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
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