Sunday 15 December 2019

To stay a wealthy nation we need to stop the drift in politics and economic affairs

The Central Bank has promised a new economic direction for Ireland. Photo: Steve Humphreys
The Central Bank has promised a new economic direction for Ireland. Photo: Steve Humphreys

David McWilliams

What will Ireland produce in the future? This is a serious question. The world is moving on and no one is waiting for Ireland.

Countries and companies are constantly in competition with each other for everything, everywhere, all the time. That's the landscape of the future.

The wealth of any nation depends on producing goods and services that other people want to buy. We have to be better, cheaper and create brands that others are convinced are valuable.

In the political arena, the government appears to be stumbling from one crisis to the next without anyone seeming to be in charge. Similarly, there is a significant element of drift in the economic affairs of the nation.

If we are to remain a wealthy nation - and we are a wealthy nation - it might be wise to go back to the drawing board and think about what we are going to do over the next two or three decades.

Over the past 20 years, the "Irish model" has been based on a number of critical policies - all of which are under threat. It is time to take stock.

The first policy that will change in the next few years is the 12pc corporate tax-rate strategy. This has been phenomenally beneficial to the companies that were big enough to avail of it. It was also very successful in creating a capital-intensive industrial base.

However, these companies got greedy and we got dumb, allowing their greed to undermine a perfectly reasonable tax strategy. The 'Double Irish' has undermined the reputation of the country and the 'tax haven' stench is contaminating the national brand.

Tax competition - although it will remain important - is something that will be tightened, mainly by governments which are losing out on corporate tax dollars to Ireland.

The unfortunate thing is that Ireland didn't benefit commensurately from these tax dollars. The shareholders of the companies benefited as we allowed them to do unnatural fiscal acts by virtue of transnational accounting tricks.

The tax strategy was a form of protectionism that - rather than protecting infant Irish industry - protected big foreign industry that didn't need protecting. It protected the strongest players, not the weakest.

This game is coming to an end.

In an effort to circumvent the authorities in other countries getting their hands on tax, we facilitated a second policy that is another tax-driven sleight of hand. This policy was called "inversion" whereby American companies could "pretend" they were domiciled here, but most of the activity still went on in America. This was aimed at reducing the corporate tax bill again.

It was the corporate equivalent of a second-hand car spray-job, where a US company got a cheap Irish legal makeover and hey presto, it was Irish. This policy is also being closed off.

Both these policies boosted national income dramatically.

The third policy has been our willingness to allow house prices to rise faster than wages. For house owners, this boosted income, generated a false sense of wealth and led to a boost in activity. These episodes are always characterized by massive private borrowing.

Today the Central Bank vows to make these periods things of the past. If it is successful (and it's a big if), we will have no more house price/asset price booms, but what will replace them?

By this I mean, what if the only way of getting unemployment down to low single digits in Ireland is the effervescence associated with housing booms?

Ever thought of it this way? Ever thought that it is only during episodes of housing booms that we have enough economic activity to generate enough jobs for everyone? Without this giddiness, what happens to the long-term rate of unemployment?

The fourth major policy was the Common Agricultural Policy (CAP), which stabilized farm incomes in Ireland. Rural incomes were pushed up rapidly in the 1980s and 1990s and were more or less maintained.

However, the CAP is being reduced throughout the EU and this will continue. In 1984, the CAP budget alone accounted for 71pc of the EU's total budget - today it is half this and will continue to contract. In short, all four policies are changing at a time when our debts have never been higher. To keep debt-to-income ratios sustainable, we have to figure out where are we going to get the income in this new world.

All successful States have national policies which draw on the reserves of the country to direct the national economic effort in one direction or another. It is now fashionable to claim the free market will do this, but it never has. Throughout history, national industries were always incubated initially by some State-given advantage. Even in Silicon Valley - which claims to be heaven for free markets - the basic technologies were developed by the state-sponsored and tax-funded US military.

Similarly, Germany built its industries by protecting them initially and then creating a cooperative structure called "Rhineland Capitalism".

Every country needs a vision as to where best to deploy its resources. Once this is figured out, then it should allow the markets to work. But in the same way as a child needs stabilisers to learn how to cycle, infant industries need some protection to get off the ground.

Ireland is a rich country that has lost its way. To maintain our wealth in a changing world we have to find a new economic GPS and a new set of industrial coordinates to guide us through, not just for the next few years, but the next few decades.

In the coming weeks this column will explore some of the economic possibilities open to Ireland

Irish Independent

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