Paschal Donohoe: As economic storms gather on horizon, our fiscal policies must lean into the wind
THE international economic landscape is changing: increasing trade tensions, slower growth and a process of deglobalisation will affect the Irish economy, now and in the future. International tax reform is on the way and Ireland will be at the coalface of any changes. Then, of course, there’s Brexit.
But we can take on these challenges with the public finances and economy in good shape. This year we will achieve a second consecutive budget surplus. Employment is at a record high. There are no signs of a credit bubble.
Having said that, I am acutely aware that economic recovery is never the same as a healed society.
Crisis legacies remain, not least in the form of an inadequate supply of housing as we work our way towards building the 35,000 houses we need annually. The reduction of rent and childcare costs is also crucial.
My job is to continue to work so that these social and economic challenges are met. Ultimately, I am the minister of an economy within a democracy, not a democracy within an economy.
This means that I am working for all people in society.
The rise in protectionism, and the associated trend towards deglobalisation, is worrying from an Irish perspective. This fundamental shift in how the global economy has operated over the last three decades is happening at a time when many worry about permanently lower growth. A combination of ageing populations and weakening productivity mean that future global growth rates will likely be lower than in the past, with potential knock-on effects for our standards of living.
More specific to Ireland is the ongoing process of international corporate tax reform. The corporate tax system that is in place in most jurisdictions was developed around a century ago. It is important that the change that is coming, in terms of addressing the increasingly digitalised aspects of our economy, is driven on a global basis with the new rules applying to all countries.
That is why I support the OECD as the most effective organisation through which these challenges can be addressed.
In terms of our ability to attract inward investment on the back of these changes, we have seen a large increase in corporation tax receipts since the mid-part of this decade: these now account for nearly a fifth of total tax receipts.
This will not last forever. We must continue to prepare for the time when these revenues start to fall and we must accelerate this preparation.
Given the risks, not least by this expected reduction, I have announced that the Government is aiming to achieve a budgetary surplus of 1pc of GDP by 2022.
In real terms (gross national income (GNI) terms – a better gauge of the size of our economy) this amounts to around
€3.8bn. All the while we will continue to invest at appropriate levels in our schools, hospitals, roads, public transport and our public services.
That said, however, this is contingent upon continued economic growth. In the event of a disorderly Brexit, running a deficit is the appropriate way to protect the economy. In this case I envisage that budgetary balance would be restored by around 2023.
Running surpluses of this magnitude will allow us to reduce our public debt to income levels, which are the third highest in the OECD at €42,000 per capita. We will reach our new target of reducing the debt-to-GNI ratio, which currently stands at around 100pc, to 85pc by 2025. Longerterm we will reduce it to 60pc.
This is how we can enhance the resilience of the economy and build a more stable and secure future for all of our people. An appropriate economic policy must recognise the essential features of our country – small, open, dynamic. We do not have the luxury of a large domestic market.
We do not have our own currency. For economies such as ours, it is important that fiscal policy ‘leans against the wind’ and does not become pro-cyclical by inflating booms and exacerbating downturns. We have been there before.
The challenges and circumstances we find ourselves in do not allow for breezy comparisons with other jurisdictions. The political economy zeitgeist may be changing, but the fundamental duty of any government to protect the public finances against risks – including those posed by potentially transient corporation tax revenues – has not.
Running successive surpluses over the medium term is the best way to meet these challenges.
Crisis legacies remain, not least in the form of an inadequate supply of housing
Paschal Donohoe is the Minister for Finance