Speech by the Minister for Finance Michael Noonan T.D. to the City of London Corporation
“The future of UK-Irish economic relations”
London, 22 September 2016
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Thank you for the opportunity to speak here this evening, on this timely and important topic.
While Ireland’s economic recovery has continued apace, the international economic environment has become more challenging, most notably on foot of the result of the UK referendum on EU membership last June.
There will be major challenges ahead for Ireland, for the UK and for the EU, and we must work together at all levels to meet these.
The key point I would like to make is that, following determined policy action over recent years, Ireland will be tackling these new challenges from a position of strength. While Ireland’s future lies within the European Union, we will work hard to maintain our excellent bilateral relationship with the UK.
Ireland’s recovery is now firmly established. The most recent employment data from the Central Statistics Office showed that in the second quarter employment increased by 2.9 per cent year on year. This also means that there are now over 2 million people in employment for the first time since early 2009.
strong employment gains have helped reduce unemployment which has fallen from a peak of over 15 per cent to 8.3 per cent in August.
We expect employment to continue increasing and that the unemployment rate will continue to fall steadily towards around 6 per cent by the end of the decade.
The latest Exchequer returns data show that, after the first eight months of the year, tax revenues are 1.6 per cent above target. This equates to an annual increase of 6.2 per cent when compared to same period in 2015. This is a solid performance.
The deep recession meant that some of Ireland’s best and brightest had to leave the country in order to find work. But economic recovery means that this has now been reversed – with net inward migration this year. A key challenge for us will be to build upon this, to create an environment in which those who want to return to Ireland can do so.
This recovery is the result of the firm application of prudent and consistent fiscal and economic policies. The debt-GDP ratio is on a sharp downward trajectory - from a peak of over 120 per cent in 2012 to 79 per cent at the end of 2015. The Irish sovereign is now rated as investment grade by all of the main credit rating agencies.
The market reaction to our management of the public finances is clear, with the cost of borrowing close to historic lows reflecting our continued economic and fiscal improvements.
Irish bond yields are now trading in-line with core European sovereign yields, having successfully decoupled from the euro area periphery. For example, in 2011 the yield on ten year Irish government bonds reached 14 per cent; it is now trading steadily at below ½ per cent.
The most recent NTMA auction of 10 year bonds on September 8th was at a yield of 0.33%. This bond sale shows a continuing confidence in Ireland and reflects the stability and certainty in Ireland’s future as a strong economy among international communities.
Ireland continues to be a desirable location for Investment. Ireland's competitiveness has improved dramatically since 2008. Ireland's cost of living has improved every year since 2008 compared to the European Union while the factors that contribute to growth in terms of our demographics, well educated population, and business friendly environment remain in place.
So while our economy is performing strongly the deteriorating international outlook illustrates the need for caution.
Ireland - UK Trade
The UK vote to leave the EU has added to concerns about the international outlook.
While trade links between the two economies may have declined in relative terms in recent decades, it is abundantly clear that the UK remains a crucial trading partner for Ireland.
Different sectors have different exposures but the indigenous sectors – labour intensive and operating off tighter profit margins – are most exposed. Sterling values have depreciated and any significant unwinding of this appears unlikely at least in the short run. This has resulted in a loss of competitiveness for many Irish-based firms.
The UK accounts for around 16% of Irish exports with over €1.2 billion of goods and services exchanged across the Irish Sea on a weekly basis. That trade provides 400,000 jobs, split evenly between the two islands, with many more in the supply chain.
What many people don’t know is that while the UK accounts for around 16% of Irish exports, we too are an important market for the UK. We are the UK’s fifth biggest export market. Because of the closeness of the British Irish relationship, the stakes have always been higher on this issue for Ireland, than for other EU Member States.
Additionally a shock to UK GDP would also be expected to impact on our other trading partners including the euro area. In that regard, the European Commission’s preliminary assessment of the economic impact of the UK’s decision to leave the EU is that Euro area growth will be lower by up to 0.1 per cent in 2016 and between 0.3 per cent and 0.5 per cent lower in 2017.
For Ireland, my Department’s initial estimate, based on the Summer Economic Statement, which takes into account both the impact on the UK and on our other trading partners, is that growth in 2017 will be 0.5 per cent lower than previously expected.
The Department will produce its next official forecasts in advance of Budget 2017 in October. These will include updated estimates of economic growth, the public finances and the fiscal space.
In addition, as part of the Department’s joint research programme with the Economic and Social Research Institute (ESRI), and building on earlier research, the Institute is undertaking further work to quantify the impact on Ireland of the different types of post-exit trading relationships over the medium term. I would hope that this research will also be published at budget time along with more detailed sectoral impact analysis by my own Department
The Government’s budget approach is of course now being formulated in a post Brexit environment. Against this background our budget 2017 approach will be to maintain the focus on prudent fiscal policies and maintaining our competitiveness. We will, in addition, be proactive in developing and adapting our development and promotional activities in the face of these headwinds, and I will be talking about our IFS strategy shortly.
Future Implications and Challenges of Brexit
A stable, prosperous, and outward-looking UK is clearly in our own interests and those of the EU as a whole. The closer the UK is to the EU, the better for all of us, and above all for Ireland.
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 to take every opportunity, both at the European Council itself and in other discussions, to underline Ireland’s unique relationship with the UK and our concerns in relation to trade between the UK and Ireland, Northern Ireland, North-South relations, and the Common Travel Area.
Ireland has been a committed member of the EU for more than 40 years. EU membership remains central to the success of our open competitive economy and has been the foundation for much of the social progress we have made over the last four decades. We value our access to the single market and the benefits our exporters derive from EU trade agreements with other countries. More broadly, we greatly appreciate the merit of being part of a Union with other like-minded democracies which share our values and interests.
We know that because of our close economic ties, any negative impact on the UK economy in the medium term could have potential implications for the Irish economy. While there will be many challenges arising from Britain’s decision to leave the EU, there will also be some opportunities for Ireland, and we will of course seek to take those opportunities.
The prudent economic and fiscal policies implemented over recent years have placed Ireland in a stronger position to weather external shocks and equally we will continue, through the IDA, to promote the attractiveness of Ireland as a location of choice for investment and talent.
IFS 2020 Strategy
In March of last year, the Irish Government launched IFS 2020 – a “whole of government” approach to driving the growth and development of the international financial services sector in Ireland.
We have appointed Eoghan Murphy, as a Minister of State at the Department of Finance with responsibility for Financial Services, to drive forward the IFS 2020.
The Strategy sets an ambitious target of growing the international financial services sector in Ireland by 30% over the five year period to 2020. While this is a highly ambitious target, I’m pleased to say that we are making very good progress.
In terms of vision for the Strategy, we want Ireland to be recognised as the global location of choice for specialised international financial services. We want to build on our strengths in talent, technology, innovation and excellent client service. We will focus on capturing new opportunities in a changing market and embracing the highest forms of governance.
To deliver on these objectives, we need to position Ireland as a leading location for specialist international financial services, including in areas like FinTech, Payments, Data Analytics and Governance, Risk and Compliance, and Aviation Finance and Leasing.
In other words, Ireland’s strategic objective is to place ourselves firmly at the cutting edge of financial services innovation. This focus on innovation and specialisation aligns with the strategic agenda that IFS companies themselves are already heavily invested in.
As I already mentioned in the context of any negotiations, the Irish Government shares the objective of constructively working towards an outcome of a close future relationship between the EU and the UK. The reasons for this are well known, not least relating to the Peace Process and the Common Travel Area. In that regard, we are committed to building upon the strong cooperation that has been developed between the Irish and British Governments in recent years.
The current border arrangements are a testament to the progress that has been accomplished to date and I can assure you that the preservation of the Common Travel Area along with the free movement of goods, people and services across these islands remain top priorities for the Irish Government. These arrangements are extremely beneficial to communities in both parts of Ireland, and we must do our utmost to ensure that there is minimal interruption and to avoid the introduction of a hard border.
The one thing that economists can agree on is that Ireland’s economic recovery is now firmly established.
But we cannot take this for granted. As a small and open economy it is important that we are cognisant of the external challenges we face. These arise on a number of fronts – most notably the uncertainty surrounding the exit of the UK from the European Union, which will disproportionately affect the Irish economy.
The best way of addressing these challenges is to ensure sustainable public finances and competitiveness improvements. We must 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.
We will work to protect the key priority areas for Ireland, namely: the Economy, Northern Ireland, the Common Travel Area and the EU itself. We are already advanced in our preparations to deal with the initial fallout from Brexit and the new paradigm of Brexit will be one of the key factors underlying budget 2017 with particular reference to competiveness.
For the coming years, let us focus on the opportunities as well as the challenges. In Ireland we have laid the foundations for a solid and sustained recovery. The prudent economic and fiscal policies implemented over recent years have placed Ireland in a stronger position to weather external shocks and we will continue to promote the attractiveness of Ireland as a location of choice for investment and talent. This will help us to adjust to the economic effects of the UK’s negotiated withdrawal, allowing us to build upon the gains we have made in recent years. We will work to ensure a positive, profitable and peaceful future throughout these islands.