CHECK AGAINST DELIVERY
Speech by Minister for Finance, Michael Noonan T.D.,
at the Irish Taxation Institute’s Annual Dinner 2017
I want to thank both Martin and Mark for their invitation to speak here this evening. Tonight marks a milestone for the Irish Tax Institute, recognising its 50th year in existence.
Marking anniversaries is often an opportune time to reflect. Ireland has changed profoundly in the fifty years for which the Institute has been in existence. This week’s employment data is a clear demonstration of this point. In 1967 there were about one million people employed in this country. Fifty years later, the number is over two million.
The structure of the economy, as reflected in the employment data, has also changed. Services, which was the biggest sector in the economy 50 years ago with close to 42% of employment, now accounts for around 75%. While the total numbers employed in industry have increased – their share of total employment is down from 28% to 19%. The biggest change is in agriculture, which accounted for 30% of employment in 1967. Today, its share is around 5%.
This growth and evolution represents a remarkable transformation of the Irish economy into a vibrant open economy – an economy open to trade, open to the exchange of ideas and open to the movement of people.
This week’s employment data also allows for a more recent comparison. When I took office in 2011, the unemployment rate was over 14% and went on to peak at 15.2%. It is now 6.8%. The economy created 65,000 jobs in the year to end-2016, and the number in full-time employment increased by 72,000 over this period. This is the 17th successive quarter of employment growth and more than 200,000 net jobs have been created since 2011.
The employment data for 2016 also shows that employment levels increased in all regions of Ireland. Gains in employment have also resulted in an end to net outward migration and we’ve had net inward migration for the past year or so – people are coming home.
The improvement in the employment data is mirrored in the Government finances. We are targeting a deficit of 0.4% of GDP this year and will balance the books next year – our underlying deficit peaked at 11.5% in 2009. Our debt to GDP ratio was an estimated 76% last year; as recently as 2012 it had been 120%. So, the correction has been made. But we should learn from others such our Australian colleagues, who have seen a quarter of a century without recession. We should have an ambition to move beyond boom, bust and correction and put in place structural changes that will facilitate secular sustained growth. I will touch upon this point again later.
Our recent successes are a result of many factors. Some of these have been external, such as the speedier recovery in our main trading partners – the UK and the US. But to explain the central drivers of our recovery one needs to look closer to home. Corrective action was taken by policy makers and by business, and our people made great sacrifices as living standards fell and jobs were lost.
While recognising the great efforts made by taxpayers and the private sector, I am best placed to speak about policy, Government policy. With the assistance of the Troika we got the macroeconomic framework right. We implemented reforms, broadened the tax base and set the public finances on a path back to stability while at all times seeking to protect those most dependent on public services.
Within this overall framework we introduced a large number of targeted measures at a sectoral level. Let us not forget that it was the lack of diversification in economic activity and our over-exposure to construction and development that proved so damaging in the crisis. The most pleasing aspect of this week’s labour market data was that employment levels in all fourteen of the economic sectors increased. As many of our macroeconomic indicators reach or surpass the pre-crisis peak, we must remember that the composition now is different – growth, employment and tax revenues are now broad based and more sustainable.
Diversifying our economy is not the only lesson we can learn from the crisis. As we all know, Ireland as a small and open economy is particularly exposed to shifts in the external environment. So we should not just aim for fiscal sustainability in a base case scenario – we need to build shock absorption capacity. This will allow for targeted fiscal stimulus when inevitable downturns materialise. This is why I have provided in our economic planning for a rainy day fund and have committed to going beyond the requirements of the European fiscal rules by targeting a debt to GDP ratio of 45% over the medium term. Importantly, both policies have been endorsed by Dáil Éireann.
As tax practitioners you will have had a front row seat for the evolution of the tax take in recent years. Restoring the State’s revenue base has probably been the most challenging task for government since the crisis. The objective has always been to broaden the base but to do so in a way that mitigates the impact on economic growth.
Tax revenues have grown from 34 billion in 2011 to 48 billion in 2016 – or by over 40% in that period. It is true that new taxes have been introduced but much of the increased revenue is driven by stronger growth and tax buoyancy. To this end a number of targeted reliefs were introduced to encourage activity. These measures, such as the abolition of the air travel tax and the introduction of a reduced VAT rate for the hospitality sector were effective in boosting economic activity. The Home Renovation Incentive for which we have some recent data is another example. The cost of the scheme to date is just over €55 million but it has encouraged new projects worth an estimated €1.3 billion, providing work for over nine thousand contractors and improving over fifty five thousand properties.
