Introduction, welcome and structure
Thank you Ann. I am very pleased to open the Department’s fourth annual Tax Policy Conference and to welcome you all to Dublin Castle for what I expect will be an interesting and thought-provoking day. I’d like to extend a special word of welcome to our external speakers – Mr. Vitor Gaspar from the IMF and the Right Honourable Lord Nicholas Macpherson formerly of HM Treasury.
In my opening remarks today, I will initially make some comments on the conference theme on the role of evidence in tax policy. I will then turn to the subject of Brexit – a topic that will no doubt feature in today’s discussions – and outline some of the work that my Department has been undertaking so as to ensure that we have a good understanding of the likely implications of Brexit for our economy. I will also outline some of the steps already taken to mitigate these. Finally, I will say a few words about the ongoing international tax reform process.
Conference theme: evidence in tax policy
As you know the theme of today’s conference is “Enhancing Tax Policy with Evidence” and you will be discussing a number of papers produced under the Department’s joint research programme with the ESRI. Given the importance of taxation policy, both in terms of its role as a key fiscal policy lever and also as an instrument that the Governments uses to contribute to wider economic and social policy goals, I believe that it is vital that tax policy decisions are informed by a high quality, robust evidence base. This is something my Department has invested considerably in over the last number of years. As well as the excellent work done under the aegis of the research programme with the ESRI, including on topics such as effects of our corporation tax system on foreign direct investment which you will hear about later, the Department has done a lot of work aimed at understanding the distributional impacts of taxation policy and in evaluating the impacts of various tax expenditures. All of this work is very valuable to me as Minister for Finance in informing the policy decisions that I and Government have to take. Of course, as politicians, we have to take into account other factors. But from my point of view, it is vital that the evidence is available and can feed into the policy making process alongside other factors.
As well as producing the evidence, we need to disseminate it and debate it with taxation policy stakeholders. And that is the purpose of today’s conference – to stimulate debate and discussion with tax practitioners, social partners, academia and others.
Brexit
I would like now to turn to the issue of Brexit which, as I mentioned earlier, will feature in some of your discussions today.
Brexit represents an important change in the external environment and an important risk to our economy given the close links and high level of trade with the UK.
While the result of the UK referendum is not what we hoped for, the Government fully accepts and respects the outcome of the democratic process in the UK.
While it is hoped that in future the UK and EU will enjoy a close relationship, it is a matter for the UK itself to establish what it wants to achieve, and how it sees its future. Within the EU, Ireland will argue that the negotiations should be conducted in a positive and constructive way.
Ireland will continue, both at the European Council itself and in other discussions, to underline our priorities in relation to our citizens, our economy, Northern Ireland, the Common Travel Area and the future of the EU itself. We will also work with our EU partners and with the UK with the aim of ensuring a strong EU-UK relationship and a well-managed withdrawal.
Within Government work has been ongoing since well before the referendum vote in the UK. Since then preparations have been intensified across all areas of Government to best safeguard Ireland’s interests, to minimise any adverse impacts on our economy, and on the free movement of people, goods and services on these islands.
In my own Department, advance preparations included the commissioning of an ESRI study published in November 2015, and ongoing liaison with the Central Bank. Following the referendum, the Department has established a Brexit Unit to coordinate the Department’s ongoing approach on this matter within the whole-of-Government framework established by the Department of the Taoiseach
Economic backdrop and policy stance
Over recent years, Ireland has laid the foundations for a solid and sustained economic recovery. Indicators such as consumer spending, tax trends and labour market developments all corroborate the fact that Ireland’s economic fundamentals remain solid.
Economic recovery will help us to adjust to the economic effects of the UK’s negotiated withdrawal. The prudent economic and fiscal policies implemented over recent years have placed Ireland in a stronger position to weather this shock. That must be protected.
The Government will remain proactive in developing and adapting our policies in order to ensure that Ireland’s economy continues to remain competitive and resilient in the face of future economic headwinds.
Economic Impacts of Brexit
In the short-term, perhaps the most significant factor arising from the Brexit decision has been the sharp appreciation of the euro-sterling bilateral rate. Indeed the current bilateral rate and its recent evolution will pose significant challenges, particularly for parts of the exporting sector, the tourism sector and areas sensitive to cross-border trade.
Overall, the Irish economy remains highly reliant on the UK as a trade partner with 17 percent of all exports and 17 percent of all imports dependent on the UK in recent years. Ireland also remains particularly reliant on the UK as a source of merchandise imports, with almost a 30 percent share sourced from the UK. It should also be kept in mind that at a global level the UK is a very important economy - the world’s 5th largest economy and the 2nd largest in the EU.
Looking to the medium term, recent work carried out by the Department of Finance and the ESRI to model the medium to long term potential macroeconomic impact of Brexit on Ireland was published on 7 November 2016 and this shows that the impact on Ireland will be significant.
Depending on the scenario considered, the level of Irish output, a decade after the UK leaves the EU, may be between 2.3 and 3.8 per cent below a baseline of what it otherwise would have been, relative to a no-Brexit world.
As part of our planning, it is useful to undertake this kind of modelling work to ensuring that Ireland's interests are protected in the upcoming negotiations at EU level.
Budget 2017
We know that as result of our close economic ties, there are challenges to be met. The best and most immediate policy under our own control is to prudently manage our public finances in order to ensure that Ireland’s economy continues to remain competitive in the face of future economic headwinds.
‘Getting Ireland Brexit Ready’ was a key theme of Budget 2017. Recognising the uncertainties ahead, alongside a number of expenditure and tax related measures, Budget 2017 also signalled a lower debt target of 45 per cent of GDP for the mid-to-late 2020s. This will help to provide additional fiscal ‘shock absorber’ capacity to the public finances to help withstand any shock, including the impact of Brexit. This will complement the contingency or ‘rainy day’ fund to be established following the achievement of a balanced budget in 2018 which will help provide a further counter-cyclical buffer.
The measures set out in the Budget are an important first step in mitigating the impacts on the Irish economy from the economic implications of Brexit.
Investment
As I said, Brexit was not the outcome we hoped for. Nonetheless, where Brexit presents potential opportunities, we will of course seek to maximise these.
In Budget 2017 the further resourcing of Enterprise Ireland and the IDA, the revision of USC rates, new risk sharing schemes under development, the extension of benefits to the self-employed and changes to the tax regime for entrepreneurs are just some of the measures to help attract more businesses to Ireland and help Irish businesses export to new markets.
In relation to Financial Services, Minister of State Murphy T.D. has responsibility, and will continue to drive forward the IFS 2020 strategy in order to build on and compete for mobile international investment in the international financial services sector.
Additionally, the Government has made a public declaration of interest for the relocation of the European Banking Authority to Ireland.
Business tax policy and the international reform process
More broadly, Ireland continues to be a desirable location for investment as an English speaking country in Europe and in the Eurozone. We have a well educated population and we continue to provide a business friendly environment here, for businesses large and small. In relation to taxation, our core offering is a competitive, business-friendly regime with a rock solid commitment to the 12.5% corporation tax rate. This long-standing commitment to the 12.5% sits alongside our support of the Research and Development tax credit and the Knowledge Development Box as part of our competitive tax offering.
In the ever changing world of international tax reform, Ireland has been the voice of clarity. We have committed to meeting the best new international standards and have set about honouring that commitment without undue fuss or drama.
This commitment and certainty is a good indicator of why many international firms continue to invest in Ireland.
Our job in government is to attract real and substantive operations to Ireland, and our corporate tax policies are reflective of this. Ireland has not been and will never will be a brass-plate location. As you all know, we only have and want real substantive FDI, the kind which brings real jobs and investment into Ireland.
Ireland is certainly competitive. But we compete from a position of legitimacy.
We have also been engaging with our international colleagues through the OECD BEPS reports. Ireland is currently engaged in implementing various recommendations from these reports, both domestically and through international agreements.
It is obviously too early to predict what the impact of the change in administration in Washington might be on US tax policy. The US political system is quite complex and tax reform requires agreement of the administration and both houses of Congress.
There has long been a recognition that some tax reform is needed in the US. It will become clearer over the coming months if such reform will happen and what any such reform might look like.
It is not correct to say that any US tax reform would be damaging to Ireland. Ireland and the US share common interests in ensuring that we have a fair system of international taxation which aligns taxing rights with economic substance. We will continue our constructive relationship with the US administration towards this mutually beneficial agenda.
Conclusion
I will conclude by thanking you again for your attendance and participation in this important Conference. I am confident that you will find the discussions stimulating and though-provoking and I look forward to hearing more the outcome of your deliberations.
Thank you