Thought Leadership News

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

Originally posted on Business Post 05 December 2021. We need more information on the opportunities and challenges that a 32-county regime would bring for businesses as well as individuals The Red C opinion poll in this newspaper last week highlighted the jarring reality that while many of us might aspire to the notion of a united Ireland, our views might change dramatically if it comes to paying for it. There is precedent for this reaction. The most prominent reunification in recent memory was that of East and West Germany. To fund that particular initiative, a solidarity surcharge was introduced which put a few additional percentage points on most existing taxes. The levy still exists today in many cases and suggests a solidarity surcharge may need to feature in debates over a united Ireland too. The travails of the Irish economy and the levels of indebtedness are well known, but the private sector is thriving. By contrast, the Northern Ireland economy is unbalanced. The proportion of public-sector to private-sector activity in Northern Ireland is considerably higher than usual – 27 per cent of workers in Northern Ireland are employed in the public sector. In the Republic, the Department of Public Expenditure and Reform reports 350,000 public sector jobs, suggesting that only 14 per cent of workers in the South are paid out of public funds. In terms of tax collected, Northern Ireland typically accounts for approximately 2 per cent of all British tax receipts, or just over £15 billion (€17.6 billion). The Revenue Commissioners in the South will collect something in the order of €90 billion in gross receipts this year. A block grant is paid from Westminster to bridge the gap between what taxpayers in Northern Ireland pay and the cost of providing all the jobs and public services in the region. This subvention runs at the rate of approximately £1 billion a month, a British funding hydrant that would surely dwindle, if not get turned off entirely, in the event of unification. The political players in Northern Ireland are wedded to their Westminster block grant, as is shown in their approach to how Northern Ireland companies are taxed. Stormont has had the power to set its own corporation tax rate since 2015, but adjusting the rate would come at the cost of reducing the block grant subvention from Westminster, so it hasn’t happened. We need some better perspective on the opportunities and the challenges that businesses, and not just individuals, would have within a putative 32-county regime. A united Ireland will surely mean some move towards harmonised income and corporation tax rates across the island, if only because Brussels would insist on it as a condition of re-admitting Northern Ireland to the EU. A harmonised corporation tax rate might be unlikely to rest at 12.5 per cent for most industry, but the all-island rate could be lower than the 19 per cent rate currently paid in Northern Ireland and which is due to increase for larger businesses to 25 per cent from 2023. Businesses would also need to factor in the costs of employment under a harmonised income tax and national insurance regime. According to recent OECD comparisons, the typical tax cost of employing a person on the average wage is remarkably similar North and South of the border. While the tax wedge – PAYE and National Insurance or PRSI combined – is around 31 per cent on average in both jurisdictions, this can change dramatically depending on family circumstances and different wage rates. Tax considerations aside, government and employers alike would have to wrestle with the significant differences in labour law which currently exist on the island. One of the biggest challenges for a truly all-island economy could come from losing Northern Ireland's privileged trade status under the Northern Ireland protocol. Despite the wrinkles in the protocol (and I do not discount the practical difficulties in its operation), the opportunity now available to Northern Ireland business to sell goods into both the EU and British markets without hindrance is a unique benefit. Neither the EU nor Britain would see any advantage in allowing one EU member country or region of the remaining 27 countries to have any form of privileged access to their respective markets. While undoubtedly there would be transitional arrangements and sunset clauses established were the political accommodation ever to come to pass, these could not be prolonged indefinitely. It is not only individuals that might be asked to pay more tax in a united Ireland; businesses in both the North and South would have to as well. Some form of solidarity surcharge would be an unavoidable consequence. Brexit has shown us what can happen when political decisions on sovereignty are taken without care for the legitimate concerns of industry. If the concerns of business are left out of the debate about a united Ireland, everyone will be worse off. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland