clearly evident they were not. The original of the species, the first Commission on Taxation, was mooted in the late 1970s, but concluded in the grinding economic difficulties of the mid-1980s. All of these tax commissions were made up of knowledgeable and committed people. Their reports were careful and informed, and there is no reason to think that the report of the current commission will be any different. Only their timing is lousy. Taxation is based on technocratic principles, but ultimately it is a political process. The maxim of that long-ago and otherwise forgotten French minister for finance, that taxation is the art of plucking a goose with the minimum amount of hissing, remains true. This maxim tells us all we need to know in advance about the likely shape of the budget which is now just a fortnight away. Those of us in industry associations who lobby at the annual National Economic Dialogue and write anxious pre-budget submissions to government may have been troubling deaf heaven with our bootless cries. Instead, there are likely to be just two imperatives as Budget 2023 is framed. The first is to look after citizens and businesses whose livelihoods are being crippled by energy costs and inflation. Here, we should benefit from the lessons of the pandemic. The pandemic budgets of 2020 and 2021 were interventionist to an extent not seen in the previous decade. The 2007-08 crash left politicians and policymakers with a horror of manipulating the tax system to any purpose other than maximising tax collection. No serious attempts were made to help address homelessness, infrastructure deficits, or education and healthcare capacity shortfalls with tax incentives and reliefs. By contrast, interventionism was the watchword during the pandemic. The income tax system was thrown into reverse and used to subsidise wages, businesses were given what were in effect interest-free loans by deferring collection of Vat and PAYE, and Vat rates were temporarily reduced. This year’s economic rebound strongly suggests that temporary interventionist tax policies can work extremely well. Temporary reductions in Vat and excise can make inflated prices more manageable for people. Income tax reductions (unlikely to be as temporary because, after an exceptional inflationary period, not all prices go down) will make goods feel more affordable, particularly fuel. Sentiment is everything. An attractive and effective tax package should, from the political perspective, also quieten potentially noisy opposition benches. A percentage income tax or Vat reduction trumps a fancy tax policy or a principled position any time. The second imperative is to ensure that the exchequer continues to be able to provide help. The exchequer returns published on September 2 are unusually rosy. Perhaps more important, though, from the budgetary perspective, was the Department of Finance Annual Taxation Report published the previous day. This report confirms that the Irish exchequer is funded by higher income taxpayers, corporate activity and consumer spending. As long as those three sources are guarded, an appropriate exchequer response to a serious crisis such as the current situation is possible. There are no steps that any government can take to guarantee their preservation, but a prudent budget will ensure that at least these sources are not threatened. Amid all these considerations, it is unlikely that the concerns of any individual business sector or industry group will feature large in the budgetary arithmetic. Nor is it likely that there will be anything too new or innovative in how taxes are raised or collected. Instead, we may well see a series of targeted and reversible tax-relieving measures to supplement direct help provided under the social welfare code – an income tax relief is not much help if you’re not paying tax in the first place. The report of the Commission on Taxation and Welfare is due to be formally published shortly after budget day. Its conclusions will surely not be discarded, but new tax ideas are more likely to feature in future national budgets framed during less stormy economic times. And if, at some stage, a future finance minister announces the establishment of a fourth such commission, history suggests it will be time to prepare for the worst. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 06 August 2022.  The resolution of the agriculture emissions problem requires it to be seen for what it is: a problem of oversupply of a by-product. The vote of no confidence put down by Sinn Féin in the Dáil last month was a failure. Not only that, it seemed to galvanise the government parties while rallying some of the independents in the Dáil, whether they belonged to the government parties’ gene pool or not. Thus stabilised, government ministers should have gone on their summer holidays feeling reasonably secure, until the dispute over carbon emissions targets came to prominence. Climate change is not a little thing, but it should not trigger a crisis within government over carbon emissions targets in the farming sector. The concerns of farmers serve as a magnifying glass on political activity, and this particular magnifying glass can burn. The government’s position is not helped, either, by a discernible scepticism about climate concerns in the public mind fuelled by growing concerns over energy security. Fear of unbearably hot conditions over the next decade are being eclipsed by fear of unbearably cold homes over the next winter if Russian gas supplies to Europe are