Brexit, the Budget and Walking the Line
Speech by Minister for Finance and Public Expenditure & Reform, Paschal Donohoe TD to the Dublin Chamber of Commerce Session of the Magill Summer School, Glenties, Co Donegal
Tuesday July 18 2017
CHECK AGAINST DELIVERY
Good evening everyone – it is a pleasure to be back here in Glenties to meet, discuss and debate with you all.
I might start by saying, without wishing to cause offence to our gracious hosts, that this is my second-favourite event of the week, because not much could eclipse the excitement of Saturday night’s U2 concert in Croke Park, which I will be attending this weekend.
In a few nights, the streets of Ballybough will bathed in the music of Ireland’s original stadium band, playing in our original national stadium.
Track six on their Joshua Tree album, which is called Red Hill Mining Town and is rarely played live, tells the story of the closure of the coal mines in mid-1980s Britain.
In doing so, it also tells the story of the social and political consequences of the wholesale withdrawal of a major industry- and source of jobs- from communities in many parts of England and Wales.
To quote the opening verse;
The seam is split
The coal face cracked
The lines are long
There's no going back
Through hands of steel
And heart of stone
Our labour day
Has come and gone
The song is steeped in a sense of abandonment.
And it is that feeling of abandonment that is now a feeling for far too many and that provides the backdrop for last year’s referendum in Britain, the Presidential election in the US and other electoral outcomes.
Because when Bono sings later…
You're all that's left to hold on to
…we have to acknowledge that a growing number of voters are asking what is there to hold on to in a world moving so quickly, and who have examined and rejected the existing political and economic frameworks which many would claim have served us well.
THE NEW ORDER
Having quoted from Bono, I might read you a short extract from an entirely different source, Dani Rodick from the John F Kennedy School of Government at Harvard University, who says;
Until recently, it looked as if the world’s economic and political order was set on an established, predictable course. Advanced democracies would be led by centrist political elites, trying to address inequality and exclusion at home while remaining committed to an open economy.
All of these conventional assumptions have been upended by recent developments – the Brexit vote, Donald Trump’s victory, and the rise of populist-nationalist parties in continental Europe.
Electoral outcomes in Britain, America and elsewhere are challenges to the previous settled economic and political orthodoxy that, it was once thought, would endure forever.
Now that orthodoxy is threatened.
Indeed, it is perhaps no longer even orthodox to suggest it will endure.
I remember feeling this in the most acute way when I went to wake up my children on the morning of the Brexit result and thinking, for the first time, that they may not live under the same institutions and enjoy the same freedoms as I did growing up.
Since the 2008 financial collapse, the social disorder that followed, and the delayed electoral response to both, none of us in the profession of politics are anything but aware of how greatly things have changed.
THE WINDS THAT BLEW US HERE
But to be aware of something is not the same as to understand it, or understand why it has happened.
In order to chart a new course- which we will- we must first come to terms with the winds that blew us here.
What has happened in our global body politic, and what is underway now, are consequences of deeper socio-economic forces that, like the coal mine closures, have been with us for some time.
Ruchir Sharma, the Chief Global Strategist at Morgan Stanley has described these as the ‘3 Ds’ - depopulation, deleveraging and deglobalization.
To start with the first “D” – depopulation.
The annual growth in the global working-age population has shrunk every year since the 1980s, with a particularly sharp fall in 2005.
In the 1980s, 17 of the 20 largest emerging economies had a working-age population growth rate above 2%, but that number fell steadily from 17 to just 2 (Nigeria and Saudi Arabia) in this decade. And by 2020, all the major emerging economies are projected to have working-age population growth rates below the 2% mark.
For example, in the US growth in the working age population has declined from 1.2% in the early years of this century to 0.3% in 2016, the lowest rate since 1951.
Visit many central European countries and their key political issues is shrinking populations as well.
The second “D” is Deleveraging.
For anyone from the Plain English Society that means paying off debt, or at least avoiding more of it.
By 2008, global debt had surged from 100% of GDP, in the late 1980s, to 300%.
This was clearly unsustainable and now we find ourselves in a situation where further borrowing, either private or public, to fund further consumption or investment is not as easy as it was.
This is highlighted in our recent publication of the ‘GNI*’ data- a new, perhaps more accurate way of measuring the strengths and weaknesses of the Irish economy, that shows debt levels in this country are at 105%.
Put simply, growth is essential for long term investment.
And then there is third “D” – deglobalisation.
Ask most people about globalisation and global trade and they will probably tell you that such trade has increased in recent years, all industries are more globalised and the inexorable march of the integrated world economy goes on.
This is, in fact, not true.
In 1980, when U2 had their first international hit, the volume of cross border trade between nations stood at 30% of global GDP.
By 2008 it had grown to 60%.
However, this has now decreased to 55%.
Policy fracture on global trade is evident. A good example of this is the inability of the EU and US to reach agreement on the Transatlantic Trade and Investment Partnership, or TTIP.
Set against the backdrop of the hostility to free trade of those on the extreme right and extreme left, and the scepticism towards it by many more citizens, a way through has not been found.
Indeed, as a committed globalist myself, I find the debate around globalisation to be increasingly confrontational and increasingly divisive.
So it these three phenomena;
- slowing population growth,
- a realisation that borrowing does not cure all ills, and
- the turning away from a globalised system by many
… that have played a crucial role in bringing us to where we are now.
And that last point- the distrust of trade deals and our system of global commerce, rooted in the distrust of the entire system – the system of government, of finance, of the establishment - is one of the reasons we are faced with an EU without the UK and a White House without Hillary Clinton.
This change, this new order, has resulted in a new political dispensation.
Stephen King, the economist (not the horror writer) in his latest book, Grave New World, which I admit sounds a little horrific, contends that;
For those of us living in the West, we have found it all too easy to claim that our own good fortune will continue and that, in time, it will inevitably spread far and wide. It's time to wake up to the reality.
Well, consider ourselves awake. And aware.
Kate Malby, a journalist and left-leaning Tory, wrote in the Guardian yesterday that the party of which she is a member, the party that her immigrant parents joined because they believed it was the only party to protect Britain against the radicalism that had fuelled the war in Europe from which they had fled, was now itself a source of instability.
One need not look any further than our own Dáil to see the mirror image of this: a far-left that resists change, and engages in the thuggery traditionally associated with the ugly far-right.
Nowadays, to be moderate is to be radical.
But the message I have for you tonight is not one of despair or helplessness.
It is one of confidence and hope.
The April 2017 World Economic Outlook, to name just one indicator, points to a robust growth outlook.
Global economic growth has moved from 3.1% in 2016 to 3.6% in 2018. Stronger economic activity and a reduced deflationary risk point to a positive outlook.
The European economy is growing.
The Eurozone is projecting growth of 1.8% this year, with only a small number of countries now in breach of the Excessive Deficit Procedure.
This may sound technical, but it isn’t.
Growth means jobs.
Growth means homes.
Growth means schools, hospitals and Gardai on the streets.
And the absence of growth means the absence of these things.
I see this every day in my job.
Ireland’s economy is being fixed. And that means we can begin to repair our society too.
Across Europe, populist momentum is weakening.
Marine Le Pen was seen off in France by Emmanuel Macron, in spectacular style.
In the Netherlands, Austria and Spain, the centre has reasserted itself.
We are also seeing strong progress on new institutions and ways of working.
We see progress on EU trade agreements with Japan and Canada.
The resolution of banks in Spain and Italy was made with no contagion in their own economies, let alone elsewhere.
Such a scenario would have been considered a pipedream only a few short years ago.
And as the UK consumes itself with Brexit, the EU is thinking bigger.
Debates about deepening integration in areas like energy and banking show that there is life- vibrant life- in the old dog yet.
As a committed European, I am heartened that the latest Eurobarometer poll shows that 56 per cent of respondents across the union say they are optimistic, up 6 percentage points in the last six months.
They asked 28,000 people this question, by the way.
Polls have also shown a surge of support for the union across most of the 27 countries in the wake of the Brexit vote.
Those of us in the political centre were often accused of the politics of TINA- There is No Alternative.
However, what might now be happening is that the alternative has been presented, and people are seeing the strength of our case.
For example, 88% of Irish people want us to remain in the EU- amongst full time students, the number is 99%.
And across the Union, positivity is on the rebound.
A Pew survey in June showed approval for the EU had increased since the Brexit referendum.
63% of people in the 10 EU countries surveyed had favourable views about the Union; up 18 points in Germany and France, 15 in Spain, 13 in the Netherlands – and 10 in Britain!
And less than one in five of the EU citizens surveyed wanted their country to leave the European Union.
The predicted exodus from the EU has not materialised.
Hope has returned, or at least is returning, to the European Union and all who believe in it.
The challenge now is to turn that hope into more tangible results.
IRELAND STANDS READY
And when I say tangible results, I am referring to the maintaining and accelerating of the progress we have already seen;
- in our labour market,
- In our public investment programme,
- In the ending of forced net emigration
…and all the other improvements that have helped soothe the pain of the economic and social catastrophe that befell us at the end of the last decade.
I have said many times that the only way to deliver this is to ensure that the political centre holds.
The policies of the far left- profligate spending, higher taxes on businesses, a “let someone else pay for it”, would all break this country.
But the centre holding is not, in itself, enough.
The centre must also regenerate – because a static political equilibrium in a changing world is not tenable.
Holding can too quickly become either stagnation or the status quo.
My assessment is that the global economic environment and order is changing, as opposed to crumbling.
We have many problems, some of which are deeply ingrained in communities.
In politics, it is easy to blame globalisation for these problems.
Indeed, Dani Rodrki, who I have already cited, says;
Economists understand that trade causes job displacement and income losses for some groups. But they have a harder time making sense of why trade gets picked on so much by populists both on the right and the left.
After all, imports are only one source of churn in labour markets, and typically not even the most important source.
Demand shocks, technological changes, and the ordinary course of competition with other, domestic firms produce much greater labour displacement than increases in import penetration.
The answer as to why the populists attack trade is this: it is the attraction of simple rhetoric and simplistic answers to complex problems.
But we in the political centre must resist that.
I believe that small countries like Ireland are well placed in this debate.
As a small country, we are open to globalisation- 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.
Our economy is powered, in no small part, by foreign direct investment.
In turn, we have reached out to the world.
Our diaspora lives and works in almost every country on the globe.
We are exporters of everything from Botox to TicTacs.
And when it comes to creating jobs- trade is two-way street. While American companies have created many jobs here, Irish companies have actually created a similar numbers of jobs in America.
A fact that I love mentioning whenever I go there!
Periods of growth, followed by periods of recession, are a deeply unfortunate component of the economic cycle.
But 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 as we can.
Our corporation tax policy is a case in point.
What we have learned is that predictability of the rate 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.
So, it is with all this in mind
- The changed political landscape
- The return of hope to our imperfect Union and
- The great potential for Ireland, as a globalised country, at the centre of the world, as Time magazine put it
…that I sit down to shape the Budget in October.
Which, I am sure, you are all very eager to hear about!
I have already articulated how the Government will approach Budget 2018;
- Firstly, at a time of economic growth, we will strengthen our ability to deal with future shocks. We will continue to get our house in order by eliminating the deficit and getting our national debt down.
If you have a small open economy with a currency that it does not print, when things go bad, they can go really bad. When they go well, they can go really well.
We will use the benefits of the latter to ease the pain of the former.
- Secondly, we will reprioritise capital investment.
I believe strongly that investing in transport, communications, health and housing infrastructure not only promotes social cohesion but also grows the long-term productivity capacity of the economy, helping in the creation of a virtuous cycle of investment and progress.
By 2021, we will be investing nearly 8 billion euro per annum in upgrading our infrastructure- an increase of 85% on the level of investment last year.
- And thirdly, we will outline our plans to integrate our capital investment programme within a proper planning and spatial framework.
While Budget Day will be some weeks before the National Planning Framework and Ten Year Capital Plan are to be published, it will act as a signpost for a planned programme of investment that sees us spend money on the right projects in the right places.
All of this, of course, is not to forget that in 2018 alone, we will be spending 60 billion euro as a country, in every area from health to housing, the arts to the army, so that our society is supported and our country can again thrive.
We will also continue to work towards a tax system that rewards work, and realises the potential that the “Republic of Opportunity”-to which the Taoiseach referred- can bring.
But I should also say that Brexit and the broader geo-political developments to which I referred are not the only threats we face.
Managing a small, open economy is never easy and the threat of overheating is there.
Despite the nasty tone of many in Irish politics, it is my job to cut through the noise and do what is right, not what seems to be right to some people who shout the loudest.
I will not risk our hard won economic sovereignty by allowing the economy to overheat and succumb to capacity constraints.
It would be a disservice, to put it mildly, to all those who depend on public services every day.
Instead, I will take a balanced look at the demands made upon me, based upon the resources that are available.
James Connolly said in 1910 that “the Irish question [was] a social question”.
He was not wrong.
For me, the economy, and all that goes with it, like sound public finances, sustainable debt levels, the balance of trade, levels of taxation- is all about making this society better.
Making Ireland a place where all can work, raise a family if they wish or start a business if they wish.
Where everyone can avail of the healthcare that is their right, the education that is their entitlement and the roof over their head that is their requirement.
But we can only provide that if we get the fundamentals right.
That is what I will do in October, and at all times.
I started by talking about U2 and I will finish by quoting the late, great Johnny Cash – an artist given a new audience in later years when he covered “One” and an apt person for a Minister for Finance to quote, I hope you agree.
Johnny “kept his eyes wide open all the time” and Johnny always “walked the line”.
Not bad advice.