The intangible nature of Ireland’s new, new economy

We must prepare to make the most of the potential in our changing economy, writes Minister for Finance Paschal Donohoe

‘The key to our future success is investment in infrastructure’

THE bicentennial of the birth of Karl Marx takes place in May. When considering the changes in the Irish economy over the years, I am struck by his oft-cited passage in The Communist Manifesto that “all that is not solid melts into air”.

As I remarked in a speech to Ibec last week, we in Ireland are not experiencing the melting of investment and trade, but we are seeing a change, even if that change is to less solid, but no less real, investments.

The Ireland of 2018 is in many ways unrecognisable from the country it was only 20 years ago. As well as benefiting from the many new citizens and communities that have chosen Ireland as their home, we have seen huge growth in the development of new companies.

Our modern economy has added layers of investment and success at different points in our recent history. Our journey away from a closed economy was led by the export of goods. To this we added excellence in the trading of services across many different sectors.

The more recent layer of development — into a new, new economy — has been the increasing importance of investment and trade in intangible assets. Of course, all of this has allowed a journey away from our historical status as an exporter of our own people.

So what are these intangible assets and how valuable are they in our global and Irish economy?

By intangible assets, I mean branding, product design and development, and the type of intellectual property synonymous with the modern high-tech sector but in fact existing in industries way beyond just that — the innovation we have seen in our food and drink sector being a case in point.

Intangibles are now the largest component of headline investment in Ireland.

In the first three quarters of last year, for example, almost 35pc of investment was in intangible assets. That is up from only 9pc in 2000.

This new, new economy poses three questions for business, government and citizens.

The first question is about how to measure and properly capture this new type of economic activity.

Measuring and interpreting the size of the Irish economy is particularly challenging given that our economy is so deeply embedded in global supplychains. But just because it is difficult to measure does not mean this new, new economy is not real.

In July, the Central Statistics Office published for the first time an alternative measure of the size of the economy, so-called “modified Gross National Income”, or GNI-star. This new measure excludes the depreciation of foreign-owned intellectual property assets located in Ireland and the depreciation of aircraft owned by aircraft-leasing companies.

The key point here is that despite this complexity, we can measure this new economic activity. However, in the future, we will need to look at our economy through many different lenses to get a clear picture of performance.

The second question we must grapple with is how to deal with the political questions this new economic activity poses and how we ensure fairness and equality.

Not everyone will immediately benefit from technological progress, increased global integration and the transition towards the knowledge economy. There will be both winners and losers. To ensure fairness, then, we must use our tax system.

When it comes to ensuring a fair international tax regime, to be used primarily to tax globalised companies, tax must be levied where value is created. Any new rules on taxation must be supported globally and we must have clear definition of what a digital transaction is.

The OECD is engaged in this work at the moment and will report shortly.

In relation to domestic tax, particularly income tax, Ireland is recognised as already having a highly progressive and redistributive tax system. The OECD said so in 2016, and this will not change during my tenure as Minister for Finance.

Indeed, in 2018, it is estimated that the top 1pc of earners in Ireland, in receipt of 12pc of total income, will pay over 25pc of all income tax and USC.

And the third question is how Ireland can continue to win in the new, new economy.

While there are a number of policies that we must pursue, like the correct legal framework for intellectual property and continuing to implement our competitive corporation tax rate, the key to our future success is around investment in our physical infrastructure that will support the new, new economy.

That is why we will this month publish the National Development Plan which will see over €100bn invested in communities around the country to make our villages, towns and cities better places in which to live and work.

Ireland has, up to now, endured a “lost decade” — lost jobs, lost investment, and lost hope. The next 10 years will be about so much more than simply recovering those losses. And while risks exist, risks like Brexit among many others, the best way to mitigate against those risks is to prepare — to be ready — for the new, new economy and its potential.