turned off. The EU’s relatively unambitious plan to cut gas consumption by 15 per cent has fallen foul of so many terms, conditions and exclusions that the net reduction might well be a lot less. It depends on every EU member state playing nice, and there are no guarantees of that. Few enough leaders across Europe have sufficient political capital to withdraw any existing services, or impose widespread restrictions on their electorates, and hope to survive the next election. This fact is at the root of the EU’s difficulties in agreeing restrictions on energy consumption, even if they can make the Russian sanctions regime more effective. Agreeing restrictions to make Ireland’s carbon sanctions regime more acceptable to the electorate is also at the heart of the current government problem, of which this is only the first instalment. If the government can survive this rattling over the next few months, it will be due in no small part to the disarray of the opposition on the issue. In all this, however, both government and opposition parties have missed the potential of commercial policies when it comes to achieving their objectives. There are many ways to view the problem of carbon emissions in the agriculture sector, but its resolution requires it to be seen for what it is: a problem of oversupply of a by-product. Agricultural oversupply can be resolved. In the past, butter mountains have been levelled and wine lakes have been drained when agriculture policies were modified to manage them. And before anyone starts whinging about subsidies to farmers, remember that for all its faults, the Common Agricultural Policy (CAP) is designed to ensure food security at reasonable prices for consumers. This is not just about incentives, but about euros and cents. If, despite protestations, the national herd gets forcibly reduced, say by 25 per cent, then the prices paid to eligible farmers need to increase by 33 per cent through direct government intervention. It won’t make the prospect of herd reduction attractive for the farming industry, because farmers are justifiably proud of their herds and of the quality of their produce. Equally, however, farmers are business people who, for the most part, recognise that restrictions for a broader purpose in their industry are sometimes necessary. One of the faults of the current CAP is that it is not clear enough about funding climate action. There won’t even be a method to measure its impact “until 2026 at the latest”, according to the EU’s own factsheets. So much for the notion that what gets measured gets done. More broadly, providing higher agriculture subsidies in Ireland to combat climate change may not be particularly effective. The world market for beef or dairy is unlikely to contract just because Ireland produces less. In this case, the ultimate consumer is the planet, not the person. We would be responding to the science, not to the demand. Perhaps the main obstacle to such a strategy is the lack of imminence of the problem. Climate activists the world over have seen their objectives topple down the policy agendas as governments grapple with Russia’s invasion of Ukraine and its consequences. It is hard to marshal political support for any problem not crystallising before the next election, or even before the summer holidays. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 06 August 2022.  The resolution of the agriculture emissions problem requires it to be seen for what it is: a problem of oversupply of a by-product The vote of no confidence put down by Sinn Féin in the Dáil last month was a failure. Not only that, it seemed to galvanise the government parties while rallying some of the independents in the Dáil, whether they belonged to the government parties’ gene pool or not. Thus stabilised, government ministers should have gone on their summer holidays feeling reasonably secure, until the dispute over carbon emissions targets came to prominence. Climate change is not a little thing, but it should not trigger a crisis within government over carbon emissions targets in the farming sector. The concerns of farmers serve as a magnifying glass on political activity, and this particular magnifying glass can burn. The government’s position is not helped, either, by a discernible scepticism about climate concerns in the public mind fuelled by growing concerns over energy security. Fear of unbearably hot conditions over the next decade are being eclipsed by fear of unbearably cold homes over the next winter if Russian gas supplies to Europe are turned off. The EU’s relatively unambitious plan to cut gas consumption by 15 per cent has fallen foul of so many terms, conditions and exclusions that the net reduction might well be a lot less. It depends on every EU member state playing nice, and there are no guarantees of that. Few enough leaders across Europe have sufficient political capital to withdraw any existing services, or impose widespread restrictions on their electorates, and hope to survive the next election. This fact is at the root of the EU’s difficulties in agreeing restrictions on energy consumption, even if they can make the Russian sanctions regime more effective. Agreeing restrictions to make Ireland’s carbon sanctions regime more acceptable to the electorate is also at the heart of the current government problem, of which this is only the first instalment. If the government can survive this rattling over the next few months, it will be due in no small part to the disarray of the opposition on the issue. In all this, however, both government and opposition parties have missed the potential of commercial policies when it comes to achieving their objectives. There are many ways to view the problem of carbon emissions in the agriculture sector, but its resolution requires it to be seen for what it is: a problem of oversupply of a by-product. Agricultural oversupply can be resolved. In the past, butter mountains have been levelled and wine lakes have been drained when agriculture policies were modified to manage them. And before anyone starts whinging about subsidies to farmers, remember that for all its faults, the Common Agricultural Policy (CAP) is designed to ensure food security at reasonable prices for consumers. This is not just about incentives, but about euros and cents. If, despite protestations, the national herd gets forcibly reduced, say by 25 per cent, then the prices paid to eligible farmers need to increase by 33 per cent through direct government intervention. It won’t make the prospect of herd reduction attractive for the farming industry, because farmers are justifiably proud of their herds and of the quality of their produce. Equally, however, farmers are business people who, for the most part, recognise that restrictions for a broader purpose in their industry are sometimes necessary. One of the faults of the current CAP is that it is not clear enough about funding climate action. There won’t even be a method to measure its impact “until 2026 at the latest”, according to the EU’s own factsheets. So much for the notion that what gets measured gets done. More broadly, providing higher agriculture subsidies in Ireland to combat climate change may not be particularly effective. The world market for beef or dairy is unlikely to contract just because Ireland produces less. In this case, the ultimate consumer is the planet, not the person. We would be responding to the science, not to the demand. Perhaps the main obstacle to such a strategy is the lack of imminence of the problem. Climate activists the world over have seen their objectives topple down the policy agendas as governments grapple with Russia’s invasion of Ukraine and its consequences. It is hard to marshal political support for any problem not crystallising before the next election, or even before the summer holidays. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 09 July 2022.  Glowing reports from the IMF won’t mean much to those struggling with rent, fuel and food costs. It feels as if the country has just done some kind of economic Leaving Cert, with end of term reports published last week. First there was the Summer Economic Statement, then the Central Bank quarterly update, and finally on Thursday a good conduct report from the International Monetary Fund. Subject to the usual terms, conditions and hedging that we tend to find in economic assessments, the portrait which all three of these reports painted of the Irish economy is surprisingly positive. The Summer Economic Statement projects that there will be a modest budget surplus in 2022 with significant money available to help on the social welfare and tax front to take the sting out of inflation. The Central Bank is of the view that the inflation spike will be most pronounced in 2022, and that once we are through this current calendar year, inflation may revert to something more tolerable. Both the IMF and the Central Bank conclude that the employment outlook is perhaps as strong as it has ever been, with less unemployment, more vacancies available and much greater female participation in the labour force. This time three years ago, the predictions from all these bodies were not as positive. The commentary in the 2019 Summer Economic Statement and the Central Bank’s quarterly forecast in July 2019 was dominated by Brexit fears. The IMF chimed in with Brexit concerns as well, adding the escalation of global protectionism, and having to adapt to ongoing international tax changes for good measure Since then, of course, we did have Brexit which was orderly or disorderly, depending on your political (not commercial) point of view, a crushing pandemic, and a Russian invasion of Ukraine disrupting commodity supplies worldwide. You would never seek it out, but one outcome of the pandemic is that it was like an experimental laboratory for the economy. Decisions were stress-tested in a way that would otherwise never have been possible. Depending on how you count them, more business supports and social welfare benefits were paid out by government in the two years of the pandemic than might usually be the case over five years. The outcome of this “experiment” has been that these payments seem to have been more in the nature of an investment than in the nature of largesse. The pandemic has also proven that our tax base is very resilient. We have discovered that the exchequer is predominantly funded by the corporate sector paying corporation tax, high-income earners paying income tax – about 80 per cent of all income tax and USC comes from the top 20 per cent of earners – and consumer activity in the form of Vat. According to the June exchequer figures, over 85 per cent of all of our tax revenues come from these three sources. Whatever else is done in the September budget, these sources have to be managed and preserved as no package of social welfare benefits and tax reliefs can be delivered without them. This resilience is further underlined by the fact that it is Irish business that acts as the collector of taxes for PAYE and Vat. During the pandemic, a sensible process of tax debt “warehousing” was introduced which allowed business to defer paying PAYE and Vat to Revenue. However, it is surprising how little tax debt was deferred in this way. Totals did vary over the ebb and flow of the lockdowns, but broadly speaking, there was deferral only to the tune of 5 per cent of the total tax yield. That's a confident performance by Irish businesses in a pandemic crisis. This sense of business confidence is reflected by surveys such as the Bank of Ireland’s Economic Pulse, suggesting that business sentiment is currently higher than consumer sentiment, but vastly more so than in April 2020, when we all stared into the abyss of the Covid-19 pandemic. There will be some who will argue that all this confidence and positive sentiment is misplaced and that we underestimate the interest rate and inflationary challenges of the coming months, but nevertheless, that confidence is there and is already having a bearing. It may yet be bolstered further. The indifference, bordering on hooliganism, shown by the current British administration to the political and economic status of Northern Ireland and Ireland’s position within the EU could soon be remedied. It certainly can’t get much worse. The problem now for the government is to translate this economic capacity and success into consumer sentiment. Glowing reports from the IMF won’t cheer anyone who is struggling with fuel, grocery or accommodation costs, nor for that matter the employer who can’t get staff because prospective employees can’t find a place to rent. And while inflation is expected to ease over the next ten months or so, it won’t over the next ten weeks between now and budget time. The economic exams may have been passed with flying colours. The budget will be a different matter entirely. There could even need to be some economic mistakes made by over-spending or undertaxing on the next Budget Day to make the public aware of these past successes. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 04 June 2022.  Many other developed countries would give their right arm to be in the solid economic position we are in. Yet we seem afraid to spend that largesse on causes that desperately need it.  We have emerged from the pandemic with an economy stronger than it has been for many years, a debt-to-GDP ratio hovering somewhere around 50 per cent, and full employment. We have suffered terrible loss and endured much misery, but much less so than other nations. Yet the advice from the Irish Fiscal Advisory Council (Ifac) for the future can be summarised in just two words: “Careful now.” Ifac has its job to do, but there’s more to economic life than is apparent in the ratios of tax-and-spend. Prominent among the the council’s concerns is our reliance on corporation tax. Yes, we do rely on a relatively small number of companies to pay corporation tax. But then we always did. That’s a phenomenon that has lasted more than 40 years. Only the names of the companies have changed and in some cases that was merely by virtue of merger, acquisition or simple rebranding. And yes, corporation tax receipts are higher than would be expected from domestic economic activity. But there’s a reason for that too. It’s called globalisation. If anything, the reliance on a small number of firms for corporation tax take is less flimsy than in the past. The corporation tax yield no longer stems from the availability of cheap manufacturing facilities and generous investment allowances in machinery and buildings. It flows from intellectual capital, which Ireland is uniquely qualified to host, and not just for tax reasons. No one locates intangible property in a country with a dodgy legal or political system. This is why the council’s call for the re-establishment of the rainy-day fund is unwarranted. Two decades ago, Irish taxpayers missed out on social services in their communities, special needs assistants in their schools, hospital care and decent roads to drive on, in favour of building a National Pensions Reserve Fund. The proceeds of their state-enforced frugality evaporated under the heat of the 2008 banking crisis. That cohort of taxpayers, and in the interests of full transparency I am among them, paid for the financial collapse twice – through reduced government investment pre-collapse and higher taxes post-collapse. And why should any group, however eminent, expect current ministers to build up a bank of cash for future ministers to spend after the next election? The injustice would not just be political. Why should anyone not have a home, or a university go underfunded, or a school not have a playground, or a hospital not have additional nurses and beds, in the interests of our totemic fear of the national debt? Many other developed countries would give their right arm to be in the solid economic position we find ourselves in. Yet we seem to be afraid even to recognise how well we are doing. We no longer measure ourselves by reference to the long established and international yardstick of gross domestic product (GDP). Instead, we have created a humbler measure called modified gross national income (GNI*) so that we don’t look quite as good, just in case we get above ourselves. We do not, British-style, have to think about imposing windfall taxes on industry to help our citizens with the rising cost of living. Our windfall taxes are already built into the existing system. We support industry in the pharmaceutical and technology sectors and benefit from their profitability through corporation tax receipts. We levy Vat at high rates on our hard-working consumers so that when prices rise, so too does the Vat take. Against that we may not be collecting sufficient social welfare contributions to provide the robust safety nets our citizens deserve against misfortune. There can be no argument against the economic benefits of such safety nets given the positive impacts of both the Pandemic Unemployment Payment and the Employer Wage Support Scheme. A key lesson from the pandemic surely is that targeted social welfare is not largesse. It makes good economic as well as social sense. It is better to spend money on our people than to build up rainy day funds which merely penalise the most productive elements of the economy while taking out of the equation money which could be better applied elsewhere. We have made that mistake in the past. It is strange that it be suggested again. A competent and influential body such as Ifac deserves our attention, but it seems to me that its May report is only contributing to a keening national imposter syndrome, perhaps inadvertently. We have problems with our health and welfare systems, and we need to invest more in housing and utilities, primarily water and power supply, but in the main we do well. We need to be mindful of what still has to be done, yet proud of what is already accomplished. We don’t need a “careful now” mindset. It is strange that anyone should believe we do. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 08 May 2022.  As a country, we consistently ask the wrong questions about our industrial and investment policy. The current row over turf tells us much about Ireland’s body politic, and it isn’t a good story. Bad policy does damage, but we don’t have enough politicians with sufficient ambition for their constituents to do it a better way. Surely, the real question is why any citizen of one of the wealthiest countries in the world has to rely on turf to heat their homes. The wrong questions are also being asked about our industrial and investment policy. The focus, post-Brexit and the Northern Ireland protocol, has been our trade in goods with Britain and the wider world, but Ireland exports just as much in services. Services can only be provided if we have people to provide them. Investment policy in this country has traditionally focused on how we tax employers. Having resolved the tax status of the body corporate, it is now time to think about the body in the office sitting at the keyboard, providing the financial management, systems programming and business support facilities which fuel so much of our prosperity. We have issues with the retention of qualified talent in this country. This seems to be particularly pronounced in the medical profession, where, as an OECD study of health systems pre-pandemic rather dryly observed, a high number of medical graduates who qualify here will never work here. It is difficult to resolve retention challenges in any particular sector, but we have to slow if not completely halt the brain drain. While not every problem can be solved by throwing money at it, should we start thinking again about how we tax our working population? What might the effect on the workforce be if we increased the personal tax allowances available to those under 30, while reducing the personal allowances available to those over 50 by a similar amount? That would, in effect, frontload the personal tax allowances people receive across their lifetime of work in the country to ensure they are less taxed in their early careers. Such an initiative would be a long-term project, and history suggests that while it wouldn’t be ineffective, it may not be permitted to be effective. The last attempt at engineering the make-up of the workforce with income tax policy was individualisation – lower taxes for working couples – and that failed for little better reason than a political resistance to any form of change. There was no ambition for the wellbeing of working couples, or for the resourcing of national growth. Turf fire thinking is not a new phenomenon. Yet there are some grounds for optimism. There have been positive developments in providing apprenticeship opportunities and in education syllabus reform. One area where the government has made considerable progress in dealing with the challenge is in the granting of critical work visas for skilled personnel coming into the country. Waiting time has dropped from almost six months to, in some cases, less than a month. Many knowledge workers do not need to be physically located in this country. International tax conventions preclude the possibility of special tax dispensations for workers resident outside the country but employed by an Irish firm. They do not, however, preclude simplifying the whole process of calculating and offsetting the correct amount of taxes due between countries. Making administration easier can make all the difference in ensuring ready supplies of goods, as post-Brexit Britain is finding to its cost. The same holds true in ensuring the ready availability of talent. This time last year, Ireland was an outlier from the international consensus was when the government sought to protect the country from the loss of one of our key investment incentives – the 12.5 per cent corporate tax rate. The outcome was an international rate of 15 per cent that would not go any higher, while persuading the European institutions that it was tenable to run a tax regime with different rates depending on the size of the industry. But the other side of the international reform agenda, which garnered less attention was that some corporate tax revenues would migrate from countries of production to countries where markets were to be found. This would mean that Western economies such as the US, France and Britain would in effect be surrendering part of their corporation tax take to countries with large markets such as Russia, China and India. There is now little to no chance of that happening any time soon. Future success will not be achieved by attempting to mirror the patterns of the past. It has often been pointed out that money tends to flow to locations where it is most welcome, and the same is true of professional talent. It is not terribly long ago since we systematically impoverished our country by restrictive trade and industrial policies which did little other than prompt people with get up and go to get up and go from our shores. We now need to do exactly the opposite. It’s time to stop the turf fire thinking. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 03 April 2022. A wage increase would generate hundreds of millions of euro in tax yield without much political or social pushback. Are wages in Ireland really too low? It would appear the emerging consensus is that they are. There have been recent debates in the Dáil over the level of the national minimum wage. Trade unions are signalling the need to achieve increases in pay in the order of 5 per cent or more. Even President Michael D Higgins has engaged in the discussions, with his observation last week at the Siptu Biennial Conference that we should be entering a new era of worker engagement and negotiations over pay and conditions. Last week, there was progress on issues such as pensions auto-enrolment and minimum statutory sick pay. Both of these are entirely laudable and necessary social reforms, but both also create further inflationary wage pressures and extra costly demands on employers. Every household in the country is feeling the pinch of higher fuel prices and other essentials, a wave of price increases prompted initially by the rapid economic recovery post-pandemic, and now perpetuated by the miserable and evil war in Ukraine. No one can be in any doubt that Ireland is an expensive country to govern. The pandemic has added to our national debt servicing costs. There are legitimate calls for additional funding for health, education and social services, along with the need to provide aid and support for the war refugees. But these calls are not being matched by a willingness among the Irish population to pay for the enhanced government services. In February, a Red C poll in this newspaper found that while the majority of the population were keen to ensure that the retirement age would not be raised, a similar majority would not be willing to pay the tax price of what undeniably is a social good. This tax reticence is nothing new. It took two attempts for a modest local property tax, to fund essential local council services, to stick. When LPT revaluations fell due last year, the system was tweaked in such a fashion that the tax burden would only increase on very few people. In 2012 the nation jibbed at paying a levy for septic tank inspections, and then many refused point blank to pay the water charges which were needed to repair a (literally) leaky public service infrastructure. Ireland collects tax and social welfare in the order of 20 per cent of our GDP. In most other developed economies, according to OECD statistics from 2020, the figure is closer to 34 per cent. As of now, we don’t raise enough taxes to pay for current and future government services, but we don’t have the collective national will to introduce new taxes or allow existing tax rates to get any higher. One possibility is that instead of changing the tax rates, the government might change how much gets taxed. The easiest way to do that politically is to levy additional taxes from higher wages. If wages increase in both the public and private sectors, but allowances and reliefs do not, a higher proportion goes in income tax, USC and PRSI. This would not be a new strategy. In the 2016 Programme for Partnership Government, a stated tax policy was not to increase tax bands and allowances as wages increased, so that additional revenue could flow to the exchequer. This phenomenon is known as fiscal drag and is a form of taxation by stealth. It seems that stealth taxation is the only way in which an Irish finance minister can raise funds without being deflected by a political headwind. The effect of fiscal drag can be quite dramatic, particularly as the Irish tax system is very much skewed in favour of the lower-paid, as indeed it should be. Calculations are frequently wheeled out around budget time on the impact of a 1 per cent change up or down in an income tax rate. We rarely see tax calculations which involve changes in wages. Tax projections are not an exact science, especially given the distortions in income levels from the pandemic, but what might be the effect of everyone in the country receiving a 5 per cent wage increase? A rough and conservative calculation, based on the most recent publicly available figures, suggests an increase in income tax yield alone in the order of €800 million. Additional USC and PRSI yields would likely drive the total yield over €1 billion. That’s a huge amount of recurring tax money to raise with possibly little enough outcry. Of course, wage increases bring their own problems, not least the challenge of competitiveness. Nor would a general wage increase be a rising tide that can lift all boats. Increases in disposable income are all very well until met with higher costs of goods and services and last week’s inflation figures are a genuine cause for concern. When government addresses wage claims either in the public sector or for that matter in the private sector, the bigger exchequer picture will be factored in. What might be lost on the roundabouts could be gained on the swings. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 06 March 2022. In German the term “merkeln” is a somewhat backhanded compliment to the former German chancellor. It means to put off decisions until conditions improve. The EU response to the atrocious Russian invasion of Ukraine is showing that this attitude has had its day. An extreme development, even within a week of extremes, has been the decisiveness of the EU approach when responding to the Russian invasion. This wasn’t just a triumph over the labyrinthine EU process and bureaucracy. There has been a change in mindset. The EU is not a defence union, but it has decided to act like one. But then the EU wasn’t a healthcare union either until it was forced to become more organised following the onslaught of Covid-19. The EU response was disjointed during the early weeks and months of the pandemic because the mechanisms were not there to coordinate healthcare policy across the member countries. Remember the initial approach to vaccine purchases by the bloc? There has been no such dithering in response to the Ukraine crisis. The latest indication of the newfound appetite for rapid reaction is the use of the Temporary Protection Directive, a process that would give immediate permission for Ukrainians to live and work within the EU and have access to some social welfare benefits. Up to now controlling the freedom of movement of non-EU citizens has been a Brussels totem, unshaken across other humanitarian crises. This directive has existed since 2001, but was never used. If Covid-19 introduced bigger EU governance, one of the permanent outcomes of the Ukraine war is that future EU influence will extend even further. This is not merely a consequence of improved political decision-making at EU level. Nor can it be fully explained by the historical instincts of the EU Nato members to push back against unacceptable behaviour within the former Soviet bloc. The theatre of war has changed. Everyone knows that war is now waged with cyber-attacks and with disinformation spread on social media platforms. Conflict in the second decade of this century goes beyond the screens of computer hackers and onto the screens of the financial traders. An army still marches on its stomach and sanctions make those bellies harder to fill. Announcing sanctions is one thing, but enforcing them is quite another. Governments are reaching deep into their financial services sectors to ensure adherence with the “new normal” approach to Russian commerce. Britain has its own Office of Financial Sanctions Implementation. Ireland does not have a separate such office, but officials have not been slow in setting out the obligations on financial institutions and professionals. Here, the Central Bank is the lead agency for financial sanctions. The application of new financial sanctions inevitably spurs attempts by the people who are targeted to avoid them. At this point the existing anti money-laundering rules kick in. Money-laundering is a criminal activity to conceal the proceeds of crime, and rules already exist to check out unexplained funds or wealth. The financial affairs of politicians and public officials are also subject to scrutiny as they could be bribed or influenced. The decisiveness and rigour of government decisions across Europe will have consequences for a long time. Adding to the existing impetus behind the anti money-laundering regulations, new powers to control and regulate data are on the EU agenda. Similarly, moves to counter climate change at EU level, though slipping on the agenda because of current events, will eventually gain new impetus. They won’t perhaps be driven by the worry of global warming, but by the fear of energy dependence. Though it is the least of our worries just now, businesses operating in the EU will in future be dealing permanently with more scrutiny and regulation over what they deal in and who they deal with. It is difficult for governments to impose tough sanctions and obligations when these have a severe impact on their own citizens. The price increases at the fuel pumps are an early sign that sanctions cut two ways. This is only the start of a phase of higher prices with some goods and services increasingly in short supply. As they deal with Covid restrictions in their capital cities, the Canadian and New Zealand prime ministers are finding that voters dislike being backed into a corner. Our response to the Ukraine disaster has to be different. Whatever the outcome of the illegal invasion, and even if the invasion were to end tomorrow, the European political climate has changed. It is not so much that the centre is holding, but that the centre has resolved to take decisions quickly and ensure they are enforced. The way the EU will conduct its affairs in future has been permanently changed, not by Brexit, nor by the EU Council or Commission or Parliament, but by the evil, though natural, action of the coronavirus and the evil and unnatural action of Vladimir Putin. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland