Speech to the Kennedy Summer School Speakers’ Lunch by Minister Donohoe
International Politics and the National Budget
Speech to the Kennedy Summer School Speakers’ Lunch by Minister for Finance and Public Expenditure and Reform, Paschal Donohoe TD
Friday, 8th September 2017
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Good afternoon everyone- it is my pleasure to be here amongst you at the Kennedy Summer School this afternoon.
2016 saw seismic electoral outcomes across the world, not least in Britain and the United States, but it was this year that saw those outcomes begin to assert themselves across our geopolitical landscape.
We saw the Brexit negotiations begin in earnest, and the real challenges they pose to the United Kingdom, to Ireland and to the European Union.
We are witnessing the potential beginning of the articulation of a new economic and taxation model in the United States that could have profound implications for authorities on this side of the Atlantic, and elsewhere.
And lest anyone thought climate change was either not real or not relevant to us in our temperate climate, Irish tourists caught up in the terrifyingly titled Heatwave Lucifer, can attest to nature’s awesome power.
OUR CHANGING WORLD
Change is, ironically, the one constant that we have in our lives.
Underlying this is the constant, visible process of technological change.
Just seven days ago, for example, it was announced that Oracle – the American computer company- was teaming up with Mitsubishi- the Japanese car manufacturer- in a move that they believe will lead to a step change in so-called “smart factories”.
This will have huge implications for manufacturing across the globe- and for policy-makers grappling with both the opportunities and the challenges that automation brings.
Amazon CEO Jeff Bezos said back in May that developments in Artificial Intelligence mean “we are now beginning to solve problems that were once seen as science fiction” and that developments in machine learning will “improve every business” in the world.
Think about that.
And think about how we in Ireland must now respond, and ready for ourselves for the future.
John F Kennedy himself knew this, when he addressed the Assembly Hall at the Paulskirche in Frankfurt in June 1963, just months before his own tragic death, and said;
“Our liberty is endangered if we pause for the passing moment, if we rest on our achievements, if we resist the pace of progress. For time and the world do not stand still. Change is the law of life. And those who look only to the past or the present are certain to miss the future”.
Of course, a negative interpretation of change would focus on the presence of instability and the anxiety that can bring.
We face a new global reality that the two countries once synonymous with global trade and integration, the United Kingdom and the United States, who together provided the foundations of the post- World War II global political and economic order, are now themselves questioning their role in the world.
Nevertheless, as an Irish citizen and an Irish Minister, it is my job to consider the implications of those decisions for Ireland and also for Europe in the time that lies ahead.
And it is in the context of the Taoiseach’s articulation of a Republic of Opportunity, were we all have the chance to be the best that we can be, that we make our considerations.
WHY DOES THIS MATTER TO IRELAND?
For Irish people, the global change about which I have spoken thus far is not just interesting to discuss, it is vitally important to know and to understand.
This is because, as a small country, we are open to globalisation- to trade, to migration, to cooperation.
Indeed, we are one of the most globalised nations on earth, according to the KOF globalisation index, which is a measure of the globalised nature of countries on a social, economic and political level.
By participating in that project of internationalism, we experienced a massive overhaul in our economic standards and benefitted hugely from the very same economic and political integration that is now experiencing change.
This has not always been easy, and the course of our economic history has been far from smooth.
Nevertheless, we have prospered.
This is for many reasons.
But a crucial factor is that in Ireland we enjoy a level of social cohesion and flexibility, or intangible infrastructure as some economists call it, that allows us to respond to the ebb and flow of those economic cycles.
Key to this – to delivering for our citizens- is to respond to all this uncertainty, all this risk, by creating as much certainty and direction as we can; Our corporation tax policy is a case in point.
Smoothing, not amplifying, these economic cycles is also key. As we know, to our recent cost, when we amplify these cycles we multiply the human cost.
What we have learned is that predictability of the rate of corporation tax and the certainty that it will not change is as important as the 12.5% rate itself, because it allows businesses to plan, invest and grow.
This approach can be applied elsewhere – to our planning system, to our rules around data privacy and a host of other areas.
These days, certainty matters in a new way.
At a time of volatility, offering predictability and order to citizens, to employers and to investors has an enormous value.
OUR OBJECTIVES IN BUDGET 2018
Because when it comes to the Budget, behind all the talk of deficit targets, of growth and of the fiscal space, lie real lives that need improving and public services that require investment.
Our challenges with housing policy and homelessness are pressing and sobering examples of this.
As important as the amount of money we are spending and taxing is, so too is what we are doing with those resources, and to what end.
And the driving objectives of Budget 2018 are what will really test how effective we will be in gradually improving the lives of Irish men and women, while securing our position in a changing world.
If I may, I would like to speak a little about what those objectives are.
Firstly, we will balance our books to keep Ireland secure in a risky world.
That means paying our way and cutting borrowing, so that we can be more prepared for the risks that we face, not least of which is Brexit.
Budget 2018 will see, for the first time in over ten years, Ireland achieve a broadly balanced budget.
This means that money coming into the State’s coffers in tax will approximately match the amount we are spending on vital public services like education, health and social protection.
But it also means that we must make choices.
Which leads me to our second objective, which is to use our recovery to invest in the change and the supports we need for better opportunities for all.
That means investing taxpayers’ money carefully and with continued reform to deliver the best capital projects, services and targeted income supports.
To deliver more for vital infrastructure like roads, energy and communications.
Or to deliver better health services, faster broadband and a more efficient public transport system.
My third objective is to make steady and affordable progress in reducing high rates of tax for low- and middle-income earners.
As you can imagine, I am neither willing nor able to give you the details of this now.
But I can tell you that it means avoiding unsustainable tax giveaways, and instead reforming our tax system to further reward work and create jobs.
A tax system must not only deliver the resources we need to fund the services we need, but must also support and reward those who pay for those services.
I will return to this shortly.
And the fourth objective I have in Budget 2018 is to support businesses and families to plan for the future.
This means having a long-term vision for this country, not just one that focusses on the short-term.
For that reason, the Government will be publishing a ten year capital plan for our country, in line with the National Planning Framework, not long after the Budget, which will seek to address the investment, housing and spatial planning issues that we must address if we are to be fighting fit for the future.
OUR PROGRESSIVE TAXATION SYSTEM
So with all this in mind, as Minister for Finance, I want to outline my approach to personal taxation and the structures of our taxation system.
Let me begin by emphasising some key aspects of our tax code.
Ireland has a tax system that is hugely progressive.
Ireland’s tax and welfare system combined, result in one of the highest redistributions of income among all OECD countries.
What is more, research from my own Department shows that;
- the top 1% of income earners pay 24% of total income tax and USC,
- the top 6% of income earners pay 49% of total income tax and USC and
- the top 26% of income earners pay 83% of all income tax and USC
It is right- economically and morally- that in Ireland we have a tax system where those on lower incomes pay less and those who earn more, pay more.
That must be sustained.
But an income tax system that starts taking nearly half of every euro earned by the time someone is earning an average wage is not fair, is not economically efficient and is not sustainable.
This is a cap on aspiration and places a ceiling on the ambitions of our people.
And while the economy is now doing well, we cannot rest on our laurels, thinking that we do not compete for investment and jobs in a global marketplace.
HOW WE WILL GET THERE
So, that’s all well and good, I hear you say.
But how will we achieve these things?
Before I tell you that, let me tell you what I definitely will not do.
I promise that unlike in the Celtic Tiger period, I will do nothing today that will have to be completely undone tomorrow.
Because the failed policies of economic shock and awe- the awe of an attractive, lucrative, feel-good tax cut followed by the shock of a penal, unbearable tax hike just a few years later- are over.
Between 1997 and 2008, a single person earning €60,000 per year received almost €10,000 in income tax cuts, while the post-tax income of a couple earning the same amount increased by a figure heading towards €15,000.
And then the crash hit, taxes went up and incomes were eroded all over again.
The ebb and flow of the economic tide cannot be completely stopped.
But steady progress through it is our safest journey.
From now on, Budget Day will be about incremental, sustainable but ambitious progress – progress on fairer taxation, progress on better services, and progress on vital capital investment.
I consider that my duty as Minister.
So how to do this.
What are the priorities?
I will address personal taxation now and other taxation and expenditure priorities on or before Budget day.
One of them is to gradually increase the standard rate cut off point in our income tax code.
We will prioritise band widening over higher rate reduction to prioritise resources on low and middle income groups.
And we will continue to recognise and support the contribution of the self-employed to our economy.
We will, overtime, amalgamate the USC and PRSI codes. Among other things this will support the improvement our social insurance system and widen the provision of supports like dental and optical benefits and paternity leave.
But let me be clear that this is a journey and will take time to complete across many budgets.
The same approach of careful, steady and sustainable progress will be taken when it comes to spending, both current and capital.
I will carefully and prudently increase current spending, especially on vital services like health and housing.
We are undoubtedly making progress in these areas, but we must – and will- do more.
The problems and bottlenecks we face will not be fixed in a single Budget but over time, in a whole of Government response and backed by the funding needed, we will address this country’s needs.
CONCLUSION – THE REPUBLIC OF OPPORTUNITY
Upon his election as Fine Gael Party Leader and as Taoiseach, Leo Varadkar spoke of the creation of a Republic of Opportunity.
Budget 2018 will begin the journey to make it a reality.
The Republic of Opportunity is about enabling everyone one of us to achieve our full potential.
Where everyone gets a fair chance, and a second chance if they need one.
The Republic of Opportunity will see everyone have a job, everyone have a roof over their head and everyone have the security of good healthcare, the benefit of a good education and the peace of mind of a secure and safe neighbourhood.
To build that Republic we need to recognise that there are barriers to people getting a fair chance and break those barriers down.
Reducing the burden of taxation, in an affordable and sustainable way, on low and middle income earners is part of doing just that.
But the Republic of Opportunity also means that we pay our way as a country and that we help all to contribute to society as well.
And a fair system of taxation is vital to that effort.
And as we meet our goals, we want all to know that Ireland is open- open for business, open to ideas and open to change.
As the Taoiseach himself has said, notwithstanding our small size, we are an island at the centre of the world.
As others build walls and borders, we in Ireland continue to look outwards.
Amidst constant global change, filled with both threats and opportunities, I conclude where I began, with the words of President Kennedy in 1963;
I preach no easy liberation and I make no empty promises […] There will be difficulties and delays. There will be doubts and discouragement. There will be differences of approach and opinion. But we have the will and the means to serve […] the heritage of our countries [and] the unity of our continents. For we live in a world in which our own united strength will and must be our first reliance.
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Contact: Deborah Sweeney [Press Adviser to Minister Donohoe] – 086 858 6878
 Tax Strategy Group paper TSG 17/02