It must be recognised that tax expenditures have downsides – such as a deadweight component and the challenge in bringing such measures to an end – but at the right time and in the right area they can be very effective in boosting activity.
Corporation tax is another area where we have seen significant growth in tax revenues. Though we have made changes to update and reform our corporate
code, this has not been at the expense of our inward FDI flow or revenue generation.
Finally, on the issue of domestic taxation, I should note that I am cognisant of the high marginal rates of income tax that apply to many people. We should be proud to have a highly progressive income tax system. We should also appreciate those that work hard to provide for their families and appreciate the value of retaining the incentive to work. I believe there is a good case to reduce personal taxation rates further, subject to the availability of budgetary resources. It is important that in the discourse on the appropriate amount of tax and spend in our economy, the views of those who contribute the majority of the taxation revenue are heard.
Tax at an International Level
In recent months I have spoken a lot about the international tax landscape and Ireland’s contribution to reform in this area – I intend to touch upon it only briefly today. It is fair to say that we have seen unprecedented change in this area in recent years. From the beginning, I was very clear that I support global tax reform. The alternative is uncoordinated unilateral action which would have led to increasing uncertainty and the potential for double taxation.
We have made good progress on this journey towards a reformed international tax system. With the publication of the OECD BEPS reports the countries involved have agreed a very clear direction of travel.
In Ireland we have shown that it is possible to meet these new standards while remaining competitive. Indeed in recent visits, Commissioners Moscovici and Vestager confirmed the sovereignty of the Irish tax system and confirmed that Ireland’s 12.5% rate was a matter for Ireland alone.
We have also proven our ability to adapt to change, while retaining our core strengths. The creation of the OECD compliant Knowledge Development Box is an example of this. I believe I can say that we made the right changes, at the right time and in the right way. In the changing world of international tax reform, I hope that Ireland has been a voice of clarity.
The changing international environment may bring uncertainty, but it will also bring opportunities. We remain responsive to changing demands, but recognise the value of constancy in our core principles.
In line with our established practice of carrying out periodic reviews of key areas of tax policy, the Government announced in September that a review of our corporation tax code would be carried out. On Budget day, I announced that I had appointed Seamus Coffey to undertake the review. I expect Mr. Coffey to make recommendations by the end of the second quarter of 2017. My Department is currently facilitating a public consultation on the matters under review and I invite those of you with an interest in these matters to make a submission.
It would be remiss of me to finish without speaking on the key macro risks to our economy. We are likely to see corporate tax reform in the US and the prospect of a form of a US border adjustment tax could have significant implications for world trade. The rise of populism in Europe amid a number of elections in 2017 has material implications for the European project and may depress growth rates.
The risk which is likely foremost in all our minds is Brexit. I do not intend to dwell on this issue – last week the Taoiseach set out in a comprehensive fashion Ireland’s position and our proposals to mitigate the negative impacts of Brexit. We must remain at the heart of Europe and open to the world. We must protect the hard-won peace on our island and we must pursue thoughtful, prudent but ambitious economic policies. This will require a whole of government response assisted by all sectors of society.
The final challenge I want to mention today is one that is the subject of far fewer column inches. We as a country are heavily reliant on the civil and broader public service. Indeed, we have a skilled and able public service. But we must continue to invest in its capacity, as the pace of change accelerates and the sources of change multiply. We must ensure the working environment is such that the public service attracts and retains high quality talent across the board.
Having discussed the risks we face I want to conclude on a positive note. There is a lot to be positive about. The economy is growing strongly and living standards are improving. The European economy is also growing and recent survey data suggests it is growing at the strongest rate in years. The US economy is entering its eighth consecutive year of growth, is close to full employment and markets are at record highs. As the commodity cycle has turned, emerging markets are also returning to strong growth. Even Brexit, which represents a significant risk, also presents opportunities for Ireland to further develop its financial services, ICT and other industries.
As a small, open and exposed economy we must anticipate and react to a changing global business environment. We have done so and we will continue to do so.