In the media

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

Originally posted on Business Post 06 February 2022. There is no evidence to support the status quo, so why are politicians still waiting to make a decision? The clearest signal yet that Irish politics has moved on from the emergency phase of the pandemic came from the Oireachtas Committee on social protection last Wednesday. In its comments on recommended increases to the state retirement age by the recent Commission on Pensions, the committee essentially contradicted the findings of that very commission. The committee said that the qualifying age for the state pension should remain at 66, with additional flexibility for long serving employees. This jars because Ireland has become accustomed to following the recommendations of experts. Guidance from public health experts has largely shaped our response to the pandemic for the best part of two years. By and large, the technocracy of public health has dictated the political decisions made since the pandemic began, perhaps to an excessive degree according to some. Nevertheless, when compared to other countries, and this is in no way to diminish the terrible loss and sadness of the pandemic, Ireland has fared reasonably well. Success came from sticking to the advice from the scientists, and this may also help explain why the harsh restrictions and measures were more acceptable to the majority of the public. We have a tradition in this country that respects knowledge, and few enough Irish people suffer from a Michael Gove-style fatigue from having to listen to experts. Whatever else can be said about the pensions commission, it did not lack for expertise, having experienced business people, public servants and academics on board. It is almost unimaginable that a recommendation from the National Public Health Emergency Team (Nphet) to the Minister for Health could have been, at any stage over the past two years, referred back to an Oireachtas committee to be contradicted. So, what has happened here? Are medical doctors in some way more expert than economists and welfare analysts? Is the political system simply trying to reassert its sovereignty? Or is the pensions issue simply less critical or urgent than the pandemic crisis, leaving expert opinion on the issue fair game for challenge? Considerations of political primacy and the perceived severity of voter pushback may have informed the committee’s report. Nevertheless, shouldn’t our politicians be more amenable to guidance from expert groups established to provide advice to the state? Politicians must of course represent the views of their constituents, if only to preserve their seats. They may not always read these views accurately or be swayed either by a vocal minority of their own support or an opportunistic opposition challenge. The Oireachtas committee came up with 13 recommendations on the pensions issue. Not one offers any concrete solution to the fundamental problem of retirement age – namely that we cannot afford the status quo. Their recommendation instead is to wait for the advice of the current Commission on Taxation and Social Welfare to give the funding answer. The Commission on Taxation and Social Welfare is another expert group. Will its report fall foul of yet another Oireachtas committee, which will recommend waiting for . . . what? In a post-pandemic era, voters may well be less tolerant of poorly informed policies. It will be interesting to see what they think of Norma Foley the Education Minister’s determination to run this year’s Leaving Certificate in the traditional format. Political noise from the opposition was inevitable. This time, however, many voters may conclude that the decision based on expert advice to go with written exams was the correct one. In the outcome of the Portuguese general elections this week, it seems that voters recognised, and then rejected, the ill-advised manoeuvres of the smaller parties supporting the previous Portuguese coalition. Those parties had not supported the fiscally prudent budget being promoted by the larger Socialist Party within the coalition, and this triggered the election. Now prime minister Antonio Costa, leader of the Socialist Party, will have an overall majority. One interpretation of this outcome is that when push came to shove, the Portuguese electorate recognised what needed to be done to govern their country well. Over the course of the pandemic, both the 2020 caretaker government and the current coalition had the good sense not to treat the population as fools. People realised that restrictions were necessary, and then got on with it. Wobbles in adherence to the pandemic restrictions only happened when government advice was conflicting or unclear, as was the case with the approach to schools reopening towards the back end of last year. Our government needs to continue the good habits of implementing policy based on expert evidence. The report of the Oireachtas Committee on social welfare flies in the face of this. If the results of the Portuguese election are anything to go by, politicians will bear the cost of getting it wrong.   Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland

Originally posted on Business Post 09 January 2022. Emmanuel Macron aims to have the 15 per cent corporate tax proposals in force by this time next year, and that’s not the half of it. The publication in the days before Christmas of a proposed EU directive to give effect to a 15 per cent rate of corporation tax across the bloc had a particular Irish hue to it – Paschal Donohoe’s sticking point of a “minimum tax rate means 15 per cent and not ‘at least’ 15 per cent” is in the text. If this Irish imprint came at the expense of surrendering a totem of our economic policy, the 12.5 per cent corporation tax rate, it also came at the expense of an EU totem that all companies must be taxed the same way. It was Brussels’ adherence to that principle, and its consequences for the EU state aid rules, that gave rise to the €13 billion Apple tax case which is still grinding its way through the European legal process. In future bigger companies will pay at different rates to their smaller counterparts. It will be up to the French presidency of the EU Council to push this draft corporation tax directive through the European political system during the next six months of its tenure. The effectiveness of an EU Council presidency is a factor of the size of the country which holds it. Put simply, the bigger the country, the more civil servants it has to throw at its pet European projects and thus the greater the likelihood of success. As the second largest economy in the EU, France has plenty of resources to direct during its six-month tenure in the hot-seat. There is no lack of ambition in the 76-page programme for the French presidency of the EU. It is not surprising that the programme commits to taking forward work on the 15 per cent proposals and aims to have them brought into force by this time next year. The French have long been suspicious of any country which, like Ireland, used low tax rates as part of their foreign direct investment offering. Ironically, the last time France held the presidency in 2008, there was some back-pedalling on EU tax reform because Irish voters had just rejected the Lisbon treaty. What is surprising, though, is that the promotion of the 15 per cent regime across the EU seems not to be the priority of the French economic and financial affairs agenda. Instead, the key project is the promotion of a “carbon border adjustment mechanism”. A carbon border adjustment mechanism is of course a tax by another name. The idea is that by levying additional duties on carbon intensive products coming into the EU, EU-based businesses will be deterred from outsourcing emissions-heavy manufacturing beyond the EU borders to avoid emissions quotas. A carbon border adjustment mechanism is a solidly “green” idea, in so far as it would cost businesses rather than individuals and is likely to play well with voters – a prime concern in an election year in France. Perhaps, though, the key to understanding this French emphasis lies in where that new tax money might go. The institutions of the EU are part funded by what are known as “own resources”. Own resources come from the excise duties collected by all the member countries on dutiable goods coming into the EU. The EU also receives a share of Vat receipts. These sources make up only one-third of the EU budget, and the shortfall comes from direct contributions from the member countries. This shortfall is now becoming a major problem because the EU budget is mushrooming from providing grants and cheap debt to countries to tackle the pandemic and deliver on the green agenda. The problem with cheap money is that someone, somewhere must pay for it. Proceeds from the carbon border adjustment mechanism are to be treated as “own resources” and are to go directly towards the EU budget. The mechanism is estimated at bringing in some €10 billion a year, which is no small amount until compared with the EU’s €750 billion pandemic recovery fund. Nevertheless, the contribution reinforces the notion that the EU must get better at paying its own way. Own resources are the new EU totem. Though not explicitly mentioned in the French programme, there are EU plans to further expand these by staking a claim on part of the corporation tax paid by companies with a €20 billion turnover. The pandemic has brought bigger government both at national and EU level – 15 per cent and global corporation tax are last year’s debates, with just some Is and Ts to be dotted and crossed. Managing and funding a bigger EU machine seems to be the priority for this French presidency. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland