Speech by Minister Paschal Donohoe, TD
European Financial Forum
13th February 2019
CHECK AGAINST DELIVERY
Good evening ladies and gentlemen.
I am delighted to join you here this evening at the 4th European Financial Forum.
It has been a very interesting and insightful day here at Dublin Castle.
We have had the opportunity to hear from the key decision makers in the International Financial Services sector at a critical time of change in the international political and economic environment.
The theme for the Forum this year is “Policies and Business Models for a changing financial landscape”.
It may be somewhat of a truism to say that unless you can change to meet the ongoing challenges and opportunities of our modern dynamic world, there is a danger of standing still and eventual decline.
I think that this is certainly the case for international financial services and the issues which pre-occupy all of us present this evening.
This element of dynamism and the need to be able to meet todays and indeed tomorrow’s challenges and opportunities was fully captured by today’s speakers.
Your deliberations have certainly had an impact outside of the conference hall. The lead story on RTE, the state broadcaster, for much of the morning came from the EFF.
Governor Philip Lane’s scene setting presentation was taken up by the station, in particular his analysis of a No-Deal Brexit.
However, Brexit was not the only discussion point, even if it did naturally come up frequently.
Steven Maijoor of the European Securities and Markets Authority said it is about challenges of regulatory divergence and arbitrage as the EU moves beyond Brexit, and this is where the focus of their work lies. In essence, it is about beyond Brexit.
Another example, and I can unfortunately only pick out some examples, is the insightful and thought provoking framework for disruption that Ronald O’ Hanley from State Street provided. His five great disruptors since the great financial crash set challenges we will need to look at, and think about carefully, whether we are in business, regulation, or like me as a Minister in policy making.
Finally, the importance of leaders and senior decision makers, like Raphael Bostic, coming to Dublin to hear first-hand where exactly the European Financial System is at, and vice versa. We have heard today of the areas where Europe is showing a lead to the US, such as in payments, and areas where the US can provide a template for Europe with financial market infrastructure.
I hope to be able to build upon some of these themes during my remarks with you this evening.
Firstly, I would like to thank all of our speakers and our audience for attending the Forum here today. I know that many of you have travelled long distances and re-arranged schedules to be here. Your efforts are very much appreciated.
I hope that you have had a productive few days in Dublin and will get some time this evening and tomorrow to enjoy this great city and our beautiful country.
I also hope that you will pencil next year’s Forum into your diaries which will take place on the 12th of February 2020.
Today’s Forum has been the most successful to date with the largest attendance and the greatest number of speakers. I’m confident that next year will build further on this success.
Ireland and Hong Kong
It is a great honour to share the stage with Secretary Lau and I would like to welcome him to Ireland and to the EFF here in historic Dublin Castle.
Ireland and Hong Kong both have very open economies successfully trading on the global stage and we are both leading international financial services centres.
We do not however, rest on our achievements and successes.
Instead, we continually innovate to provide the very best financial services ecosystem and we must continue to do so to face into the challenges ahead.
One such challenge for Ireland is the key date of 29th March when the UK is due to leave the European Union.
Ireland wants the closest possible relationship between the EU and the UK, in order to minimise the impact on our economy and trading relations.
At the same time, it is vital to our economic interests that the EU’s Single Market is fully protected.
A No Deal Brexit is the worst possible outcome for the UK, Ireland and the EU.
That is why our focus remains on securing the deal that has been reached.
Brexit will have negative consequences in all scenarios, but our key protection from whatever Brexit brings will be our status as a Member of the European Union, with all the stability and solidarity that brings.
We welcome and share the UK Parliament’s ambition to avoid a No Deal scenario.
However, we will continue our preparations for all outcomes.
While we do not want this to happen, we are doing all we can to be prepared both at home and in co-operation with our EU partners.
To that end, I want to especially highlight the decision of the European Commission in December to grant equivalence to the United Kingdom with regard to Central Securities Depositories.
This time limited equivalence decision has provided welcome clarity for the Irish equity and ETF market and provides a 2-year period to transfer settlement to Euroclear Bank Belgium.
Euronext Dublin, Euroclear, the Irish market and State authorities are all working closely together to ensure this transfer occurs in a timely fashion with minimal disruption to the Irish market.
For this complex project, the one certainty we have is the two-year timeline from the end of March, and all parties must work to complete the transfer within this period of time.
We must all accept that Brexit is a disruptive event which has negative impacts on business models and ways of operating. This requires us all to accept certain changes and to accept previous long standing certainties are no longer available.
While Brexit poses challenges, there are also sectoral opportunities particularly in the international financial services sector which is heavily reliant on the need for access to the Single Market and ongoing compliance with EU regulatory standards.
Brexit has already seen opportunities for Ireland to increase its share of financial services based investment.
Public announcements to establish or expand operations have been made by many companies who are present here today.
These include announcements by Bank of America Merrill Lynch, JP Morgan, Citigroup, Barclays, Bank of China, Legal & General, S&P Global, Kroll and Coinbase, to name a few.
Our proximity to, and similarities with our closest neighbour, will ensure that Ireland’s offering as a specialist financial services centre will continue to complement London’s offering as one of the most important financial centres in the world.
We will build upon our close ties to London, while also becoming an increasingly important bridge between the EU and the rest of the world for financial services.
In the wake of the Brexit referendum result in 2016, the Government has continued to implement the IFS2020 strategy for driving growth in the international financial services sector and we will continue to leverage this strategy to maximise those opportunities.
This Strategy has been in place long before the UK decision to leave the EU and provides a clear roadmap to develop the sector.
My colleague Minister for Financial Services & Insurance, Michael D’Arcy spoke to you earlier about our continued efforts to support, sustain and indeed grow this sector through our new Strategy for IFS into the next decade which will be launched in the coming months.
Ireland, as an English-speaking, common law jurisdiction with guaranteed access to financial services regulatory passporting across the EU, can offer an effective and efficient solution for those companies considering their Brexit strategy.
We will continue to promote the attractiveness of Ireland as a location of choice for mobile international investment and for talented people.
Ireland’s new five-year Strategy for financial services will build on our existing success, but it also looks to the future – a sustainable and inclusive future.
For us, key areas for action include Sustainable Finance and Fintech.
While the Strategy builds on our existing expertise and success in these areas, we want to do more.
One of the major challenges facing Ireland and our global partners today is climate change.
Sustainable finance is a key area that Ireland has identified to help us develop the financial services sector while also ensuring we are fully equipped to tackle future climate challenges in the present.
Last October’s UN’s Intergovernmental Panel on Climate Change Report was a stark reminder of the grave challenges facing us now and into the future.
With no single solution to addressing the challenge of climate change, collaborative efforts will require leadership and action from a multitude of actors from multilateral organisations and Governments, to businesses and individuals.
In Europe alone, an annual €180 billion of additional investment is required to achieve our 2030 climate and energy targets.
Ireland, like all other countries, has an important part to play in meeting these challenges and we already have taken a number of significant steps.
Last October, Ireland became the 4th EU country to issue a Sovereign Green Bond. For 12 years and amounting to €3bn, it attracted very strong market interest and it was over-subscribed on a 4:1 basis.
The Green Bond is a strong signal of our commitment towards transitioning towards a low-carbon economy.
It will also help reduce the cost of capital for green projects by attracting new investors and mobilising private capital towards sustainable development.
I am pleased that International Financial Institutions have attended this Forum where they met investors and investment firms working in sustainable finance and climate finance.
Helping to build linkages between investors and investment needs ensures that sustainable finance becomes deeply and successfully embedded into the financial services ecosystem.
The Green Bond and the work by our Sovereign Wealth Fund are underpinned by the Government’s National Development Plan which will invest €22bn in green infrastructure by 2027 to help meet our national decarbonisation targets.
Out of total funding of €50bn, this represents a very significant investment.
It also includes a €500m Climate Innovation Fund established to identify and develop innovative businesses and initiatives in the areas of Climate Action and sustainable finance.
Last October, Ireland and Hong Kong signed a Memorandum of Understanding between Sustainable Nation Ireland and the Hong Kong Green Finance Association.
This is a tangible demonstration of the global interest in sustainable finance and, in particular, the interest in Ireland and Hong Kong.
It signifies the close ties between these leading financial services centres and a commitment to further develop this important area for our future and the future of the next generations.
Ireland and Fintech
From the beginning of the Government’s current Strategy for financial services (IFS2020) in 2015, we recognised the increasing opportunities for Fintech with Ireland’s long and successful track record in both the technology and financial services sectors making Ireland the perfect location for Fintech firms.
In very basic terms, you cannot have Fintech without both financial services and technology.
In Ireland, we have both.
This is not the result of luck or chance – it reflects the outcome of a strong commitment and investment into both areas over a long period.
It also reflects an ongoing investment in education and skills, the essential building blocks for Fintech and the innovation which drives it.
While we have come a long way in respect of financial services and Fintech, it is not just taking place in Dublin.
Payments and Fintech in particular are thriving in Ireland’s regional towns and cities providing a competitive and seamless service to clients worldwide.
We have seen a number of significant investments in Fintech in Ireland in recent years. Established players such as Mastercard, Citi, and Fidelity have launched innovation labs in Ireland.
We have also embraced a new wave of innovative Fintech firms with operations in Ireland. The likes of Stripe, Kabbage and Yapstone are examples of this new era of firms who are locating operations in Ireland.
The strength of Ireland’s knowledge economy is continuing to drive employment in blockchain-related jobs with global companies such as MasterCard, IBM, Deloitte and Consensys and Coinbase all choosing Ireland as a destination of choice to expand their European blockchain operations.
The world’s top 10 global software companies have chosen Ireland as a centre of excellence, alongside all of the top 10 ‘Born-on-the-Internet’ companies.
Given the way that Fintech is developing, especially in Ireland as a world leader, it is both sustainable and inclusive.
This is why I will be putting Sustainable Finance and Fintech as the central pillars of the Government’s new financial services Strategy.
They will be the growth engines for the future for Ireland but on a global basis.
Successful creation of a sustainable and inclusive future in regard to financial services is a challenge, but it is also a wonderful opportunity.
If developed properly, it can create significant benefits in the present but also well into the future.
For us, it will bring benefits to Ireland but also to other countries. Together, sustainable finance and Fintech provide a perfect match linked to the Forum’s key theme.
They enable the identification and development of policies and business models for a changing financial landscape.
A landscape with significant promise for those who dare to dream and shape the future.
Firstly, I want to thank Joe Carmody and Feargal Purcell of Edelman Ireland for the invitation to attend the launch of the 2019 Edelman Trust Barometer here this morning.
In my remarks, I would like to focus particularly on the key role that strong public institutions play in the development and maintenance of trust in our economy and society more generally.
Equally institutional failings are corrosive to public trust in the ability of government or the private sector to act in the common good.
Trust in society, between all its actors and institutions alike, has always been integral to the realisation of a well-functioning, democratic and successful society.
Our own system of representative democracy here in Ireland is based upon a social contract between citizens and Government.
Our recent history shows that this contract cannot be taken for granted.
It must continually be renewed and legitimised or it risks falling into disrepute.
In general, Edelman’s research shows that trust in Governments is falling with polarising effects that we now see on a daily basis.
More broadly, there has been a growing dis-trust, not just of Government, but of institutions more generally.
And while Ireland is different, with trust in government and politics higher than elsewhere, we cannot be complacent.
Trust in Institutions
They are the enablers of social and economic well-being.
In Ireland, however, our public institutions have often ignored or become fodder for political point-scoring.
Ultimately, I believe, this is counter-productive and unsustainable.
Indeed, I would highlight that the economic literature in this area is consistent in its finding that strong institutions are part of the DNA of a strong economy.
Economists and political scientists such as Robert Putnam and Francis Fukuyama in seminal works such as ‘Bowling Alone’ and ‘Trust’ have helped us understand this relationship.
However the Global Financial Crisis, and the so-called Great Recession that ensued are often seen as a watershed moment: many people lost faith and trust in institutions – both public and private – during the crisis, and the legacies of this remain with us today.
It is clear that the trust that was lost has not been fully restored and many legacies of that era still persist.
And while our institutional framework here in Ireland has generally served us well, that is not to say that it couldn’t have been better or that the journey has been smooth.
Indeed, it has been anything but smooth – think of the mismanagement of the public finances, especially during the 1980s, which economists largely see as the reason our living standards remained far below EU norms for so long.
Other parts of our institutional framework have been more effective – for example our corporation taxation system or our system of income re-distribution.
As Minister for Finance, I want to focus this morning in particular on the role of economic institutions.
As I alluded to moments ago, the Global Financial Crisis has been a ‘game-changer’ in many ways.
As you know, a decade ago we in Ireland were at the coal-face of this crisis.
A system-wide collapse of our banks, one of the sharpest declines in economic activity and one of the largest increases in public debt ever recorded in an advanced country outside of war-time created what can only be described as an existential threat to our living standards.
Ultimately these developments all led to a loss of economic sovereignty, and our citizens – quite rightly – questioned the role of our institutions and fundamentally lost trust in their ability to act for the common good
In the public sector, institutional shortcomings certainly contributed to our crisis.
Several reports – the Regling Report, the Honohan Report, the Wright Report the Banking Inquiry Report to name just some – all identified failures within important institutions of the State.
To address this, structures have been put in place to enhance the analytical capacity of the Department in all areas under its remit, and it is my view that the Department an entirely different organisation than the one that entered the financial crisis.
These are all building blocks of greater public trust in our institutions.
In particular, in recent years we have seen significant reform brought into our budgetary framework, which has facilitated a more transparent, inclusive and effective budgetary process.
The establishment of the Oireachtas Budget Oversight Committee in July 2016 means that there is now more involvement among your public representatives in the consideration and evaluation of budgetary proposals, both prior to and following Budget day.
The process now begins with the Summer Economic Statement, which sets out the broad parameters for macroeconomic growth as well as details of the fiscal outlook and constraints over the medium term.
Another relatively new element of the process includes the National Economic Dialogue – aimed at facilitating an open and inclusive exchange amongst all members of Irish society in advance of the Budget.
Separately, the Mid-Year Expenditure Report provides the starting point for the examination of the budgetary priorities by the Oireachtas.
This is followed by publication in July by the Department of Finance of their Tax Strategy Papers, which costs some of the budgetary options being considered in terms of possible changes to taxation measures.
These concrete, tangible steps have transformed our approach and are in line with best practise as recommended by the OECD amongst others.
There is an inherent value in such constructive exchanges on the key issues facing our nation.
Indeed, in an era where open dialogue is under attack worldwide, our commitment to building consensus through social dialogue is a testament to the fact that we remain an open society that is committed to building greater trust.
Financial and Corporate Culture
Since the financial crisis, reforms we have introduced to the Central Bank has enhanced the quality of financial regulation and oversight.
The Bank is much more active and hands-on in discharging its functions, rather than the ‘principles-based’ approach that characterised it previously.
This is a critical component in restoring trust to our wide banking and financial system where trust has taken an enormous hit.
The collapse of the domestic banking system was clearly a defining moment.
However, subsequent behaviour including around tracker mortgages has done nothing to help the cause.
In the aftermath of the tracker mortgage scandal – and I use that word deliberately – I requested the Central Bank to prepare a report on the behaviour and culture in the five main retail banks in Ireland.
I requested this report as culture feeds directly into whether customers and citizens have trust in the banking system, which is a fundamental prerequisite to the proper functioning of both it and the wider economy.
The Central Bank’s Report is well worth a read as it was written in conjunction with their colleagues from the Dutch National Bank, who are considered world leaders in banking culture.
One of the clear takeaways from the Central Bank’s Report is that the culture of banks meant employees did not feel able to speak up and stand up when something was happening, whether it was mistakes being made, poor processes and controls in place, or outright wrongdoing.
This culture has very significantly undermined the public trust in a vital economic sector.
It is easy to single out bankers, but we have many examples across many professions in this country where an excess of forbearance has been damaging to public trust in our institutions and to our public life in general.
With this in mind, my officials are working on new Central Bank legislation to enhance the regulatory and enforcement powers of the Central Bank, which will cultivate “good culture”.
While the building of trust in both our private and public institutions is critical, these are necessary but not sufficient steps in the restoration of greater trust in our social contract
For that we must develop a deeper sense of citizenship and of what our French colleagues call a ‘sens de l’État’, a commitment to public service that transcends political, sectional and personal interests.
In doing so, we need to make a much stronger case for the achievements of the State than are sometimes reflected in day to day political and media discussion.
In this, all politicians and public servants hold a solemn responsibility.
Because it is only by meeting real and compelling needs of our citizens, while openly acknowledging when we fall short of these standards, that we can enhance the legitimacy upon which that very sense of citizenship rests.
Before I conclude, I want to acknowledge the work carried out by Edelman in highlighting the significant trends that have been taking place among different societal groups, in terms of the level of trust and confidence that is now placed in our key institutions.
I am particularly struck by the findings that despite general trust in media remains low, that trust is greater in traditional news sources than social media which has dipped significantly in recent years.
As a lifelong newspaper reader and strong supporter of public service broadcasting, I take some reassurance in these findings.
They suggest that in an age of snap judgements, hot takes and confirmation bias that there is still a demand for balance, perspective and reflection on public affairs.
Equally, the increasing trust in employers is significant both here and globally.
The expectation of employers both amongst their employees and customers has risen and this represents a significant responsibility and opportunity for business.
Overall, the results of this report act as a reminder to all who serve in public office, that openness, accountability and transparency must inspire our work at all times when we serve the public; a public who have placed their faith in us to deliver and maintain a high quality of public services.
We have witnessed rising economic and political uncertainty globally in recent years, with increasing moves towards trade protectionist policies in the United States, to the series of challenges that may lie ahead of us in the form of Brexit.
As evidenced by Edelman’s report, pessimism will rise amongst the public on the back of this uncertainty and there will be a negative impact in terms of people’s expectations for their future.
It is, therefore, imperative on us in government, to take all necessary measures to protect and strengthen our own institutions, to continue on the journey of rebuilding trust in our institutions.
As I finish, I will leave you with a few words from Edmund Burke, which provide the best guidance on how those in public and commercial life can build public trust in their actions:
“It is not what a lawyer tells me I may do; but what humanity, reason, and justice tell me I ought to do.”
I thank you for your time today.
CHECK AGAINST DELIVERY:
I wish to thank the Committee for the invitation to come here today to discuss Brexit preparations and the recent European Commission Communication “Towards a more efficient and democratic decision making in EU tax policy”.
I look forward to a positive exchange.
In relation to Brexit, the Government remains firmly of the view that the only way to ensure an orderly withdrawal of the United Kingdom is to ratify the Withdrawal Agreement, as endorsed by the European Council and agreed with the British Government.
The European Council has made clear that it stands by the Withdrawal Agreement and that it is not for renegotiation.
The Agreement, with its backstop provisions, is the only agreement on the table that provides the essential legal guarantee to avoid a hard border in any circumstances and protects the Good Friday Agreement in all its parts.
As a Government our focus remains on securing ratification of the Withdrawal Agreement but we must also continue to implement our preparations for a no deal scenario.
On 19 December last, the Government published its Brexit Contingency Action Plan, setting out its approach to dealing with a no deal Brexit. Intensive work related to the Action Plan continues right across Government on a daily basis.
As Minister for Finance, my objective is to protect the economic and financial interests of the State and to support the work of the Revenue Commissioners so as to minimise the Brexit disruption to trade, to the greatest extent possible.
My Department is working within the whole-of-Government approach and coordinating closely with its agencies who are developing and implementing plans and measures to protect our economy.
I recently met with the Chief Executive of the NTMA, the Chairman of the Revenue Commissioners and the Deputy Governor of the Central Bank.
All are engaging closely in the overall whole- of- Government preparations, and are confident that they have put appropriate contingency measures in place to do everything possible to limit the inevitable disruption to consumers and trade, in the event of a no deal Brexit.
However, it is not possible to eliminate all risk in a no deal situation. Any Brexit will be negative, and a no deal most of all. Not all issues are within Ireland’s direct control.
This is not to avoid responsibility, but to be frank and open.
This is about damage limitation.
The Government is working actively at EU level and the EU will be taking a number of unilateral, limited and temporary measures in areas such as air transport, for example.
However, it is important not to pretend that there can be, what some in the UK are calling, a ‘managed no deal’.
No such thing exists and, from the EU perspective, we need to be very careful not to put at risk the benefits of the Withdrawal Agreement and, in particular, the transitional arrangements and the backstop.
Economy and Budget
Last week, following discussion with Government, I issued an initial assessment of the economic and fiscal impact of a ‘no deal’ Brexit prepared by my Department.
The new analysis is based on an initial application of the latest UK estimates from the National Institute of Economic and Social Research, the UK equivalent of our ESRI.
Brexit, in whatever form, is a historic challenge for Ireland and the implications for our economy will be disproportionate relative to the rest of the EU.
While my Department’s central economic and fiscal planning scenario remains an orderly exit, based on the UK leaving with a transition arrangement in place, the risk of a disorderly exit has increased in recent weeks.
In a disorderly exit, while in aggregate terms, the economy is likely to continue expanding, the pace of growth would be lower than is currently expected.
The initial assessment by my Department suggests that the level of economic activity will be around 4¼ percentage points lower than our existing trajectory over the medium-term and will be around 6 percentage points lower compared to a ‘no Brexit’ scenario.
The reduction in the pace of growth would have negative spill-overs to the public finances and to the labour market.
The headline deficit could deteriorate by nearly a percentage point of GDP in the short-term.
In terms of the labour market, the unemployment rate would increase by an estimated 2 percentage points, relative to Budget 2019 projections.
As earlier research from the Department of Finance has shown, the most adverse impacts are likely to be felt in agri-food and indigenous manufacturing sectors.
The more comprehensive assessment by the Department of Finance and the ESRI, will be published later this quarter.
This output will be incorporated in the Stability Programme Update, due to be published in April this year.
It is important to recognise that such estimates may not capture the full impact, and the figures may be conservative.
Indeed, the impact in certain exposed sectors and regions will be worse than the average.
Nevertheless, quantifying the impact is important to help Government understand the possible macroeconomic implications and to design the appropriate policy response.
Of course, it is important to point out that Ireland is facing the challenge of Brexit in a robust economic position, with the highest GDP growth in Europe and record employment levels.
In addition, exports, job creation, inflation and public debt indicators are all strong.
This strong performance will provide a stable platform for the external challenges that lie ahead.
The Government has already taken significant action to get Ireland Brexit ready. Since the UK referendum, all of our national Budgets have been framed to prepare for the challenge of Brexit with dedicated measures announced in Budgets 2017, 2018 and 2019.
This is supported by long-term planning through the National Development Plan and the National Planning Framework which will provide significant investment in Ireland’s public capital infrastructure.
My Department has been working closely with the Central Bank on planning for Brexit.
The Central Bank has statutory responsibility for financial stability.
It is working closely with financial services firms to ensure that they have contingency plans in place for end March 2019, and that they are adequately prepared to cope with the possible effects of Brexit, with as little disruption for consumers as possible.
In terms of Financial Services, the Department and the Central Bank have stressed that responsibility for contingency planning remains with individual firms.
On the basis of its ongoing work and its intensive engagement across the sector, the Central Bank has been able to provide assurance that, while some level of market disruption is inevitable, the financial system as a whole should be resilient enough to withstand a hard Brexit and that the most material ‘cliff edge’ financial stability risks arising from Brexit have been largely mitigated.
In this context, the contingency preparations announced by the European Commission last November mitigate the immediate risks arising from potential loss of access to UK based market infrastructure – the Central Clearing Counterparties, used to clear derivatives – and for Ireland specifically, access to a Central Securities Depositary (CSD) which allows for the settlement of Irish equities/Exchange Traded Funds (ETFs).
In relation to the CSD, I am proposing legislation in the Government General Scheme which will support the Commission decision.
As far as consumers are concerned, the most important issue for consumers arises where UK or Gibraltar based insurance firms have not put adequate contingency plans in place.
While most insurance firms and intermediaries providing services from the UK and Gibraltar have taken appropriate action, contract continuity still remains a risk where firms have not taken adequate action.
The legislation, which I am proposing as part of the Government Omnibus Bill, will allow for the run-off of policies in place at the time of Brexit over a three year period, eliminating the most material risk for customers of insurance firms.
Customs and Taxation
The Department of Finance has been working closely with the Revenue Commissioners on Brexit since before the UK Referendum.
While the Department is responsible for overall policy, Revenue is an independent body responsible for implementing that policy in a fair and efficient manner.
Revenue is on the frontline in terms of our preparations for Brexit and facilitating efficient movement of legitimate trade post Brexit to the greatest extent possible.
I know that the Chairman of the Revenue Commissioners attended this Committee on 24 January and outlined the very significant work currently being undertaken by Revenue, and how this work has intensified in recent months.
He outlined the scale of the challenge in terms of the very significant, increase that can be expected in traders who will have to deal with customs formalities for the first time, leading to an estimated 10 fold increase in customs declarations, the complexity of issues relating to the landbridge and the challenge for Government agencies, including Revenue, in putting the necessary arrangements In place in a context where many issues are outside our control.
The Chairman outlined to the Committee the very significant programme of work that has been ongoing in Revenue in terms of ICT, staffing and engagement across the country with the business community:
• Regarding ICT, an additional €2 million has been invested in scaling up Customs ICT framework to deal efficiently with the anticipated increase in customs declarations, post Brexit.
• Regarding staffing, Revenue has accelerated and expanded their recruitment and training schedules to be ready for March 2019 and are on track to have over 400 additional staff in place by the end of March 2019.
• Regarding outreach to business, the Chairman outlined how Revenue is working hard to support trade and businesses to be prepared as possible and to deal with the outcome of unfolding developments.
This is being done through engagement with trade representative bodies, participation in and organization of events and seminars around the country and targeted correspondence to reach some 85,000 large and small traders who do business with the UK.
A ‘no deal’ Brexit will be a serious challenge for our traders.
However, I am satisfied that the Revenue Commissioners have been working very hard and will continue to work hard to ensure that they are prepared to facilitate the efficient movement of legitimate trade to the maximum extent possible in a no deal scenario.
The general scheme for the draft Omnibus Bill, known officially as the Miscellaneous Provisions (Withdrawal of the United Kingdom from the European Union on 29 March 2019) Bill, was published on 24 January.
This focuses on those areas that need to be addressed urgently and immediately, through primary legislation, to protect our citizens and to support the economy, enterprise and jobs, particularly in key economic sectors.
I would like to take this opportunity to outline, in more detail, the elements of the general scheme, for which I, as Minister for Finance, am responsible. These are parts 6, 7 and 8:
In Part 6, legislative amendments are proposed for Income Tax, Capital Tax, Corporation Tax and Stamp Duty legislation in order to ensure continuity for business and citizens in relation to current access to certain taxation reliefs and allowances, and the retention of a number of anti-avoidance provisions when the UK is no longer a member of the EU/EEA. I can confirm that I received Cabinet approval, this morning to introduce postponed accounting. Accordingly, provision will be made in the Brexit Omnibus Bill.
In Part 7, legislative measures are proposed for the Settlement Finality Directive to support the implementation of the European Commission’s equivalence decision under the Central Securities Depositories (CSD) Regulation, and to extend the protections contained in the Settlement Finality Directive to Irish participants in relevant third country domiciled settlement systems.
Part 8, includes legislative measures for a temporary run-off regime, which, subject to a number of conditions, will enable insurance undertakings and intermediaries to continue to fulfil contractual obligations to Irish customers for three years after the date of the withdrawal of the UK from the EU.
As the timelines for ratification are tight, the Government will work very closely with all Opposition parties in the Oireachtas and all members of the Dáil and Seanad to ensure that the necessary no deal Brexit related legislation will be in place before the 29 March.
EU Taxation Proposals
Let me now turn to the second topic on the agenda- the launch, earlier this month, by Commissioner Moscovici of a Commission Communication entitled ‘Towards a more efficient and democratic decision making in EU tax policy’.
This communication sets out a roadmap, which aims to start a debate around changing the system of voting for tax files from unanimity to ‘Qualified Majority Voting’ (QMV).
At this point, I believe it is important to reflect on just how much has been achieved on tax issues at EU level by Member States and the Commission in recent years.
Since 2015, unanimity has not prevented the agreement of an unprecedented 21 different tax initiatives by all Member States.
This is an average of more than one initiative being agreed by Finance Ministers every 3 months, and includes important Directives on VAT, administrative co-operation, Anti-Tax-Avoidance and, also, the EU list of non-cooperative tax jurisdictions.
This is evidence of real, tangible progress made through all Member states working together for the benefit of the whole Union.
The Commission Roadmap identifies the ‘passerelle clause’ as being the most feasible option for moving away from the unanimity voting procedure.
The passerelle clause provides that the European Council could unanimously decide to move an entire policy area or part of a policy area from unanimity voting to QMV.
The support of the European Parliament as well as national parliaments, including Dáil Éireann, would also be required.
This is a highly sensitive suggestion for many Member States, including Ireland, as any move to change the voting method, used for tax files, would reduce Member States’ sovereignty.
Given the large volume of important agreements reached at EU level on tax issues, I do not see the need for, or merits of, any proposals to move away from the requirement for unanimity.
To conclude, regrettably the UK is leaving the EU and that means that some things are going to change.
Planning for this change has been taking place on a whole-of-Government basis for some time, and we have been taking the necessary measures to implement actions to mitigate the risks, as far as is possible.
No future relationship between the EU and UK will be as good as the status quo.
Membership of the Single Market and Customs Union is a core element of our economic strategy – including in attracting business, both over the decades and more recently.
That will not change.
Ireland will remain an active and enthusiastic member of the EU.
The Government is committed to working with the European Commission, and with our EU partners, to ensure the closest possible relationship between the EU and UK, and to minimise any disruption for our businesses and citizens as much as possible.
In terms of taxation the same principles apply. It is our view that all Member states, working together for the benefit of the whole Union, is the way to achieve the best results and real tangible progress.
Chairman and members of the Committee, I trust that the above gives you an outline of the issues you asked me to address.
I would like to thank you for your attention and, at this point, I will be happy to respond to any questions that Members may have.
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Opening Statement by Brian Corr (Department of Finance) Chair of the CUAC Report Implementation Group to the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach.
I would like to thank the Committee for inviting the Credit Union Advisory Committee (CUAC) Report Implementation Group to attend this meeting to discuss the Implementation Group’s Final Report. I am accompanied today by the Credit Union representatives of the Implementation Group, namely:
- Ed Farrell, CEO of the Irish League of Credit Unions
- Kevin Johnson, CEO of the Credit Union Development Association
- Tim Molan, Chairman of the Credit Union Managers Association, and
- Joe Tobin, Treasurer of the National Supervisors Forum
The Central Bank representative on the CUAC Report Implementation Group, Deputy Registrar Elaine Byrne is not present today. However, the Central Bank has indicated that the Registrar and Deputy Registrar Elaine Byrne are available to attend the Committee to address any matters from a Registry of Credit Unions perspective, if the Committee wishes to extend an invitation to them on another occasion.
I would also note the positive contribution of Joe O’Toole who attended a lot of our meetings as a CUAC observer, to assist our understanding of the CUAC Report.
Background to the CUAC Report Implementation Group
As the Committee is aware this Implementation Group has its origins in the Credit Union Advisory Committee Report entitled “Review of Implementation of the Recommendations in the Commission on Credit Unions Report”. This review was requested by the Minister of Finance in 2016 and was presented to him in June of that year.
The CUAC Report contained a number of recommendations, along with an overarching recommendation to establish an Implementation Group for a specified period of time to oversee and monitor the implementation of the CUAC’s recommendations and to advise the Minister for Finance on their progress.
As such the Implementation Group was established under a very tight terms of reference and was not tasked with addressing legislative or regulatory issues facing the sector other than those recommended in CUAC’s Report, namely:
- Tiered Regulation;
- Consultation and Engagement;
- Business Model Development; and
- Additional CUAC Policy Papers on a) Interest Rate Ceiling, b) AGM Voting and C) Common Bond.
Work of the Implementation Group
The name Implementation Group is a misnomer given most of the CUAC’s recommendations could only be fully implemented by the Oireachtas, the Central Bank or Credit Unions themselves. The Implementation Group therefore worked on progressing each of the recommendations as much as possible and monitoring those which were being implemented.
The Implementation Group met 18 times during 2017 and 2018 and worked through each of the CUAC recommendations, prioritising work on Recommendation 2 (Lending) and Recommendation 3(a) (Consultation and Engagement) during 2017.
In addition to the Final Report three papers were completed by the Implementation Group on (1) Lending, (2) Engagement and (3) Tiered Regulation, all of which were submitted to the Central Bank.
It is important to note that while these papers and the Final Report represent a collective view of the Implementation Group, they are without prejudice to the individual views of the organisations represented on the Implementation Group. As such the documents do not bind the Department of Finance, the Central Bank or any other members of the Implementation Group in advance of any public consultation carried out by the Central Bank in accordance with its statutory mandate or any legislative process commenced by Government. The independent status of the Central Bank is also recognised.
I believe the Final Report is a considered document reflecting a balance of different views amongst the stakeholders involved.
In terms of the implementation of the CUAC recommendations, as you will have seen while some have been progressed satisfactorily, or are being recommended for implementation, others have not, as there were cases where the members of the Implementation Group did not agree with a CUAC recommendation or felt it was of low priority.
As the Final Report outlines, the main progress has been on the following four issues:
- In terms of lending, the Implementation Group’s Scoping Paper was fully considered by the Central Bank in the current consultation paper on the lending framework for Credit Unions (CP 125). The Implementation Group would hope that some matters proposed in the paper which were not taken on board will be reconsidered during the consultation.
- The Minister for Finance has agreed, subject to Cabinet approval, to bring forward proposals to increase the interest rate cap from 1% to 2% in line with the recommendation of the Implementation Group. Such a cap merely provides further flexibility to Credit Union boards, and is not intended as a target or to express any desire for them to raise rates.
- In terms of Business Model Development a range of collaborative ventures have been progressing towards implementation, many more than when CUAC initially prepared its report in mid-2016.
- The consultation process for regulations has improved, though further refinements can be made over time.
On the negative side, while Central Bank engagement with the sector has improved both formally and informally since the CUAC report, both the Implementation Group and CUAC are disappointed that a version of the CUAC proposal for Service Level Agreements between the Central Bank and credit unions has not been introduced to date. This is a matter for the Central Bank in its role as the statutory independent regulator of Credit Unions.
Another recommendation which has not been progressed in line with the CUAC Recommendation – namely Tiered Regulation – deserves further explanation, as it has been a consistent issue for the sector since the Commission on Credit Unions, as I am sure you are all aware.
While proportionality and avoiding a regulatory framework which is “one size fits all” is supported by all members of the Implementation Group, after careful assessment the Implementation Group decided to propose a different approach than what was recommended in the CUAC Report.
Developments in the sector such as tiering in investment and lending regulations in recent times and refinements in supervisory approach, led to the Implementation Group concluding that a form of this approach continue, with tiering introduced within Central Bank Regulations rather than through a formal tiered regulatory structure which would divide the sector in two. Such a recommendation was accompanied by a number of principles, which include:
- not restricting any Credit Union from services, or limits, they can currently provide,
- automatic inclusion in higher tier for Credit Unions of a certain size and risk profile, and
- clarity in the approval process.
This is a pragmatic change in approach which may better serve to meet the needs of evolving credit union business model demands and reflects a different environment to that encountered when CUAC prepared its report. This recommendation is of course dependent on sufficient tiering being incorporated into all new Regulations and a clear and transparent approval process where relevant. The Implementation Group agreed that failing this Tiered Regulation should be revisited.
The change in approach reflected in this report does not conflict with the sector’s call for proportionate regulation and supervision.
And we must remember that the Credit Union Act 1997, as revised, prescribes in many cases that the Central Bank ensure that its Regulations:
“are effective and proportionate having regard to the nature, scale and complexity of credit unions, or the category or categories of credit unions, to which the regulations will apply”.
Committee’s Report on the Review of the Credit Union Sector
As you will have noticed, Appendix 2 of the Final report is a cross reference to your own report on the Review of the Credit Union Sector. This is intended to identify those aspects which were addressed by the Implementation Group and those aspects which were outside of the scope due to the tight terms of reference I mentioned at the start of this statement.
The Final Report also sets out the many positive developments in train with a ‘2019 Roadmap’, which points to the material regulatory changes that are either bedding in or due to come into effect over the short term and the imminent expansion of services and products for a large cohort of credit unions.
As this section points out, 2019 could be an important year for the credit union movement, by the end of which it is possible that the sector themselves will have materially expanded their offering, to include debit cards and current accounts for up to 50 of the larger credit unions (encompassing greater than 50% of sector assets), as well as the sector-wide potential expansion of the provision of mortgages, and the further roll out of agri-lending and other SME lending initiatives.
Notwithstanding this, there are emerging issues and challenges facing the sector which are summarised in the penultimate section of the Final Report and which may be subject to additional work by stakeholders.
To conclude, I would like to say that the Final Report is not an end point but rather just a staging post, with much done but much more to do. And as demonstrated by the 2019 Roadmap, this year promises to be a busy one for the sector and all stakeholders involved. There will be new Regulations coming from the Central Bank following its review of the lending framework, and new proposed legislation in relation to the interest rate cap, subject to the Oireachtas. The Representative Bodies, individual credit unions and credit union service providers and advisors will also be busy with the many projects being implemented or developed, some of which were noted in the Final Report.
Thank you for your attention.
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I am delighted to welcome the commencement of HBFI’s lending activities as it seeks to open new doors for home building in Ireland.
Today represents the culmination of what has been one of my Department’s priorities since Budget 2018.
Thanks to the savviness and meticulous planning that has characterised the design of this scheme, HBFI is now in an excellent position to achieve its objective of delivering 7,500 new homes over the coming years.
Use of Existing State Resources
Perhaps most encouraging about this initiative is that it is inspired by a model that has worked, and is continuing to work, for delivering large numbers of high-quality new homes throughout Ireland.
A residential funding programme operated by NAMA has supported the delivery of 9,700 homes on land associated with the agency since 2014, with another 9,400 in the pipeline.
Considering the success of NAMA in achieving its housing objectives, and the general dearth of finance available for residential projects outside our major urban centres, it is only common sense to open up a similar programme to builders and developers who are not affiliated with NAMA.
A unique advantage of HBFI lies in its efficient use of resources already available to the State.
In order to capitalise on the experience and talent that exists within State agencies, the HBFI legislation has been designed to facilitate the easy transfer of staff and systems that are currently within NAMA and the NTMA.
This will allow HBFI to hit the ground running as it assesses its first loan applications over the coming weeks.
Another considerable advantage HBFI will have is how it is funded.
In order to realise its objective of financing 7,500 new homes over the next 5 years, I have directed the Irish Strategic Investment Fund, to make a €750 million investment in HBFI.
This will ensure that HBFI will have adequate financial resources to meet the challenges involved in increasing the supply of housing across the country.
This investment also has the considerable benefit of delivering a financial, as well as a social, dividend for the State.
Due to the fact that HBFI must seek to make a commercial return on its lending, not only is it envisaged that any ISIF investment will be repaid to the State, but the profit earned by HBFI will ultimately flow into the State’s coffers.
This means that in the long run HBFI will deliver more homes for the people of Ireland and a commercial return for the Exchequer.
This requirement for a commercial return will also be present throughout HBFI’s lending activities. There will be no question of HBFI providing cheap or subsidised loans to developers.
Our present troubles in the housing market are due, in part, to the construction bubble fuelled by cheap and easy credit before 2008.
This Government will not repeat the mistakes of the past in that regards.
Rather, HBFI will provide finance to viable project at rates equivalent to those that are already available in the market.
Insisting on commercial rates has many advantages.
It is an essential requirement to ensure that HBFI’s operations do not fall foul of EU State aid rules.
It also ensures that the money lent out by HBFI will not be recorded as expenditure on the Government Balance Sheet, freeing up resources for other worthwhile endeavours.
Finally, it protects taxpayers by ensuring that their investment in HBFI is used to finance commercially viable projects that will return a profit for the Exchequer when HBFI is wound up after completing its mandate.
In summary, HBFI is a smart, efficient, and targeted measure that is just one aspect of the multifaceted approach that this Government is taking to resolve the Housing Crisis.
Through extensive preparations we have managed to ensure that HBFI will facilitate the construction of 7,500 new homes all across the country by optimising the use of resources already available within the State and with minimum risk to the taxpayer.
With these strong foundations laid I confidently look forward to HBFI’s future success and I wish the new team all the best in their endeavours.
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OPENING REMARKS AND THANKS
Good morning everyone. I’m delighted to be here with you all this morning and I’d like to specifically thank Conor O’Kelly for inviting me to address you.
I know that this is the 6th year in a row that ISIF has held an event of this type. I can see from the numbers in attendance that the annual market engagement event has established itself both as an opportunity for ISIF to reach out to the market and promote some of its successes; and for ISIF to support many of you in networking for future opportunities.
ISIF 2.0 Investment Strategy
This year’s event is a landmark one in that it launches ISIF 2.0 – ISIF’s refocussed investment strategy covering the next 5 years.
ISIF 2.0 has been the subject of extensive engagement between my officials and Conor and Eugene’s teams in the NTMA as I sought to have ISIF refocussed to meet our changed economic circumstances and the challenges that have emerged since ISIF was first conceived of in 2011.
In bringing forward the proposals for the ISIF 2.0 Investment Strategy to Government, I was very much informed by the writings of Professor Mariana Mazzucato of University College London and I know that ISIF have also engaged with Professor Mazzucato. She points out that many private sector investment time horizons do not allow for the longer term and riskier investments required to address the really big national and global challenges that we face over the coming decades.
She sets out the position that these challenges require State investment given the levels of risk and the public good returns.
The ISIF is our State’s fund for making these longer term investments, which can drive long term growth, value creation and most importantly, innovation for the benefit of our State and its citizens.
In line with Professor Mazzucato’s writing, it is important to recognise that the ISIF approach is crowding into Ireland those private sector investors that are willing to take such risks and long term time horizons so that both they and the State benefit.
GOVERNMENT ECONOMIC AND GROWTH POLICY
Through the pursuit of the correct policies by Government and the efforts of the Irish people, we have seen huge improvements in Ireland’s economic circumstances over the last number of years.
These improvements have allowed Government to refocus the ISIF from supporting economic recovery and growth to a longer term more innovative fund which is “thinking in decades”.
Despite these extremely positive developments, the Government is acutely aware of the need to be prudent.
As many of you will be aware we have used the proceeds of the AIB share sale towards reducing our debt. Our debt-to-income ratio, while still too high, is moving in the right direction.
In 2019, we will establish the Rainy Day Fund, with an initial contribution from ISIF, which is possible due to the higher private sector leveraging achieved by ISIF since its inception.
Over the next decade, we will invest €116 billion – more than a third of our GDP – in long-term critical infrastructure, while focusing on keeping current expenditure in line with economic growth.
Likewise we are investing in education to ensure our workforce has the skills to compete in a globalised economy. A whole of Government project to frame Ireland’s economic agenda over the coming years entitled “Future Jobs Ireland” will be launched this month.
Despite the positive outlook, we remain conscious of the risks our economy faces, with the most immediate risk being the potential fallout from a more adverse-than-expected outcome from Brexit. The threat from Brexit is a critical consideration for business and our economy as a whole.
Extensive planning has been underway across all Government Departments since before the Brexit Referendum. However, Government planning and preparation can only go so far. I would encourage all of you to continue working to make sure your businesses are Brexit ready. Given the uncertainty of events, the Government will continue to provide the most up to date information on Brexit in regular updates.
More positively, Brexit will also provide opportunities and the Government will work to help maximise those opportunities. Post Brexit we will be the only country in the EU that is an English speaking, common law jurisdiction.
The Government has been swift in taking action to seize on these opportunities, and mitigate the risks from Brexit.
We announced measures in Budgets 2018 and 2019 as well as the €300 million Brexit Loan Scheme and the Future Growth Loan Scheme to support businesses in preparing for and adapting to Brexit and investing strategically for a post-Brexit environment.
ISIF 2.0, which I will talk about in more detail later, is a key element of the State response to Brexit.
Its investment is focused on supporting businesses through the Brexit challenges that have been identified by my Department’s and other economic studies:
• The new investment strategy’s focus on regional development will support those regions more impacted by Brexit than Dublin, as the economic studies show that Dublin already has greater levels of trade with EU and global markets than the regions have.
• The strategy’s focus on indigenous industry will be vital as the economic studies show that Irish SMEs are more focused on the UK market than the Foreign Direct Investment sector. Therefore, ISIF will be seeking investment opportunities either directly or indirectly in Irish SMEs that are seeking to broaden their markets, or SMEs that are innovating to reduce their cost base or to move up the value chain so they can continue trading with the UK.
• The strategy also has a broad focus on the sectors most affected by Brexit. I do not want to prejudge ISIF’s independent commercial investment decisions, but based on the economic studies, I would expect these sectors to include the food and food processing sectors, among others.
I want to stress that ISIF’s investments will be additional to the enterprise agencies that work with a wide range of companies – making them more competitive, diversifying their market exposure, and up-skilling their teams.
Other challenges aside from the immediate challenge of Brexit are the openness of our economy for which any rise in protectionism leading to a disruption in world trade could significantly impact Irish growth prospects.
The normalisation of the European monetary policy may not be as smooth as projected and this also has the potential to impact our growth trajectory. As these factors are beyond our control, the best way we can mitigate against these risks is through prudent budgetary policy, careful management of the public finances and by focusing on competitiveness-oriented policies.
I previously mentioned the transfer of ISIF funds to the Rainy Day Fund, which will assist in building fiscal buffers.
We also have domestic challenges that come from a rapidly growing economy, such as shortages in housing and pressures on public services. The Government is implementing policies to address these challenges by looking forward and planning in a positive way.
Project Ireland 2040 is the Government’s overarching policy initiative to plan for the Ireland of the future.
Among the major innovations of Project Ireland 2040 is the introduction of four new funds focused on urban and rural investment, climate action and disruptive technology. Investment in the best projects will be prioritised with funds targeted at different sectors to ISIF so as to ensure no deadweight in the use of State funds.
In terms of the built environment, Project Ireland 2040 will be complemented by the National Planning Framework, the establishment of the Land Development Agency, Home Building Finance Ireland (HBFI)’s €750 million of funds for residential development and the increases in the public capital programme.
ISIF 2.0 is also contributing to our housing response through partnering with private sector investment to increase the supply of housing.
ISIF 2.0’s role is part of a range of measures to boost housing supply complementing Rebuilding Ireland. I am happy to relate that while still some way from achieving normality in the housing market, there are encouraging signs of steady improvement. The latest figures indicate almost 19,000 new homes delivered in 2018 – an increase of around 30%. This is a huge increase from the 5,518 homes delivered at the start Rebuilding Ireland in 2014.
We are also seeing a welcome moderation in residential prices, with house inflation cooling to its lowest levels in 2 and a half years.
In spite of the challenges we face, we must remember the positives in this new future facing us; we have a young, well-educated population and a Government committed to supporting the building of a more business friendly environment, for businesses large and small, foreign and domestic.
We will remain open to business and talent and do everything to attract more of both.
Interestingly, in my recent visits to the US and Europe, this openness to investment and also the political and economic stability we offer, have been consistently identified as key attractions to investors.
Political and economic stability is important in creating the environment for the participation of ISIF’s private investment partners across a range of funds and fields.
These partners have been effective in bringing their resources, knowledge and expertise for the benefit of projects and firms in the Irish economy.
As I said at the outset, today’s event launches ISIF’s new refocussed Investment Strategy for the next 5 years – ISIF 2.0.
ISIF’s statutory mandate has been and will remain to invest on a commercial basis in a manner designed to support economic activity and employment in the State.
Since it began, ISIF has committed €4.1 billion to investments and projects that support economic activity and employment in Ireland, supporting over 30,000 jobs.
ISIF’s €4.1 billion investment commitment has unlocked total commitments of nearly €11.6 billion and makes it a valuable State asset.
In announcing the outcome of the ISIF Review, which was published as part of Budget 2019, I set out my view that the State’s domestic economic activity and investment levels are sufficiently robust at this time to allow for a degree of scaling back on investment by ISIF.
In light of this conclusion, Government agreed to my request to transition ISIF
from a broad investment strategy to one with a focus on priorities that will support the Government’s Project Ireland 2040 and, as I mentioned earlier, address the challenges of Brexit.
In refocusing the ISIF, the Government took particularly account of:
• The economic and investment position of the Irish economy;
• The risks currently facing the State and the potential mitigation measures to these risks; and
• Wider Government policies such as our budgetary and fiscal stance, and Project Ireland 2040 and the associated National Planning Framework.
Thus, the overarching vision for this Investment Strategy is that ISIF should be ‘Thinking in decades and making a difference’. Under the new strategy, ISIF will now target the delivery of a €3 billion 5-year investment programme focused on:
• Regional development;
• Housing supply;
• Indigenous industry;
• Projects to address climate change; and
• Sectors adversely affected by Brexit;
ISIF’s very specific focus on climate change provides the capacity to make big investments in radical innovations.
ISIF wants to hear from people with the next big idea on how to make dramatic changes to our energy consumption and production. In addition, ISIF’s focus on supporting housing is fully aligned to the objective of a more sustainable housing stock that reduces energy use in terms of heat and light, and in terms of inefficient forms of commuting.
As Professor Mazzucato points out, State “mission-led investment” allows all of us to achieve longer-term benefits in terms of creating a more sustainable economy, both from an economic perspective in terms of developing and supporting indigenous firms to move up the value added chain; and from an environmental perspective in terms of mitigating climate change.
ISIF’s new strategy will focus on investments, which will help Irish people live and work in the right places and will increase resilience in businesses throughout the country.
Enjoy the rest of the event and thanks for your attention this morning.
Thursday, 17th January 2019
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Speech by Minister Paschal Donohoe, TD
‘Responding to Populism’
Institute of International and European Affairs
17 January 2019
Thank you very much for inviting me here today.
It’s always a pleasure to return to and speak at the Institute of International and European Affairs.
The current series of lectures is very timely.
In beginning my comments I want to say that I will not be focusing on the immediate consequences of the vote on Tuesday evening in the House of Commons.
I have addressed this elsewhere but am happy to respond to any questions or comments on it.
My address focuses on the longer term causes, consequences and responses to many of the challenges associated with Brexit.
The populist wave that crested in 2016 has spread across the shore of global politics with openly populist governments now in office in both developed and developing countries.
Unlike in 2016, when the great age of populism was largely prospective and amounted to a series of electoral shocks we have now learned a considerable amount about the governing method of populist parties.
So we must update our understanding, analysis and response to the populist project.
So today in addition to sharing with you my reflections on populism and the liberal order I would also like to offer some thoughts on the impact of populism in government, what we can learn from it and how we might respond to it.
I will address four different themes.
First, I will offer definitions of each of these concepts, of populism and the liberal economic order.
Second, I will focus on how some elements of the liberal offering created the environment for the development of populism.
Third, based on this I will argue that Ireland is well placed to respond to the challenges that others are now facing – but that we have no reason for complacency.
Finally, I will briefly ask what of ‘post populism’, of the risk of a populist double dip.
I make all of these points, as a public servant, who believes in the political centre, believes in it in Ireland but believes that it is not a question of the centre holding.
Stasis does not hold in a dynamic world – the centre must always be renewed and must always regenerate.
When it comes to defining populism the most persuasive analysis that I have read is by the Princeton academic Jan-Werner Müller.
According to Werner Müller, a populist will always set themselves against a supposed elite by framing themselves as representing the “real people”.
So the populist revolt is against not just the elites but also the people who are insufficiently supportive of the revolt. Populism opposes pluralism.
The second key feature of Müller’s definition is that the institutions of the state are themselves biased against the populists.
Any defeat of the populist is a defeat of the people.
Institutions stand in the way of the will of the people.
Any defeat can be blamed on flawed institutions. And democracy is proven to be flawed in that ‘the people’ didn’t win.
THE LIBERAL ORDER
So let us look at the key features of the liberal order.
The liberal international order that emerged in the wake of the Second World War had four distinctive features:
First, an increasingly open international economy and a belief in the mutual benefit of global trade.
Second a commitment to rules and institutions, both national institutions such as politically independent judiciaries, and independent media as well as supranational institutions such as the EU and the U.N.
Third, a belief in democracy and open societies as the optimal domestic political system.
Finally, America as the system’s underwriter and guarantor.
Underpinning these individual features was a fundamental belief that the arc of human progress always tilted towards the ascent.
These features shaped not just the liberal democracies that espoused them but the rest of the world as well. Ultimately this order created globalization.
That integrated network of global trade, immigration, communication, and the financial system, has pulled more people out of poverty than any other force in the history of the world.
Its achievements are extraordinary. But it has changed the context for the liberal proposition. It created forces that have undermined, for too many, core features of the liberal offering.
HAS THE LIBERAL ORDER FUELED THE GROWTH OF POPULISM?
I believe that we can identify three promises of liberalism to help understand the growth in populism – the promise of equality of opportunity, the commitment to redistribution and the consequences of interdependence.
Equality of opportunity has become a defining feature of social justice in liberal societies.
Prime Minister Gordon Brown in 1996 stated that “Equality of opportunity should not be a one-off, pass-fail, life-defining event but a continuing opportunity for everyone to have the chance to realise their potential to the full.”
American leaders, over many generations articulated the same world-view. For example President Barack Obama’s observation, “Now, as a nation, we don’t promise equal outcomes, but we were founded on the idea everybody should have an equal opportunity to succeed. No matter who you are, what you look like, where you come from, you can make it. That’s an essential promise of America. Where you start should not determine where you end up.”
Louis D. Brandeis was typical of the founding fathers of American New Deal liberalism in contending that “Democracy rests upon two pillars: one, the principle that all men are equally entitled to life, liberty and the pursuit of happiness; and the other, the conviction that such equal opportunity will most advance civilization.“
This became a central policy goal of most parties on the centre-left and centre-right. Equality of opportunity means a level playing field. A chance for someone to achieve the most they can with the capabilities they have.
Amartya Sen, who won the Nobel Prize for Economics, offered a more complex definition. He suggested that equality of opportunity should be understood to include an individual’s capacities.
It is not enough to simply create opportunities, a person must be supported in such a way that they can avail of those opportunities.
This more nuanced definition of equality of opportunity opens a deeper exploration of the consequences of not delivering this agenda.
Social mobility became a crucial metric of understanding whether this agenda of equality of opportunity was delivered.
Research into social mobility often refers to the so-called “Great Gatsby Curve”, which takes its name from the inequality and class distinctions in America during the Roaring 20s.
In simple terms, it demonstrates a clear negative relationship between inequality at a point in time and intergenerational social mobility –more unequal societies are less mobile.
It is much harder to climb the ladder when the rungs are very far apart.
Nearly a century from the era of the Great Gatsby social mobility continues to atrophy in many western societies. However it is different from the inequality that drove the lack of social mobility in that era.
The OECD has found evidence of a middle-class divide between the lower and the upper middle classes since the 1990s and fewer chances for people moving from the middle-income to the top income quintiles in many democracies.
Today’s global story of winners and losers has been hugely beneficial for the middle classes in developing economies and the super-rich.
This is illustrated in another famous curve, this time the ‘elephant curve’ which shows very significant gains for the emerging middle class in the developing world whereas the established middle class in the developed world have seen relative decline.
At the same time, the very wealthiest have made exponential gains. It is unsurprising that a powerful political reaction has ensued.
So if the core commitment of the liberal order to ensure consistent progress and improvement in living standards is not met whose fault is it?
That has become a common enough question for seeking to understand the growth of populism.
But if equality of outcome is not reconcilable with the aspiration, incentives and capacity of a market economy, then the opportunity agenda becomes, as I have argued, central. Personal capacities have become part of this definition.
So the reaction to failure becomes even more personal.
This is compounded by changes in the nature of capital.
Since the 19th century, the concept of comparative advantage has been used to argue that international trade could be more than a zero sum game.
For most citizens in the developed and developing nations the benefits of growing international trade were clear for the second half of the twentieth century.
However popular perceptions of this have changed.
Now globalisation is seen by many as something which, far from addressing inequality, exacerbates it.
I have just spoken about the income and social mobility consequences of this.
However the changing nature of capital is also crucial in understanding this perception.
A major challenge to this redistributive role and capability is the changing nature of wealth, of assets and of capital. The changes are increasingly clear.
First – capital is absorbing a growing share of national and global income.
Second – the returns on capital are exceeding the return on labour, or to state the latter more plainly, the income that citizens receive from their work.
Third – the nature of capital is profoundly changing. Intangible capital absorbs a growing share of national and company capital.
A noteworthy example of this is a recent analysis of a leading technology company, which estimated that the traditional assets of plant and equipment equated to only 1 per cent of the company’s market value.
The texture of economies has profoundly changed, and quickly. Capital is more valuable, more invisible and more mobile.
Sources of wealth are harder to understand and literally harder to see. The traditional tools of redistribution have to work harder.
One of the key features of the liberal economic order has been ever increasing national and international economic interdependence.
This interdependence was seen as a prudent diversification which would protect our economies, our financial systems and our banks.
Diversified risk, we were told, was reduced risk.
The global financial crisis seemed to argue the opposite.
Such a tsunami of instability, a contagion borne out of mutual economic and political interdependence threatened the very foundations of our economies.
One of the key features of the political liberal order was the sharing of sovereignty between national and supranational institutions.
This is perceived by some to have reduced freedom where it is needed – for example to determine national budgets exclusively – while at the same time increasing freedom where it is harmful – for example perceived uncontrolled migration due to freedom of movement of people.
Populists have found fertile ground in this fear.
They have sought to reclaim the middle ground by portraying the economically rational as ‘ideological globalists’.
Institutions that are meant to symbolise mutually beneficial interdependence such as the EU have become lightning rods for populist anger and dissatisfaction.
Ireland is fortunate to have only a few minority viewpoints that echo the worst of populist movements elsewhere.
But we should not comfort ourselves with complacency or delude ourselves that we are somehow immune from the populist reaction to liberal democracy.
The political centre must respond to this.
Confident in making the case for what has been achieved.
But equally confident in challenging our underlying assumptions and policy approach.
With regard to equality of opportunity Ireland has had positive income growth over many decades which has transformed living standards across the country.
While we dropped from fifth in 2008 to eleventh in 2013 in the UN’s Human Development Index, we have since recovered and in 2018 were placed fourth in the world.
However we are not doing as well in social mobility as this performance might suggest.
The OECD has demonstrated that it is on average five generations before a person in the lowest rung will have an opportunity for their descendants to rise.
Ireland is very much mid-table in terms of mobility – ahead of much of the Anglosphere, but considerably behind the best performers in the Nordic countries.
As the OECD has noted that insofar as there is a silver bullet that Governments can apply it is education.
We are well placed to make this case, and must build upon it.
We continue to have one of the best education systems in the world with excellent mathematics and reading performance at primary and second level and high participation and progression rates at third level.
We can see the impact of this in the labour market, with strong demand for skilled Irish graduates and sustainable wage growth across the economy.
However many challenges remain, not least the levels of young people not in employment, education or training , the imperative to increase participation rates at third level from people with disabilities and from disadvantaged backgrounds and the related requirement to maintain our commitment to redress the historic under-investment and policy emphasis on early childhood education.
In responding to these obstacles to greater social mobility, the Government has prioritised increased levels of lifelong learning and participation in apprenticeships and traineeships in our ‘Future Jobs’ plan.
Meanwhile, in recognition of the very high social return on investment in early years, we recently commenced our ‘First 5’ strategy which will double investment in early education over the next decade integrate it far more closely to our primary school system.
Our work in the North East Inner City is an example of a new approach by government to old and difficult challenges.
When it comes to redistribution the last number of years have seen significant challenges in Ireland as we continue to deal with the consequences of the financial crisis.
This Government has worked hard to create a positive work and jobs environment which has facilitated significant and continued improvements in standards of living for the vulnerable in our society.
The crisis highlighted the critical importance of redistribution to our economy and our society. When unemployment peaked at nearly 16% in 2011 that safety net gave so many people, so many families, critical support.
Our redistribution policies and systems are effective. Even today in markedly changed times our social welfare and redistribution system continues to perform strongly to support improved outcomes.
The latest figures show just under one third of the population was the at-risk-of-poverty before social transfers, a number that was almost halved after social transfers.
The effectiveness of our system of redistribution system means that Ireland continues to be one of the best performing EU countries in reducing poverty through social transfers.
However we need to supplement the success of our performance in redistribution with a renewed emphasis on policies that seek to tackle income inequality before redistribution.
A large part of this work involves making markets function better in the public interest – what the US political scientist Steven K. Vogel calls “marketcraft.”
Rather than to minimise government intervention in the market, we should instead optimise the manner in which we craft markets to work in the public interest.
Equally we must have the intellectual honesty to recognise where markets do not work and a clear and robust understanding of their limits.
In addition to inequality of market income, an unequal distribution in the ownership of assets is a distinctive feature of the contemporary political economy.
This is why the Government is prioritising two key areas that seek to enhance the pre-tax allocation of economic gains.
Firstly housing, where initiatives such as the Land Development Agency, which are modeled on best practice in Germany and the Netherlands, will intervene within the market to improve the supply and affordability of housing in important locations.
Second pensions, where the introduction of auto-enrolment will provide greater economic security for the many workers who currently do not have a supplementary pension.
This policy agenda tackles access to assets, not just access to income.
And then interdependence.
Ireland that sees the benefits of interdependence through the prism of our membership of the European Union.
When the president of the European Commission addressed the Dail in June he said that Ireland stood at the heart of Europe.
This is a national sovereignty that is shared, not lost.
Membership of the EU has brought Ireland great benefits. Being part of the Single Market and the Customs Union have been key pillars of our economic development. It has allowed access to a market of over half a billion people and has helped us cultivate a capacity which has allowed us to trade globally.
We have been empowered by our membership of the EU.
It has allowed us to take different journeys than our friends in the UK and to have a very different relationship with the concept of the EU.
But cannot allow our membership of the EU to be defined by Brexit.
As a small open economy we are dependent on our European partners to deliver action and progress on a whole range of issues that have a very tangible impact on every Irish citizen.
Most people understand that to address climate change, to protect data privacy or to address terrorism we need European collaboration and community.
So we need to continue to maintain the breadth of our engagement in the European project.
Whether this be on banking union, making the case for an open Europe or the nature of European engagement in Africa – our engagement in Europe will not be defined by the decision of any country to leave the European project.
Populists in Government & the ‘Double Dip’
As I stated at the start, the big difference in the analysis of populism in 2019 is that it is now as much a method of governing as opposing.
Some have warned that populists in government will corrupt public institutions and cling to power, undermining democratic norms in the process.
Others have suggested that populist governments are usually so incompetent that they prove short-lived.
Yet others, including the political theorist Chantal Mouffe, have talked up the positive potential of left populism, and implied that critics of these movements are simply defenders of the failed status quo.
Given the variety of such views, consider a potential ‘double dip’ of populism, either or both could happen:
The first dip is that a populist agenda achieves either government or power but cannot achieve the objectives of a defining project.
Who is left to blame?
As a thought experiment, imagine the very hardest of Brexit consciously occurs in line with the agenda of the hardest Brexiteers.
But the consequences include a significant reduction in living standards across the UK and there is limited scope to achieve big trade deals without further impacting on the living standards and working conditions of the UK population.
Who is left to blame? None of the answers to this question are good.
A second dip would be the role of institutions.
Markets co-exist with institutions within the liberal order.
Markets can deliver better outcomes for citizens (not just shareholders) when institutions perform their roles well.
But what happens if populism undermines the ability of institutions to perform this role?
Say the EU that cannot complete banking union or a Central Bank that cannot fulfill its mandate due to lack of implicit political support.
Imagine if market outcomes actually got worse? Again the question is who gets blamed and again there are no good answers.
The new narrative that develops on foot of this double dip is one of betrayal. In the process, the well of public debate and political engagement becomes ever more poisoned.
That is the scale of our challenge.
However, let us also recall the extraordinary progress the liberal order has achieved;
States who adhered to its norms respected the rights of their citizens, a free press and democratic debate.
Poverty reduced and living standards improved.
The demons of tribalism, nationalism and racism that nearly destroyed Europe on two occasions in the twentieth century were largely vanquished.
And co-operation and multi-lateralism replaced the Hobbesian conception of a war of all against all that characterised the previous international order of inter-state competition.
So we cannot and should not retreat from the central principles of that liberal order.
That doesn’t mean that we step back from the challenges populism poses.
What it does mean is that we, centrist politicians, need to do better at explaining what is done well and countering the populist narratives that say there is an easy fix if only we blamed someone else.
What it does mean is that we, moderate voters, need to challenge our politicians to do better and accept that in a liberal democracy effective Government requires compromise.
What it does mean is that we, Irish citizens, need to rage against the claim of the dying of the light and strengthen the liberal order against the tides of populism that can sometimes seem pervasive.
But the liberal order of today cannot be the same as that of yesterday. That is not a recipe for stasis, it is the inevitable slippery glide to stagnation.
Ireland can do this.
From early years’ intervention to increased ownership of assets such as pensions, this thinking is underway.
We need to make this case and continue to renew and reiterate it.
In Europe the heart of our challenge lies in the need to better connect the profound vision of the founding treaties of the European Union with the daily reality of the lives of our citizens.
In part this means a better functioning Eurozone and stronger economic performance.
However, we should also seek to go further by embedding a greater public purpose in the political and institutional dimensions of the European Union.
The forthcoming European Parliament elections offer those of us who want to align Europe closer with the aspirations of its citizens the ideal platform to make this case.
A case must be made for the European liberal order, in this week of all weeks.
I want to make it and thank you all for the opportunity to do so today.
Check against Delivery
Meeting of the Budget Oversight Committee, 16th January 2019
Opening Statement by the Minister for Finance and Public Expenditure and Reform, Mr. Paschal Donohoe, T.D.
At the outset, I wish to thank the Committee for the invitation to appear here today as part of your ex-post scrutiny of Budget 2019 and I look forward to a fruitful and positive exchange.
I would like to take this opportunity to touch briefly on some of the key milestones that have been reached recently in terms of the public finances.
In terms of the outturn for 2018, for the first time in over a decade, our public finances are balanced in cash terms. This is not an insignificant achievement given where we were only a few short years ago; the main budgetary metric for international purposes is the ‘general government balance’ and this will be reported by the CSO at end-March.
However, based upon the Exchequer figures, a small general government surplus is now possible. A modest deficit of 0.1% was projected in the recent Budget. We are now aiming to deliver a surplus of 0.1% which represents an over-achievement on this target.
To achieve this Exchequer (cash) surplus we used the 2018 revenue over-performance, albeit largely driven by Corporation Tax. This represents a positive development in terms of reducing our overall debt burden as the day-to-day running of the central Government is being met from within resources and we are not borrowing to fund these activities.
In 2019, current expenditure will grow by 3.9% compared with the 2018 outturn. In 2018, the equivalent growth compared to 2017 was 5.6%. However, much of this increase was driven by overruns in the Health sector. If we exclude growth in Health expenditure current expenditure grew by a more modest 4.8% in 2018 compared to 2017.
Turning to the outlook for this year, in assessing our Draft Budgetary Plan, the European Commission, the body charged with formally assessing our compliance with the EU rule, has assessed Budget 2019 as being compliant with the fiscal rules and have projected that we will achieve our medium term budgetary objective this year. However, this of itself does not represent grounds for complacency.
Indeed, it should be noted that our debt burden remains highly elevated at 105% of GNI* versus a comparable 87% for the euro area and reducing this must be our priority. In that context, at Budget time, my Department projected a balanced budget in headline terms, moving to a surplus thereafter. However, given that the external economic outlook is deteriorating, the probability of a disorderly Brexit is rising and quantitative easing is ending – driving up our borrowing costs, our policy approach should be to target larger surpluses to build up our fiscal buffers for when times become less favourable.
It is my intention to run budget surpluses into the future if the economy continues to perform strongly and to use them to reduce our national debt. Furthermore, any windfall receipts that arise from the State reducing its involvement in the banking and financial sectors will also be used to pay down public debt.
A notable feature of well-performing small open economies is that they typically operate budget surpluses when their economies are operating close to potential. From a budgetary perspective, this facilitates the building-up of fiscal capacity which can help mitigate against future negative risks and potential shocks.
This approach has also enabled these states to increase public expenditure sustainably, with incremental spending increases based on solid, structural improvements to their economies thus avoiding a pro-cyclical policy approach.
Sustainable expenditure management has enabled these Member States to expand the volume of public services delivery without increased funding being absorbed through inflationary pressures. Furthermore, these countries enjoy a high stock of public infrastructure as investment is maintained. This in turn improves economic competitiveness, increases growth potential and improves both the standard and quality of life for their citizens.
Notwithstanding this, our public finances continue to move in the right direction and this is testament to the sound, sustainable fiscal policies we have implemented over the past number of years. Our task, going forward, will be to continue to build on these hard won gains and to ensure that our public finances remain on a stable and secure footing.
Some of the policies I have committed to implementing in this regard include the establishment of a Rainy Day Fund from this year which will increase the State’s resilience to potential economic shocks. In addition, by continuing to maintain a broad and stable tax base we can ensure that the State continues to be financed properly.
The rate of VAT in the hospitality sector increased to 13.5 per cent from this month. This measure allows me to reduce our over-reliance on increases in other tax heads, such as Corporation Tax and allows me to continue to broaden the tax base.
In recent years, different measures have represented a positive move in this direction. In addition to the VAT change, measures include the introduction of USC, local property and sugar tax. For 2019 these are projected to raise revenues equivalent to approximately 1.5 per cent of GDP or 5.7 per cent of overall general government revenue.
These measures also underline my commitment to responsibly manage the public finances and maintain a broad tax base.
Furthermore, it is my intention to publish a set of proposals in the coming period aimed at reducing our over-reliance on Corporation Tax.
At this point, I would like to acknowledge the work of the Irish Fiscal Advisory Council in relation to Budget 2019, in terms firstly of their assessment and endorsement of the Macroeconomic forecasts underpinning the Budget as well as for the analysis set out in the November 2018 Fiscal Assessment Report (FAR). I welcome the observations of the Council and I recognise the important role their reports play in bringing greater transparency to the budgetary process. My response to the FAR will issue shortly and will be available on my Department’s website.
I would also like to acknowledge that I am in agreement with many of the points made by the Council in the FAR, including their assessment of the economy’s strong performance as well as the key risks it is facing – mainly external in origin such as Brexit, rising trade protectionism and an evolving international tax environment – these are similar to the main risks identified in the Autumn forecasts published by my Department as part of Budget 2019.
One of the issues that arose at the meeting of your Committee on the 5th of December with members of the Fiscal Council, was the charge that my Department faces ‘serious challenges’ in predicting Corporation Tax receipts. In fact, a widely recognised feature of our Corporation Tax base, is its high concentration of receipts among a small number of firms, leaving this tax head much more exposed to sector and firm specific developments.
A further complicating factor in forecasting this tax head is the budgetary timetable, which means that the second instalment of annual Corporation Tax does not fall due until November, a full two months after the forecasts have been finalised. In addition, the Revenue Commissioners and my Department both rely on information from companies around expected profitability, which can often be under-estimated. In fact, the Council in a 2016 review of the challenges forecasting Irish Corporation Tax, indicate this is due to the concentration of receipts amongst a small number of firms (mirroring our export sector). IFAC acknowledge forecasting Corporation Tax has traditionally been difficult in Ireland. They test a number of alternatives to my Department’s methodology and these provide a slightly better outcome, but still provide a large variation versus forecast. They conclude this suggests the importance of idiosyncratic developments in explaining annual movements in Corporation Tax.
A second charge that was made at the meeting on the 5th December, was that Budget 2019 was based on a ‘relatively benign outcome’ in terms of Brexit. However in Chapter 6 of the Economic and Fiscal Outlook document, alternative Brexit outcomes apart from this central scenario were explored. Indeed, the possibility of a ‘no deal’ Brexit has influenced policy decisions made in relation to the public finances in terms of our stated aim of balancing the books and investing in capital infrastructure. This is also why I am adopting measures to ‘build-up’ our fiscal buffers, so that our economy is well placed to withstand the impact of possible adverse economic shocks. By running a balanced budget this year and targeting budgetary surpluses beyond 2019, we are ensuring that we do not add to our already elevated levels of public debt.
A third issue raised at your meeting was the assertion that the medium-term spending projections lack credibility given the probability of expenditure overruns. I would point out that when preparing the expenditure allocations beyond 2019, the ceilings are prepared on a prudent and contained basis, which maintains allocations across all spending areas and which takes account of demographic factors in the areas of Health, Social Protection and Education. In addition, the overall spending projections include a separate unallocated provision. This amount is distributed across Departments in the context of the annual budget process to reflect developments, for example, in public service pay and pension agreements. In adopting this approach to forecasting, my Department is mitigating against the risk of simply restating ceilings and applying inflationary increases. This approach would lead to expenditure baselines ratcheting ever upwards, and would pre-empt the space for rational and prudent discussion of policy priorities.’
Turning to the expenditure side more generally, I will first give a brief overview of the outturn for 2018. At the end of the year, total gross voted expenditure was just over €63 billion, made up of €57 billion in current expenditure and €6 billion in capital expenditure. This amount is €1.3 billion, or 2.1 per cent, ahead of profile for the year. Of this, €1.1 billion relates to current expenditure, while €118 million relates to capital expenditure. This is broadly in line with the projections for the year set out on Budget day last October, when additional spending was announced for 2018 in a number of areas, primarily in support of our key social priorities of Health, Housing and Education.
These priorities are also reflected in the allocations for 2019, which were published in the Revised Estimates Volume last December. This year, the Government has allocated a total of €66.6 billion in gross voted expenditure. The vast majority of this is for day-to-day current expenditure, amounting to €59.3 billion, with a further €7.3 billion allocated to capital expenditure. Funding for the key day-to-day public services of Social Protection, Health and Education together account for 80% of total gross voted current expenditure.
The allocation for Health for 2019 is over €17 billion, reflecting our commitment to supporting our health service. However, given the scale of this allocation, I am also acutely aware that the last number of years have seen overspends in this area which impact on the overall level of resources available for public services. With this in mind, there is ongoing engagement between my Department and the Department of Health in relation to how we can best manage this expenditure and ensure that the provision of these additional resources is matched with increased levels of accountability and transparency in expenditure matters, in particular by senior management within the Health Service Executive.
Housing has also been prioritised for 2019, with an overall allocation to the Department of Housing, Planning and Local Government of over €4 billion. This represents a significant increase in year-on-year terms, in particular in relation to capital expenditure which has increased by over 20% compared to the 2018 outturn. In terms of Education, this years’ allocation amounts to €10.8 billion, an increase of over 5% on the 2018 outturn.
Looking more broadly at Expenditure policy in recent years, the FAR refers to the ‘rapid pace’ of spending growth between 2015 and 2018, noting that this was largely driven by in-year increases in spending. In assessing the Council’s criticisms of recent expenditure policy, it should be noted that expenditure growth in the post-consolidation period has been significantly more modest than what was seen in the pre-consolidation period.
Indeed, from 2003 to 2008, gross voted expenditure grew by 63%. In comparison, from 2014 – 2019, gross voted expenditure is set to increase by 23% or just under 5% per annum on average, as set out in section 2.2 of the Budget 2019 Expenditure Report.
I should add that this return to modest, sustainable increases in public expenditure is not to be taken for granted, and reflects the disciplined approach to which I am committed as Minister for Public Expenditure and Reform, and to which the Government is committed. If I were to listen to the many demands made from different quarters, and from lobby groups of various colour, and if I were to accede to even one-half of these demands, then I can assure you that public expenditure growth would not have been managed below 5% a year over the last three years.
Instead, we need to use this period of relative economic strength to deliver improved public services in a planned and steady manner, within the resources that are made available. Looking specifically at expenditure management from 2015 onwards, this goal has been accomplished, subject to a significant additional allocation of resources to meet Healthcare funding needs as I have previously stated. When we take this into account, and also factor in the Government’s decision to reinstate the annual Christmas bonus, then unplanned deviations across all other sectors of Government spending are very small indeed, at approximately 0.4% over the last four years.
Finally, returning again to the higher than anticipated revenue generated in 2018 from Corporation Tax discussed earlier, it should be noted that these revenues are facilitating important Government initiatives, including support for capital investment.
Further, it should be noted that although there was a not insignificant ‘once-off’ element to the increase in receipts in 2018 the over-performance also arose from a combination of enhanced trading conditions and increased product sales. Corporate profitability has almost doubled since 2010 and saw annual growth of just under ten per cent in 2017. Capital expenditure can play an important role in mitigating risk and increasing the resilience of our economy. As set out under the National Development Plan, 2019 will see an increase in capital investment of over €1.5 billion or 24%. This means, with a total allocation of €7.3 billion in 2019, that we are in a position to provide a sustained increase in the delivery of social housing, meet our commitments in relation to school places and transport infrastructure and progress the delivery of important projects across many sectors of our economy. The Government is not going to apologise for using this period of strength in our Corporation Tax receipts to accelerate infrastructural investment in the areas where we need it most.
In summary, insofar as expenditure management is concerned, the Government has a record of steady increases in support of social and economic development of our country, at much more sustainable levels than in the past; and moreover these planned increases are being delivered on-budget and on-time across virtually all areas of public expenditure. I do recognise that there are particular challenges and pressures within the Health sector where management and accountability practices are now being stepped up.
To conclude, the commentary around our economy tends to fluctuate between the risk posed through overheating on the one hand and the challenges arising from Brexit on the other. As Minister for Finance, the best course of action open to me is to maintain stability in the public finances, build up our fiscal buffers for when times become less favourable and balance our books.
I would like to thank the Committee again for the opportunity to speak here today and I am happy to address any questions you may have.
Check against delivery
Speech by Minister Paschal Donohoe TD
Launch of two commemorative coins to mark the 100th anniversary of the first sitting of Dáil Éireann
16 January 2019
I would like to thank Governor, Philip Lane, and the Central Bank of Ireland for producing these beautiful coins.
This a significant coin theme marking 100 years since the first Dáil assembled and I would like to thank the Lord Mayor for hosting today’s launch in this wonderful, and very apt, venue.
The First Dáil
On Monday next, the 21st of January 2019, a century will have passed since the elected representatives of Ireland met in this very building and established an independent parliament for Ireland called “Dáil Éireann”.
Twenty-seven names were recorded as present on that date but over forty Members of the first Dáil were unable to attend on account of being either imprisoned or on-the-run.
The first meeting of that first Dáil lasted a mere two hours.
Two of the most significant hours in the democratic history of this country; two formative hours in the birth of the Irish Republic as we know it today.
The Members adopted a Provisional Constitution, approved a Declaration of Independence and a Democratic Programme, and read and adopted a Message to the Free Nations of the World[i].
An impressive amount of work for any Dáil to get through at the best of times, and these were not the best of times.
Dark clouds were gathering. On the very same day, the first shots in the War of Independence rang out in Soloheadbeg in Tipperary. The gunfire would not silence for many years to come.
In the Mansion House, the Declaration of Independence was read, first in Irish, then in French and, finally, in English.
That Declaration ratified the Irish Republic that had been proclaimed on Easter Monday 1916, and asserted that “the elected Representatives of the Irish people alone have power to make laws binding on the people of Ireland”.
It should not be overlooked that the Members of this first Dáil had been elected in the General Election held a month earlier on the 14th of December 1918.
This was the first General Election to be held since the Representation of the People Act 1918 had almost tripled the Irish electorate from 700,000 in 1910 to 1.93 million.
Working-class men over the age of 21 were able to vote for the first time.
Women had finally won the right to vote as well, an achievement recently remembered in a commemorative coin launched in Leinster House on 20 November last year.
This was the beginning of universal suffrage in Ireland, and the results were seismic.
Following what was by far the biggest exercise in democracy seen to date on the island, parliamentarians gathered here in a reflection of the will expressed by the Irish people to have their own Government and institutions.
The first Dáil reaffirmed the resolution of the people of Ireland to secure and maintain complete independence.
Not independence for its own sake, but independence
“in order to promote the common weal, to re-establish justice, to provide for future defence, to insure peace at home and goodwill with all nations and to constitute a national polity based upon the people’s will with equal right and equal opportunity for every citizen”.
These values – peace, justice, the interests of all of the people, good international relations, and equal rights and equal opportunities – are timeless.
They remain as fundamental to the work of the thirty-second Dáil as they did to the work of that first Dáil.
To achieve those values, the first Dáil established a system of government based on a classic separation of powers.
This tripartite system provides the necessary checks and balances to help ensure that the values we hold dear are maintained, even in inclement times.
Article 1 of the first Constitution of Dáil Éireann created a legislature in the form of the Dáil, and an executive in the form of “Aireacht” or Ministries[ii].
Separately, a system of courts was also being established.
It might seem a little odd to recall, at this event, some words of Winston Churchill, who was Secretary of State for War during the time we are commemorating.
I will do it anyway, as those words are so fitting. In 1947, he said –
“No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time”.
The democratic structures established 100 years ago in this Mansion House were built on firm foundations.
They have changed a little down the years, but the fundamentals endure to this day.
Our system of government and our electoral system preserve that century-old vision that all voices should be heard, and that the interests of all of the people should be served.
I am delighted to be here at today’s launch to mark such a significant commemoration.
Commemorative coins are an important way by which we recognise the people and events that are important to us as a nation.
Today we remember those first elected representatives who gathered together in this building at half-three in the afternoon on a January day 100 years ago.
We also remember the important foundations they laid that started our journey to becoming the confident, modern, outward-looking country we are today.
It is important that we value those foundations and work to maintain them.
I would like to again thank the Lord Mayor for allowing us the privilege to hold this event in the oldest mayoral residence in Ireland or Britain, and the oldest free-standing house in Dublin.
Finally, I’d like to thank the Central Bank for all the work involved in bringing this initiative to fruition.
These coins are a wonderful way to commemorate one of the most important events in Ireland’s recent history.
Address by Paschal Donohoe T.D.,
Minister for Finance and Public Expenditure and Reform,
Peterson Institute for International Economics
Washington DC, 11 December 2018
Check against delivery
Ladies and gentlemen,
It is a pleasure to be back in Washington, and to be here this morning, at the Peterson Institute for International Economics.
Institutes and think tanks such as this play an important role as forums for analysis, discussion and debate on the themes that shape the global economy.
As a policy maker, I recognise the vital contribution that independent analysis and commentary provides.
The Institute’s capacity to gather such a broad range of expertise over the years is why it has been able to maintain itself as such an important voice in American and global debates.
And, indeed, why you have been voted the best economic think tank in North America for the past three years.
Before we begin, I would like to pay tribute to the memory of the late President George H. W. Bush, and the important contribution he made to ending the Cold War and the division of Europe.
Because ending this division made possible the united Europe of freedom and security that we enjoy today.
When the Berlin Wall fell, President Bush imagined a new world order taking its place, ‘a world where the rule of law supplants the role of the jungle; a world in which nations recognise their shared responsibility for freedom and justice; a world where the strong respect the rights of the weak.’
This vision of a world order based on the rule of law, backed by strong global institutions, has been a defining characteristic of how we in Ireland, a small country, outward-looking and open to the world, believe the international order should be arranged.
And central to our vision is a strong transatlantic relationship, in which Europe and the United States work together to uphold shared values and principles, and to promote prosperity and well-being for our people.
So this morning, I want to speak of that transatlantic relationship, its past and present.
And I want to look to the future.
To the role Ireland might play, post Brexit, in bridging the Atlantic.
A Modern Ireland-US Relationship
In the weeks leading up to this visit I have enjoyed ‘Capitalism in America’ by Alan Greenspan and Adrian Wooldridge. It charts the history of your economy.
The first chapter, ‘A Commercial Republic’ describes the catalysts of economic transformation between 1776 and 1860. It identifies the laying of the first transatlantic cable on 28th July 1866 as a key moment, creating integrated transatlantic financial markets. It neglects to mention that the departure of the vessel that began this project was from Valentia Island, off the West Coast of Ireland.
So, from the very first transatlantic cables to the passenger liners of the early twentieth century, to the busy air routes above our skies today, the Atlantic Ocean has been a highway between Ireland and the United States, carrying people, goods, hopes and ideas.
Ours is a shared history of connections.
Of family ties built over generations.
Of political ties, built on values and beliefs held in common.
Of countless business, cultural, academic, and sporting ties.
These bonds of friendship and cooperation that cross the Atlantic have helped shape the Ireland in which I grew up, and the Ireland of today.
The United States made a central contribution to the search for peace in Northern Ireland, through the leadership, support and encouragement shown by US Presidents and politicians, including of course, Senator George Mitchell and many others.
We remain thankful for the achievement of the Good Friday Agreement.
In the twenty years since it was signed, it has provided the basis for peace, stability, reconciliation and cooperation on the island of Ireland.
It also created a new opening in relations between Ireland and the United Kingdom.
I will say a few words about this in a moment.
But for now I want to talk about the contribution the United States has made to development of the Irish economy.
I was nine years old when President Ronald Reagan visited Ireland in 1984. In an address to our Parliament, the President celebrated the fact that 300 American firms had invested there, employing some 40,000 people.
Three decades later, the number of US companies Ireland hosts has more than doubled, while the employment they create has increased fourfold – a reflection of the substance underlying investment.
Why have US firms built such a strong presence in Ireland?
No single reason, but many.
A common law, a common language and a connected culture, reflected in the 33 million Americans who claim Irish heritage.
A pro-business environment, underpinned by a tax code which is not only competitive in rate, but – more importantly – stable, simple and transparent in function.
A talented labour force, with Europe’s youngest population and one of its best educated.
And linked to this – most critically, I believe – an openness.
Not just to investment, but to people.
When we joined the European Union in 1973, less than 5% of Ireland’s population was born overseas.
Today, that number is 17%.
Our workforce is the third most international in Europe.
We’ve come to recognise, I think, that our nation’s greatest strength is the strength of our welcome.
That ‘cead míle fáilte’ – one hundred thousand welcomes – is more than a common Irish greeting. It’s a national creed.
That while we are an island people, we are the very opposite of insular.
And that far from being on the periphery of Europe, we are at the centre of the transatlantic economy.
Combined with access to the world’s largest single market of 500 million consumers, it’s this attribute, above any other, that has made Ireland a natural home for US investment.
A Two-Way Street
At the same time, Ireland is investing in the US.
Because in the 21st century, transatlantic trade and investment is not a one way flow. It’s a two way street.
According to the US Bureau of Economic Analysis, Ireland’s investment in the US totalled $147.8 billion dollars last year; a stake in the US economy larger than countries many times our size.
More than 500 Irish companies have facilities here.
What do these firms do?
They build American homes – from CRH / Oldcastle, this continent’s largest asphalt producer; to Kingspan, a market leader in advanced insulation, Irish firms are at the cutting edge of US construction.
They save American lives – Aerogen’s revolutionary aerosol delivery system, developed in Galway, has improved health outcomes for more than 2.5 million Americans. Icon’s award winning research and development services have led to the approval of 18 of the world’s 20 best-selling drugs.
They sustain Americans – whether in the form of Kerrygold, America’s third largest butter brand; McCann’s, one of its favourite imported cereals; or the advanced nutrition products of Kerry, Glanbia and others.
And, of course, they employ Americans.
Over 100,000 to be exact. Across all fifty states of the Union.
The success of our companies abroad is rooted in the health of our economy at home.
From a point of crisis, our country has made remarkable progress over the past few years: rebalancing our public finances; restoring our competiveness; returning to near full employment.
This year, our economy is forecast to grow by 7.5%, on the back of 7.2% last year.
We look forward to growth of 4.5% in 2019.
Our unemployment rate is down to 5.5%.
We have come a long way, through hard work and commitment.
We are committed to continuing this work, to provide the greatest opportunity for our people to realise their ambitions and potential.
And the greatest support and protection, for those who are vulnerable in our society.
But we recognise the challenges that will impact on our ability to pursue further growth, and to provide these opportunities and supports.
One of these, of course, is Brexit.
The Challenge of Brexit
We are at a historic moment.
Ireland and the UK joined the EU together, forty five years ago.
In the decades since then, we have grown closer, by working together as partners in the EU.
The United Kingdom is our closest neighbour and our friend. We are bound together by geography and by a shared history, culture, kinship and trade.
I deeply regret that our British friends have chosen to embark on a different path, even if, of course, I respect their decision to do so.
The British Parliament has been considering the terms of the Withdrawal Agreement, and the accompanying Political Declaration on the shape of the future relationship that the UK will have with the EU after it is left.
There is much at stake.
For the United Kingdom.
For Ireland, the EU Member State that will be most directly affected.
For all of the other members of the European Union.
And indeed for the United States; a close and valued partner for all of us.
It is a weighty decision, one that I hope our British friends and partners will consider carefully.
Crucially for Ireland, the Withdrawal Agreement guarantees, through the backstop arrangements in the Protocol on Ireland and Northern Ireland, that there will be no hard border on the island of Ireland in any circumstances.
From the very beginning, protecting the Peace Process and the Good Friday Agreement – and the open border on the island of Ireland that is so central to both – has been a priority for the Irish Government.
We also set out to protect the Common Travel Area between Ireland and Britain; to minimise the impact on our trade, jobs and our economy; and to reaffirm our place at the heart of a strong and prosperous European Union.
On each of these priorities, we have reached a satisfactory outcome.
And equally importantly, the Withdrawal Agreement secures a transition period, during which much will remain unchanged, providing certainty to citizens and businesses.
Looking forward, we want to see the closest possible relationship between the UK and the EU.
The ambition to achieve a deep and comprehensive partnership between the EU and the UK set out in the Political Declaration is very welcome, and we will work to make this possible.
This is a carefully balanced agreement.
As with any such negotiations, there have been compromises on both sides.
Let me be clear. There is no scope to reopen the Withdrawal Agreement.
Preparing our Economy
We are not under any illusions about the challenges that Brexit will bring. For our economy, for businesses, for our citizens, and for the way we engage with our British friends once they have left the EU.
We are working hard to prepare, and to be ready for all scenarios.
Since the UK referendum in 2016, Brexit has been embedded in the Irish Government’s economic decision making, and in the management of our economy.
We have already taken important steps to prepare.
And, due to the sound policies of recent years, Ireland is facing the challenge of Brexit in a robust economic position.
But there is no room for complacency.
In our budget for 2019, we have continued the overall approach of prudent financial management, to strengthen the resilience of Ireland’s economy.
We are working to build up our fiscal capacity, and to pay down debt, so that we have the buffers to cope with uncertainty and to weather future shocks.
Over the next decade, we will invest €116 billion – more than a third of our GDP – in long-term critical infrastructure, while keeping current expenditure in line with economic growth.
Our Government’s enterprise agencies continue to work with a wide range of companies, helping them to deal with Brexit – making them more competitive, diversifying their market exposure, and up-skilling their teams.
And while Brexit will pose undoubted challenges, there will be opportunities as well, and the Government will work to maximise those where possible.
We will be the only country in the EU that is an English speaking, common law jurisdiction.
We have a young, well-educated population and the Government continues to build a business friendly environment, for businesses large and small, foreign and domestic.
We will remain open to business and talent – from the United States and elsewhere.
The world economy is increasingly interconnected and interdependent. Globalisation and the digitalisation of the economy continue apace. This presents challenges to policymakers in a number of areas.
But especially in the field of international taxation.
In a world of click bait and soundbites it is difficult to explain how some companies seem to be able to avoid paying their fair share of tax.
Policymakers have faced up to this challenge.
In this regard that I welcome the recent reforms to the US tax code. We are seeing evidence of US companies re-patriating historical profits to be taxed in the US.
I believe the changes introduced combined with the widespread implementation of the BEPS recommendations will have a major impact.
We in Ireland have been playing our part.
Ireland’s Corporate Tax Roadmap was published in September and outlines the actions Ireland has taken, and the actions that will be taken over the coming years.
Further to legislating for a new Exit Tax, new Controlled Foreign Company rules and the BEPS Multilateral Instrument this year, our tax administration has worked bilaterally with its counterparts in Malta to bring about an end to the so-called Single Malt scheme.
The agreement will mean companies will no longer be able to use the bilateral treaty to avoid tax.
You may be aware that Ireland has principled objections to the EU’s proposed Digital Services Tax.
There is no agreement on this proposal, and negotiations are set to continue until March. We will continue to voice our principled opposition.
I firmly believe that a globally agreed sustainable solution to the challenges digitalisation presents is best achieved at the OECD.
We are working very closely with our partners at the OECD, including the US Government.
We share significant common ground. For instance, we both agree it is best to seek consensus on a way forward rather than countries taking unilateral action and both have faith that the OECD will deliver a solution.
We are like-minded in the belief that the solutions to these challenges are within the corporate income tax system rather than taxing turnover. This principle encourages investment and growth which ultimately benefits wider society.
It is in everyone’s interest that the ongoing work results in an international tax framework that is sustainable into the long run to provide certainty to business and to governments into the future.
Ladies and gentlemen,
Our EU membership has been central to the success of our small, open, trading and competitive economy. It has enhanced, not diminished, our sovereignty.
Only last Monday night, I sat with twenty six other European Ministers of Finance negotiating a way forward for deeper and more secure monetary union. This is an expression of sovereignty, not the erosion of it.
Membership of the Single Market and Customs Union is a core element of our economic strategy.
Access has allowed our economy to prosper and has greatly assisted in attracting business.
It has given us full access to EU trade agreements with other major markets and a capacity to engage in global free trade that we could not possibly have on our own.
I would like to see discussions progress towards a trade agreement between the United States and the EU, as I believe both our economies would stand to benefit.
I believe that the open, rules-based global trading system has contributed to raising living standards on both sides of the Atlantic, and throughout the world.
The EU is a home which we have helped build. And while there are many challenges, the Irish Government is confident that we can work together as twenty seven countries, to deal with those challenges.
We are committed to remaining at the heart of the EU.
And while Europe is our home and our closest marketplace, our horizons are broader.
Under a programme called ‘‘Global Ireland’’, we are leading an ambitious extension of Ireland’s international footprint.
This includes strengthening our embassy in Washington, and a new consulate in Los Angeles.
We are expanding our Development Aid programme.
We are campaigning for a seat on the UN Security Council in 2021.
We are taking these steps to position Ireland for the future, in our increasingly inter-connected and inter-dependent world.
A strong Ireland-US friendship within a wider partnership between the EU and the United States is an essential part of our vision.
In celebrated novel TransAtlantic, the Irish writer, Colum McCann, remarks on the multitude of connections and intersections – great and small – that criss-cross the ocean between us.
How true that is also of the great relationship between Ireland and America.
Hewn from the hopes, aspirations and contributions of countless women and men who have crossed our shared Atlantic to build homes and lives on each other’s side of it.
This rich multiplicity of connection sustains the transatlantic ties on which our shared prosperity rests.
Ireland will play its part to strengthen and grow these bonds of friendship so that the Atlantic continues to be a rich and vibrant highway of people, goods, hopes and ideas, binding us together.
Thursday 6th December 2018
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Speech by Minister Paschal Donohoe, TD
2018 European Investment Bank and Department of Finance “Investing for the Future” Conference
Good morning ladies and gentlemen.
You are all very welcome to today’s conference on “Investing for the Future”.
This event was organised by my department and the European Investment Bank and is very kindly hosted by Governor Lane and his colleagues at the Central Bank of Ireland.
I would like to start by welcoming EIB Vice President Andrew McDowell.
our own director of the EIB, Des Carville;
and Cormac Murphy who heads up the Dublin office.
President Hoyer is travelling to Ireland for this event and I am looking forward to discussing Ireland’s very successful and positive engagement with the bank with him when we meet later this evening.
I would also like to thank all the other officials who have travelled from the EIB’s head office in Luxembourg to be with us today and tomorrow.
We are now at a stage when we need to secure additional EIB funding for areas outside the traditional areas of engagement. This is particularly true in relation to private sector engagement.
In this regard, today’s conference promises many interesting panel discussions on topics which I hope you will find interesting, engaging and topical.
They are relevant to you, the bank as a lender and the Government as policy priorities.
There are three things I hope you take away from today:
The first takeaway is a greater understanding of the scale and breadth of the EIB and to appreciate how it can benefit member states;
Secondly a greater insight into what the Government and the State are doing to assist industry in the key areas covered by the panel discussion today;
I will leave the third and final mystery takeaway until the very end of my address.
First Takeaway – Benefits of EU membership and the EIB
Let us start with reminding ourselves what the EIB is and what it represents.
It has been at the centre of Europe since being established by the Treaty of Rome in 1958 and it celebrated its sixtieth anniversary this year.
It is the world’s largest international public lending institution and has been active in Ireland for 45 years.
Furthermore access to its funding and expertise is one of the many benefits of our membership of the European Union.
Just to touch on this latter point first: In these times it is important that we acknowledge and appreciate the broad range of benefits our membership of the EU bestows.
And I am glad to see recent research indicates that the citizens of Europe see and appreciate how membership of the EU benefits them.
The most recent Eurobarometer survey of approximately. 28,000 people across 28 Member States showed that almost two thirds of citizens believed that their country benefitted from membership of the EU.
This is the highest score ever measured since 1983.
What was very notable from an Irish perspective was that this figure rose to 81% in terms of Irish respondents.
This was the second highest score in the EU 28 and is consistent with many other polls which demonstrate that we are resolutely pro-European.
We have been and continue to be committed Europeans. This is never truer than the present moment given the current developments in relation to Brexit. While we do not support the withdrawal of the UK from the EU, we do acknowledge the outcome of the Referendum and, as you know, we are working very closely with our EU and UK colleagues to ensure that the impact will be minimalised on all of our people and businesses. Regardless of Brexit, Ireland’s future is very much in Europe and with the EU.
We know that we have benefitted from EU membership in a wide variety of ways. Some of these benefits can be intangible such as the peace and stability in Europe.
But it is important to celebrate tangible benefits such as the EIB, which directs 90% of its activity towards EU member states.
The EIB is the largest multilateral financing institution in the world with a Triple A rating from the top three rating agencies.
To give you a sense of scale, its balance sheet had loans outstanding of over €450 billion at the end of 2017 and current lending activity is approximately €60 billion per annum.
It has lent over €1.3 trillion over its life.
Since Ireland joined the EC in 1973, the bank has supported 449 Irish projects to the tune of €17 billion.
Some of its first Irish projects in 1973 included companies such as Irish Sugar, IAWS, CIE and Golden Vale.
The largest project here to date was €490 million for the National Children’s Hospital. The economic and social impact of such support and commitment shown by the EIB to Ireland is clear.
The EIB Group, which is comprised of the bank and the European Investment Fund, lent just over €1bn in Ireland in 2017 and is on track to achieve a similar figure this year. I would like to congratulate and thank everyone who was involved in helping us achieve this goal both in Ireland and in Luxembourg.
Last week the EIB announced €30m investment into Dublin based biotech pioneers Nuritas.
You will hear some fascinating case studies throughout the day including innovative agri-tech company Devenish Nutrition.
These are new areas of activity for the EIB in Ireland and demonstrate the breadth of products which the bank offers.
President Hoyer and Vice President McDowell will be signing tomorrow a Gas Networks Ireland project and there are also other signings today and tomorrow involving renewable energy and the future BREXIT loan Guarantee scheme.
The range across these examples clearly shows the widening and deepening of the Ireland/EIB relationship over recent years and the level of shared imagination and ambition between us. I look forward to further new areas for the future.
Alliances are very important in Europe, especially for smaller countries such as Ireland, and the EIB is no different.
EU Member States are in nine shareholder groupings called constituencies. Each constituency has its own Vice President at the bank.
Whilst large European countries like Germany and France have their own constituencies, smaller countries are joined together into a number of group constituencies.
We are in a constituency along with Denmark, Romania and Greece. When you think of it, it is actually a very diverse yet a very representative group with a Nordic, an eastern country, a southern country and an island.
Our constituency’s right to appoint a Vice President is shared equally amongst the four countries. Currently we hold the vice-presidency, which is very capably held by Andrew McDowell who you will hear from shortly.
Our director, Des Carville, sits on the board, the Risk Policy Committee and is an alternate member of two other board committees.
We have a dedicated team within my Department which deals with policy matters regarding the bank and supports our director and myself in my capacity as a Governor of the bank.
The bank opened a Dublin office, headed by Cormac Murphy, in 2016. It will relocate from Mount Street to the NTMA’s new offices on North Wall Quay next year.
The bank employs over 90 Irish nationals in its workforce of over 3,000 including its Head of Legal and Head of Internal Audit.
So our dedication to, involvement with and belief in the EIB has never been higher.
Second Takeaway – Government Action
The second takeaway, is to hopefully come away with a better understanding of what the Irish Government and State are doing through the various departments and agencies to assist industry in the key areas covered by today’s panel discussions.
Housing is a top priority for this Government.
My colleague Minister Murphy will be talking this morning along with representatives from two new dedicated agencies created to address the housing shortage; Home Building Finance Ireland and the Land Development Agency.
I am delighted to have announced this morning that the legislation for Home Building Finance Ireland was signed by the President earlier this week so I expect it to commence its lending activity early in the New Year.
Minister Bruton will speak about his intention to make Ireland a leader in tackling climate change and the need for the private sector to play a key role in achieving this.
Just before your lunch in the Central Bank’s Exhibition Centre, my colleague Minister D’Arcy will discuss Ireland’s recent Green Bond which highlights our ambitions for building a sustainable, low carbon society through sustainable finance.
After lunch, I am delighted to see that the Funding for Growth Panel will include representatives from the Credit Union sector, which my Department has policy responsibility for, and the SBCI as it is a body under the aegis of my Department.
Finally, just before EIB President Hoyer’s closing remarks you will be joined by my colleague Minister McEntee to give you a perspective on Brexit and the EU post Brexit.
So in the issues that matter to you, the Irish Government is proactive and engaged.
Final Takeaway – networking
The third and final takeaway really is no mystery – it is an action point.
Today is as much as anything a networking event. I hope you will be able to stay for the day and network over lunch, the coffee breaks and the drinks reception later.
This is a great opportunity to renew or make new connections with the bank through Werner, Andrew, Des and Cormac and their colleagues throughout the day.
Hopefully you will be better informed about the bank and what it offers and can find a way to tap into its resources for your companies or for your client companies.
Before I hand over to Andrew, I would just like to once again thank Governor Lane and his staff in the Central Bank for the kind use of their facilities today.
 LU was highest at 85%; CZ was lowest at 34%; HR 36%; IT 39%
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Good Afternoon ladies and gentlemen, honoured members of Chartered Accountants Ireland.
Thank you for welcoming me here today.
I would like to start off by acknowledging the success of the President of the Institute, Feargal McCormack, at the British Accountancy Awards in September.
His firm, PKF-FPM, took home no less than three awards.
For an independent Northern Ireland based firm this is a phenomenal achievement and I congratulate you and all your colleagues.
I am aware that a number of you here today are finance professionals from the public service and are members of other Accountancy Bodies such as CIPFA, CIMA and ACCA. You are most welcome.
Great Brunswick Street
Every time I have had the opportunity to walk through the gleaming, striking facade of this building I am minded to reflect on what a strong vote of confidence in the future of your organisation the redevelopment of Chartered House was.
Right here in the centre of Dublin this pioneering headquarters, education and training centre forms a bold canvas for your work in the years to come.
Indeed the ground on which we stand has a long storied strand in the grand history of our fair city.
An almanac from 1862, not long before the Chartered Accountants of Ireland was established by Royal Charter in 1888, shows that this area was a hub for a wide variety of occupations from gas light inspectors to coal merchants.
They were all important professions of the age. Key enablers for the society and economy of the time to function.
What is Accountancy in 2018?
Popular culture loves a good stereotype. A caricature of a profession and those who practise it.
The old impression of your profession sitting in their back offices, totting up figures and speaking a language that largely unintelligible– does this resonate with what accountancy is in 2018?
Standing here with you today in Chartered House, looking out onto an audience of dynamic female and male business leaders and shapers, I don’t think anything could be further from the reality.
Accounting is not some staid, Dickensian craft.
Accounting is the language of business.
At the Centre of the Economy
You are at the centre of our economy, at the crossroads of a multitude of different companies and sectors.
Your profession is endlessly dynamic, rewarding and challenging.
The accounting, auditing and other services institute members provide allow Governments, investors, shareholders, employees and citizens to see through the fog and perceive the economic reality and the opportunities within.
I have spoken before on how we lost our sense of economic reality during the Celtic Tiger.
We lost track of the fundamentals of what a successful stable economy and society should and could be.
We sacrificed transparency and real innovation for something that was not real.
Years of hard work, sacrifice and prudent decision making has us back to strong economic growth and back in control of our finances.
But we must not forget lessons we have learned the hard way.
That we cannot bet our prosperity and society on unsustainable illusions.
Accounting is the language of business and economic reality. It is the base upon which all sustainable and innovative economies are built.
You must be the vanguard of speaking this language fluently and audibly.
Of applying the many improved and reformed accountancy standards and rules which our economies and societies needed and demanded.
But more than that the institute is a key hub and incubator for a new culture of clarity, transparency and passion.
Paul Collier, the Oxford based economist writes the following of institutions in his new book ‘The Future of Capitalism’ that “institutions encapsulate the accumulated social learnings from a range of experience too vast to be known by any individual”.
This is a key role for all of you, of supporting professionals in their development for norms and standards.
Norms where diversity of thought and innovation go hand in hand.
Our regulators have spoken extensively of the importance of culture in financial services firms.
But I believe true cultural change is impossible if the practitioners and decision makers do not reflect our society.
To that end I am pleased to see the institute representing and encouraging opportunity for your female members.
One third of the governing council is female with a membership split of 60/40 male to female.
The student body is currently 51% female. This is a great indicator of the future but the systems must be put in place to allow the female leaders of tomorrow to step forward.
I am also heartened to see members of the institute as well as other accountancy bodies work and contribute to the public sector.
Indeed a number of my parliamentary colleagues are members of the institute.
Given how valuable the skillset set and perspective you possess is, I feel obliged to say what a huge contribution more of you could make to a public service which is rapidly modernising, changing and professionalising.
So if the opportunity came to serve and it worked for you please do consider it.
These are my challenges to you.
That is societies challenge to you. As an institute, as professionals and practitioners of the future.
To be leaders of transparency, diversity and innovation.
Speaking of economic realities, thankfully ours is a much improved one.
Our economy is in good shape, the latest data confirming that the strong growth we have experienced over the last number of years has continued into the first half of 2018.
Importantly domestic demand is now making a positive contribution to growth, reflecting the rising levels of consumer spending and the sustained investment by Irish businesses.
I am proud to be able to say that the strength of our economy is nowhere more apparent than in the labour market.
Job creation has continued at a robust pace over the last number of years, as a result there are now more people in work than ever before.
Greater employment opportunities have in turn helped to reduce the unemployment rate which is now at its lowest level in a decade.
The positive economic outlook in the recent budget should support the creation of 62,000 additional jobs next year.
Whilst the unemployment rate is expected to fall to just over 5 per cent.
We should not lose sight of the profound impact this has had on our nation and our people.
Every job added is a potential job seeker back on his or her feet and participating in the real economy.
A school leaver starting to make their way in the world.
A household building a better future for itself.
The strength of our economic recovery and the positive outlook for the years ahead reflect, not only the hard work we have endured as a nation but also the benefits we have enjoyed as a small open economy.
However our openness also means that we are particularly exposed to a number of risks in the years ahead:
• First and foremost there remains significant uncertainty around the outcome from Brexit;
• Secondly, given the importance of the traded sector in the Irish economy, any disruption to world trade, in particular from increasing protectionism, could significantly impact Irish growth prospects;
• In addition, a faster-than-expected normalisation of monetary policy in the euro area or changes in other jurisdictions that affect the competitiveness of Ireland’s corporate tax regime all have the potential to constrain our growth trajectory.
As we cannot directly control these risks, we must focus on mitigating against them. The best way to do so is through the prudent management of our public finances and by focusing on competitiveness-oriented policies.
By dealing with economic realities and not unsustainable illusions.
The strength of the economic recovery has been reflected in our public finances. In 2019 we will reach an important milestone, balancing the budget for the first time in a decade.
However this is not an end in itself, it is imperative that we continue to enhance the resilience of our public finances to ensure sustained economic growth.
That is why we are establishing the Rainy Day Fund.
The Fund will be capitalised with €1.5 billion from the Ireland Strategic Investment Fund and supplemented with an annual contribution of €500 million from the Exchequer starting from 2019.
Some of the historically high levels of corporation tax will be set aside for the purpose of capitalising the Fund.
We have not forgotten the lessons learned from the crisis.
You will be well aware of the recent significant developments on BREXIT.
After a lengthy negotiation process, a draft Withdrawal Agreement between the United Kingdom and the European Union has been agreed.
Importantly, this agreement satisfies our national priorities set out at the outset of the Brexit negotiations, namely to;
• Protect the Good Friday Agreement
• Maintain the common travel area and related benefits
• Reaffirm our place at the heart of the EU
• And protect trade, jobs and the economy
Of course, we cannot become complacent.
The risk of disorderly Brexit remains ever-present until the final text is ratified by both the UK and the EU.
Irrespective of the future relationship between the UK and the EU, we will face a very different world once the UK does depart.
The UK will inevitably become a ‘third country’.
The status quo will change.
Both Government and business will have to embark on this journey into this new world.
Although we will inevitably face many obstacles along the way, I am confident that working together we can and will overcome these challenges.
The International Focus and Team Ireland
A key part of overcoming this challenge is making sure we continue to build relationships.
The UK will remain a key relationship of course.
I know this remains a key priority for the institute and your President.
Feargal, as Managing Director of a thriving practise with offices on both sides of the border, you know what’s at stake and I am pleased that you have been such a strong voice for the business community in Northern Ireland.
And we need to continue to look to increase our engagement and partnerships within the EU and further afield.
And a key part of this is our diaspora.
In 2015 the previous Government published the first comprehensive articulation of national policy towards the Irish diaspora around the world.
A key part of this strategy is using our global scope to amplify the reach of partners like the Institute.
I was pleased to see the Institute engage so actively with our embassy network on the way to and during the World Congress of Accountants in Sydney earlier this month.
I note that Feargal met diplomats and local members in Abu Dhabi, Dubai, Sydney, Melbourne and Singapore.
And I see that he welcomed the 27,000th member of the Institute at a function at the Ambassador’s residence in Abu Dhabi.
I spoke before of accountancy as a language.
It is also a passport.
And nothing indicates that more than a successful young accountant receiving her membership of the Institute whilst living and working in the UAE.
As with accountancy rules and standards, our taxation system is evolving to reflect the changes in how we do business.
Bigger and increasingly globalised and digitalised companies need a tax system to suit.
Corporation tax, and global tax reform, remains very high on the international political agenda.
The OECD BEPS process has been the vehicle for major corporate tax changes in recent times and although its implementation is still in its early stages we are already seeing some fruits of that work beginning to emerge.
However it is important to understand that the international tax landscape is continuing to change and the key question remains as to how this can be achieved in the safest way possible.
My view, from the perspective as an open, small economy, is that this is best achieved by global consensus at the OECD.
So while change is inevitable, I believe that any changes must be designed for the long term.
for a situation whereby the call for quick fixes in this area are met is a cause for concern.
My concern is that some of these proposals are short-sighted and may cause difficulty in the longer term.
I do not support short-term measures nor do I support measures that transform corporation tax from a tax on profits to a revenue based tax.
I believe that the BEPS project shows us the best way to move forward – seek global agreement at the OECD and then seek to implement measures domestically, bilaterally and, where appropriate, through EU Directives.
For Ireland to have a credible voice in international discussions we must do our part in implementing the BEPS agreements.
Ireland has been an enthusiastic participant in the BEPS process from the start as a means of addressing the most egregious aspects of aggressive tax planning.
I published the Corporation Tax Roadmap in September to outline the substantial actions that we in Ireland have taken and will continue to take on international tax reform, some of which were announced in the recent Budget and are included in the current Finance Bill.
This year’s Finance Bill includes important legislation on Controlled Foreign Company rules and Exit Taxes.
The ratification of the Multilateral Instrument in this year’s Finance Bill is also an important step in Ireland playing its part, and it is expected that the final step in ratification will be taken in January next year.
We are already working towards implementing our future commitments and my Department published a detailed consultation paper on other aspect of the Anti-Tax Avoidance Directive very recently.
I trust that many in this room will be among those contributing important submissions to this consultation.
I would also highlight that role of industries and the professions is also important in the ongoing global debate.
Your profession has a key role to play and I would encourage you to engage positively by contributing to the ongoing international tax debate to ensure we end up with a system which addresses the challenges arising from the digitisation of the economy in a way which makes it fit for purpose and fair to all.
We live in challenging times.
As we look to the future, we must be cognisant of the elevated risks posed by Brexit, in addition to the risks posed by increasing protectionism and changes to the international tax landscape.
Given these challenges over the horizon, the government remains committed to ensuring that our economy is as resilient in bad times as it is dynamic in good times.
We are striving to run our economy, to set policy, to deliver public services in the best way possible.
And we ask the same of the Institute.
To be champions in this new era of transparency and innovation and diversity.
To think big and wide and to help others do the same.
To lead the way in best practise, to contribute to public discourse and to be partners and positive influencers within our economy and society.
Speech by Minister Donohoe to the Eversheds Sutherland Conference on Culture:
Leadership, Accountability and Culture in Financial Services
14th November 2018
I’d like to thank Eversheds Sutherland for inviting me here this morning, and in particular Ciaran Walker for moderating this event.
I know some of you heard me speak on this subject in Trinity a few weeks ago and you may be familiar with some of the points that I previously made.
However, these points bear repeating as they are vital elements of the dialogue necessary to drive cultural change within the financial sector.
I would like to assure you that I, and my colleagues in Government, are supportive of measures to change behaviour, operations and organisational culture within the financial sector, in order to keep the customer at the heart of its operations.
The culture review has been described as a watershed moment for Irish banks.
It comes at a time when culture is to the fore of the international discussion on banking practices, as illustrated by the roll-out of senior manager regimes right across developed financial systems.
As I said before, the true test of whether this is a turning point for Irish banks, and the financial services industry more widely, will be if we find ourselves with firms who truly do consider the impact of their business decisions on individuals, the economy and society as a whole.
Getting to that point is what requires a seismic cultural shift.
The culture of any organisation encompasses the collective values, beliefs and behaviours of its members, which contribute to its unique social and psychological environment.
Because culture is not just the procedures set out by management, or the laws that a business must follow, but is made up of the choices that each individual makes, it presents a difficulty for regulators and policy makers: changing culture is not as easy as simply changing the rules.
Nonetheless, we have an opportunity to bring about real change in the financial services industry – changes that are not reactionary, but proactive and carefully considered.
There are many good examples of what organisational culture means.
For example Herb Kelleher, founder of Southwest Airlines, offers the straightforward definition that culture is what people do when no one is watching.
Kelleher further elaborates on how his company achieves its goals of good organisational culture by ensuring that employees are put first.
‘If you truly treat your employees that way, they will treat your customers well, your customers will come back, and that’s what makes your shareholders happy. So there is no constituency at war with any other constituency. Ultimately, it’s shareholder value that you’re producing’.
At last month’s Central Bank conference in Trinity College, business leaders shared their experiences of working within frameworks of accountability and responsibility in other countries.
Their central message was clear – while leading change in cultural attitudes starts from the top down, we need to start talking to each other and learning from each other at all levels to achieve the goal of cultural change that we are striving for.
Ethical behaviour must be fostered from the top by the board of directors and senior management team, in what they do, say and by the examples they set.
Living examples of ethical principles by leaders will send a clear message that the organisational expectation is that good ethics must prevail to allow good business with a firm focus on consumer protection to flourish.
The opinion of the Central Bank in its report that ‘banks undertaking comprehensive organisational transformations (…) should place an emphasis on inclusive and collaborative leadership styles, aimed at integrating as many people and perspectives as possible’ lends itself to that same message.
The UK Financial Conduct Authority has some good practical examples of best practise and it is this that I am speaking about when I say we can learn from others in order to achieve the desired goal of good cultural environment that will benefit everyone.
I mentioned that I had taken time to reflect on the findings of the Culture Report; I am also taking time to consider how legislation can be used to best effect.
I am determined to adopt such a strategic approach in proposing and bringing through legislation that allows the Central Bank and firms within the financial sector to drive the necessary changes in culture.
My officials and I will systematically work on these proposals, as opposed to adopting a short term crisis response.
The Government’s objective is a sustainable financial services industry, with rewards reaped over the long-term for customers, staff, and shareholders. It is one where consideration of the impact on individuals, the economy and society as a whole is firmly embedded in organisational culture.
In changing to a culture more focused on individuals, the economy and society, we need to properly reflect the Latin origins of the word ‘culture’ – to tend to, to grow, to nurture – by cultivating new norms within the financial sector, as opposed to merely transplanting another set of rules.
Our study of political philosophy points to the importance of statute in creating the social norms which influence our everyday actions as citizens.
This wider societal norm applies equally within individual firms.
I was particularly struck by Derville’s previous citing of research which demonstrates that there is not a random spread of bad behaviour within the financial sector but that it is concentrated in certain banks and firms.
This demonstrates the need for common conduct standards throughout the banking sector to ensure fair treatment of customers and to ensure a level playing field for competition within the sector.
As I’ve previously stated, I intend to seek Government approval for a Central Bank Amendment Bill in early 2019.
In drafting the proposed legislation, my officials have been undertaking detailed analysis of how best to further enhance the regulatory and enforcement powers of the Central Bank.
My Department is engaging with the Central Bank and other stakeholders, while also evaluating best practice, including lessons from the UK’s experiences, in order to ensure that the legislation addresses the recognised failings set out by the Culture Report, while also being fit for purpose.
The Principle of Trust
Historically the core principle at the heart of the banking sector has been ‘trust’. This principle of trust was at the core of the Florentine banking system in the 14th Century, prior to the existence of legally enforceable regulation.
For the centuries since, trust has been at the core of banks’ operations.
I was particularly struck by Baroness Onora O’Neill’s comments at the Trinity conference when she stated that honesty and competency lead to trust.
The sector as a whole now needs to convince wider society that it can be trusted again so it can avail of its ‘social license to operate’.
Unfortunately in Ireland the bond of trust between banks and their stakeholders has been sundered.
The deep generational impacts of our financial crisis have left ordinary citizens suspicious of banks and bankers.
So trust needs to be restored at all levels of Irish banking.
Perhaps the definitive work on this subject is Francis Fukuyama’s ‘Trust’, published in 1995.
Fresh from predicting the ‘End of History’, he sought to establish the key factors that influence economic and social prosperity.
He concludes that the social virtue of trust is foundational.
Fukuyama views modern institutions as a necessary but not sufficient condition for prosperity and the social well-being it underpins in advanced societies.
For such societies to truly flourish, institutions need to be combined with certain communal social and ethical habits, of which social trust is the most fundamental.
His argument is particularly prescient in our present time as he warns that ‘we cannot take these older ethical habits for granted’.
In bringing forward legislation on foot of the Central Bank’s proposals and particularly when working with my colleague, the Attorney General, there three key tests I will apply.
First, is the legislative intervention appropriate?
At the Trinity conference, Professor Marco Lamandini caused us to ponder on the fact that the intensity of regulation can exempt people from thinking that they should act properly and in the best interests of customers.
Second, will it be proportionate?
It is crucial that any new accountability regime applies fairly to different staff within the bank and wider sector in terms of reflecting the importance and significance of their respective roles within their firm and the sector as a whole.
Finally, any such legislation must be effective.
There will be a cost to this regulation. Are the improvements worth it? We must be particularly cautious that we don’t drive consumers into lesser regulated sectors where costs are lower because of this, thereby putting them in an inferior position.
These considerations must be carefully adhered to in advancing the culture proposals that are robust and not open to challenge.
I previously articulated the key principles which I believe changes should focus on in order to impact banking culture. These are:
- Accountability; and,
These three principles set out many steps, which I will further elaborate on.
Responsibility should exist at both a personal and organisational level.
At the personal level, individuals must be empowered to speak up – within their own organisations, and to the Central Bank in cases where it is a regulatory matter.
The Central Bank’s proposals for common conduct standards could, if legally possible, play an important role in empowering bank employees to speak up by making it a requirement for them to do so when they witness wrongdoing.
It is also in the industry’s long-term interests to have people at all levels taking responsibility: whether that be the branch official taking responsibility for providing the customer with the most appropriate product, to the senior manager taking responsibility for innovations that improve the bank’s wider product offering to customers.
Accountability means not only being responsible for something but also ultimately being answerable for one’s actions.
A great deal of work has gone into making non-executive directors accountable for their actions, now this needs to be carried through to the executives, making senior management and middle management accountable for their decisions.
At the organisational level, responsibilities should be clearly defined and ownership taken.
If the sector is to advance, it is vital that those working within it are willing to innovate, and fail, while taking all of the reasonable steps to manage the associated risk.
This regime should be designed to call to account those taking unnecessary, uncalculated risks; who engage in moral hazard, who refuse to follow the correct protocols and processes, who lie to or mislead their colleagues and clients, and who knowingly commit wrongdoing.
It is for the protection of firms’ own reputations and the industry as a whole.
This regime should not be about taking action against any individual who has taken all the steps, caution and due diligence that could be reasonably expected, and is acting in good faith.
Most importantly, it is clear that changes need to be made to foster diversity and inclusion in the banking and financial services sector.
When we are cultivating the ‘right’ type of culture in banks, it must be one that is reflective of the broad spectrum of our society.
The Culture Report found that the banks have much more work to do in terms of ensuring their organisations are sufficiently diverse and inclusive, particularly at senior level.
I am aware that this is challenging given the stringent regulatory requirements for suitably qualified individuals.
Without diversity – of experience, perception, and thought – firms will be unable to prevent group-think, guard against over-confidence or promote internal challenge; all characteristics that were seen in banking in the lead-up to the financial crisis.
Some banks are taking the lead by publically setting themselves diversity targets, which is to be applauded.
These efforts need to be expanded and continually built upon.
The practical implementation of these measures will play a vital role in determining whether culture changes or not.
I will await the Central Bank’s recommended approach but the following broad thrust would appear to have merit:
A phased introduction – over time and across financial sectors.
In speaking I have focused on the banking sector but I see the logic in extending some of the Central Bank’s proposals to other financial sectors.
A consultative approach – hearing from all sides so as to identify potential unintended consequences.
Industry should engage with the Central Bank and my Department at an early stage to ensure that any valid and reasonable concerns about the regulatory changes are addressed.
Clear guidance from the regulator – however, this can only be guidance as the very spirit of changing culture is to foster a different and better approach, and firms must take the initiative to improve themselves.
Any new regulatory regime must be practicable and proportionate; here we can learn from the UK’s experiences with implementing a Senior Manager’s regime, what they found works and what doesn’t.
But again let me reiterate, the changes required here cannot be outsourced for a quick solution.
We can find and learn from examples of best practice, but at the end of the day firms must put in the work themselves.
On a practical level, my officials are working on what is legally and constitutionally possible with the assistance of the Attorney General and his Office.
The steps that industry are taking from their own initiative are also to be welcomed. I am pleased to note the launch of the public consultation by the Irish Banking Culture Board Establishment Office.
However, it is vital that we recognise that industry initiatives are not a substitute for regulation and will not supplant the proposed regulatory changes already in train.
There are challenges here for the Central Bank, for Government, and for industry.
I have said that the true test of whether this is a turning point for Irish banks will be if we find ourselves with firms who truly consider the impact of their business decisions on individuals, the economy and society as a whole. Working together, I believe we can achieve it.
Thank you very much for your attention.
Speech by Minister Paschal Donohoe, TD
Opening of Grant Thornton Offices
13-18 City Quay, Dublin 2
12th November 2018
Check against Delivery
Thank you for inviting me to officially open the new headquarters of Grant Thornton here at City Quay right in the heart of Dublin city.
This confident move is a testament to the hard work and great success you have enjoyed over recent years in Ireland and is a strong vote of confidence in the capability and future of your firm.
I congratulate you.
Much has been written on the dominance of the ‘Big Four’ in the space in which Grant Thornton now operates.
I note that earlier this year Grant Thornton UK announced that it was withdrawing from the audit market for FTSE 350 firms.
I am glad that Grant Thornton Ireland feels that the corporate landscape in Ireland for these kinds of services remains competitive and note that you see it as a key part of your strategy to grow the business.
The economy needs a wide variety of different operators of different sizes, specialities and skillsets and Grant Thornton has much to offer public and private clients.
Getting our bearings
Given we are but a stone’s throw from your old office there is clearly something to this area which drew you and kept you here. Let us get our bearings for a moment.
In front of us is the river Liffey, a waterway with a thousand years of economic pedigree to it.
To the Northwest of us stands Liberty Hall, long a focal point for the trade union movement in Ireland.
To our North East the docklands and the banking and financial services hub that grew up in the place of industries of old.
From fewer than sixty people working in the Dublin Docklands in 1987, the International Financial Services (IFS) sector now employs over 35,000.
We have a deep pool of staff, managers, professional advisers, regulators and service providers with sophisticated domain knowledge in the key mobile financial services sectors.
There are only a limited number of places in the world with such an ecosystem.
And just up the river a wave of modern technology companies have opened up yet another new frontier making Dublin one of the world’s premier tech hubs.
All of this is a real microcosm for some of the major elements of our economy and our society.
Directly across the river, in the middle of all of this, quietly sits the figure of commerce atop the dome of the Customs House.
Apart from all the hustle and bustle around her.
A solemn figure built atop firm foundations, a structure laid down for all to see.
I find that quite symbolic.
The Language of Business
A few weeks ago I addressed the Collins Institute on the great economic and political challenges we face domestically and internationally.
Years of hard work, sacrifice and prudent decision making have taken has us back to strong economic growth and back in control of our finances.
Yet we continue to wrestle with the consequences of painful financial mismanagement and strive to ensure this never happens again.
We lost our sense of economic reality during the Celtic Tiger.
We lost track of the fundamentals of what a successful stable economy and society should and could be.
Our political institutions, our banks and much more, stopped dealing with the real language of the economy and dealt instead with unsustainable mirages.
They sacrificed transparency and real innovation.
We paid dearly for this.
Accounting is the language of business. It is the communication of economic realities and the base upon which all sustainable and innovative economies are built.
The accounting, auditing and other services you provide allow Governments, investors, shareholders, employees and citizens to see the economic reality.
Now it was clear that there were deficiencies in some key accounting standards and rules which applied throughout economies across the developed world.
And extensive work has been done on improving these at both a national and international level.
The language of business has evolved to better serve our needs.
I note that this week Collins Dictionary announced its newly inducted Word of the Year – ‘plogging’.
The combination of picking litter and jogging.
The Grant Thornton Corporate Challenge 5k is a great success each year.
Might I humbly suggest incorporating some upper body work into the mix via plogging?
Other words of note inducted included ‘single use’.
As in ‘single use’ plastic items.
Our language evolves to reflect our evolving concerns in this ever changing world.
Clearly concerns around sustainability are to the fore here.
Sustainability in environmental terms.
In health terms. In economic terms.
And the language of business is no different.
The language has changed in response to real world economic problems and deficiencies.
And within these new rules, these new approaches, is the concept of a different culture.
One where transparency, diversity of thought and innovation go hand in hand.
But it will only ever be as good as those who speak it and teach it.
And that is where you come in.
As a firm, as individuals, graduates and seasoned professionals.
We need you to speak the language of business with ever more clarity, transparency and passion.
We need you to help businesses understand the present in a different way so they may better strive and innovate for the future.
Regulators have spoken extensively of the importance of culture in financial services firms.
In a city like Dublin, with its eco-system of accountancy firms, law firms, other advisors and combined labour pool, financial services firms are an important part of culture transmission in our society.
A phrase often attributed to Peter Drucker goes that ‘culture eats strategy for breakfast’.
So your culture is an integral part of what you do.
I am heartened to see how prominently cultural transformation and change features both internally and in the work that Grant Thornton does.
The new headquarters opened today by Grant Thornton is part of a major investment which includes training 240 of Ireland’s brightest graduates.
I applaud those who are beginning their careers, the young women and men who will start their professional journeys with accounting and associated services with Grant Thornton in this innovative and collaborative new workspace.
I note that Grant Thornton was named employer of the year in 2017 by the International Accounting Bulletin (IAB) and has been recognised consistently for its excellent workplace, so you are starting on fertile ground.
After many years of hard work and determination we once again have much more to offer our graduates than emigration.
We have the fastest growing economy in Europe and you are, thankfully, in a position where you have many choices.
Know that the choice you make now in following an apprenticeship in the language of business will be challenging and illuminating.
You are placing yourselves at the centre of our economy, at the crossroads of a multitude of different companies and sectors.
Some of which are small, some of which are large. Indeed many of which do not yet exist.
You have long rewarding careers ahead of you.
You will learn much.
I am sure many of you will move to a multiplicity of different firms over the courses of your careers and that is something to be applauded.
One thing I would like to see more of is some of you consider getting some experience in the public sector at some point.
It is quite common in the UK for financial services professionals to move in and out of the HM Treasury.
I believe this trend would be of enormous benefit to both financial services firms and the Irish public sector.
So if the opportunity ever presented itself to undertake a temporary ‘secondment’ to an arm of the state please consider it.
Then you can return to City Quay with another string in your bow or, as may well be the case, those of you who move to the public sector may decide to stay there, embarking on fulfilling and worthwhile careers.
To those experienced professionals who are the in the mid to senior echelons of Grant Thornton, much is required of you as well.
You have to speak the language of business in a way that embodies the transparent and innovative way our society and economy needs and demands.
As discussed previously, culture is key to all of this and ensuring the makeup of decision makers reflects society as a whole.
I am heartened by the clear buy-in management has in creating a culture of diversity and inclusion right at the core of the business.
The Embrace programme run by the Head of Diversity and Inclusion, Sasha Kerins, is a powerful statement of intent and I am pleased to see a pragmatic and data driven approach in understanding and assessing your progress.
The International Accounting Bulletin (IAB) recognised Grant Thornton’s Women in Business report with the Thought Leadership Initiative of the Year Award last year.
The Families blog by Sinead Donovan, the Gender Diversity blog by Maura Cronin, the Multicultural blog by Catherine Taguiling, the LGBT blog by William O’Carroll and much more on your website really give an insight into an organisation that is embracing change and a new way of doing things.
I will finish with a quote attributed to the King himself, Elvis Presley:
‘I have no use for bodyguards, but I have very specific use for two highly trained certified public accountants’.
Little could Elvis have known that they would become one in the same – we need strong, transparent and innovative financial services firms like Grant Thornton to safeguard our economies and our futures.
To speak the language of business in a way that protects us today and delivers future growth and prosperity tomorrow.
CHECK AGAINST DELIVERY
Opening Remarks and Thanks
I’d like to welcome you all here this morning.
I want to begin by acknowledging the work of Professor Blanaid Clarke and her colleagues in putting this conference together. I also want to particularly thank Blanaid for her eight years of service on the Central Bank Commission during some of its most challenging times.
I know that Blanaid’s fellow Commission members greatly appreciated her legal expertise and the academic rigour she brought to the Board.
Her work illustrates the importance of marrying the knowledge and expertise that exist within our universities with public policy and regulatory decision making.
It is my very great honour to give the opening address at this conference.
As some of you may know, I was a student here at Trinity, so it is a novel experience to be back here in the lecturer’s position, although I certainly don’t intend to lecture you.
This is the first opportunity I’ve had to speak at length on the issue of culture and diversity since, following my request, the Central Bank published its report on behaviour and culture in the five main retail banks in Ireland.
I have taken this time to reflect on the findings of the report, and to consider its implications.
The Edmund Burke Theatre is certainly an appropriate setting for a discussion about culture and values and while I was preparing my remarks for this address, I considered what he might have had to say on this subject.
One of Burke’s life-long concerns was the moral codes governing the behaviour of individuals as citizens and the social obligations that flow from participation in the commercial life of a society.
In keeping with this, one of the clear takeaways from the Culture Report is that employees in the banks did not feel able to speak up and stand up when something was happening, whether it was mistakes being made, poor processes and controls in place, or outright wrongdoing.
We will all face times when we have to choose between a quiet life and ‘doing the right thing’, but such choices are made even more difficult when the lines between right and wrong are blurred, and our colleagues and peers, people we admire, are engaged in the ‘wrong’.
However, in charting a course through these dilemmas, Burke provides clarity when he states that:
“There is, however, a limit at which forbearance ceases to be a virtue.”
It is easy to single out bankers, but we have many examples across many professions in this countrywhere an excess of forbearance has been damaging to public trust in our institutions and to our public life in general.
It is also easy to think that this is a problem confined to Ireland but it occurs across the world, as illustrated by the roll-out of senior manager regimes across developed financial systems.
Nonetheless, as members of society, regardless of our role, it is our moral obligation to make choices which will not be to the detriment to our community, not only in our work but in our everyday lives.
By making these statements I am not unduly criticising those working in financial sectors but instead encouraging them to speak up if they feel or know that something is wrong.
The culture of any organisation encompasses values and behaviours that contribute to its unique social and psychological environment.
One straightforward definition of culture that is particularly noteworthy is that ‘culture is what people do when no one is watching’.
Because this focus on culture is such a new concept in the spheres of banking and regulation, much of our understanding comes from the academic research in this area.
According to David Needle, lecturer of business at King’s College London, an organisation’s culture represents the collective values, beliefs and principles of its members.
It is a product of factors such as management style, and the organisation’s vision, norms, environment, and habits.
Taking this analysis, culture is not just the rules set out by management, or the laws that a business must follow, but is made up of the choices that each individual makes.
The nebulous intangibles of culture present a difficulty for regulators and policy makers.
Nonetheless, we have an opportunity to bring about real change in the financial services industry – changes that are not reactionary, but proactive and carefully considered.
I mentioned that I had taken time to reflect on the findings of the Culture Report; I am also taking time to consider how legislation can be used to best effect.
Many of the specific issues unearthed by the mortgage tracker scandal took place more than a decade ago. The regulatory landscape has been utterly overhauled since the financial crisis, with the Central Bank Reform Act 2010 and the Central Bank Supervision and Enforcement Act 2013.
Likewise, the European Single Supervisory Mechanism, which was introduced in 2014, changed regulation and supervision of the banking sector almost beyond recognition.
I want to assure you that the Central Bank of Ireland is acknowledged now as being one of the most robust and challenging institutions in Europe, and that so-called “light touch” regulation is a thing of the past.
Our Central Bank, like many public institutions, has learnt the hard way from the crisis and made radical changes to its own behaviour, operations and organisational culture. Now it is time for industry to do the same.
It was Christine Lagarde who said that:
“Those working in the financial sector must be as serious about values as they are about valuation, and just as passionate about culture as they are about capital”.
I, and the Government, are determined to drive the necessary changes. We are now fortunate to be in a period of growth, a chapter where we can take the time to do things properly.
The word ‘culture’ stems from the Latin meaning ‘to cultivate’.
My objective in legislating for expanded Central Bank powers, is to cultivate a sustainable financial services industry, with rewards reaped over the long-term for customers, staff, and shareholders, and where consideration of the impact on individuals, the economy and society as a whole is firmly embedded in organisational culture.
In order to achieve these objectives, I intend to seek Government approval for a Central Bank Amendment Bill in early 2019. In drafting the proposed legislation, my officials have been undertaking detailed analysis of how best to further enhance the regulatory and enforcement powers of the Central Bank.
My Department is engaging with the Central Bank and other stakeholders, while also evaluating best practice, in order to ensure that the legislation addresses the recognised failings set out by the Culture Report, while also being fit for purpose.
The banking sector is heavily regulated for a variety of reasons, including:
- its critical economic functions,
- the need to maintain financial stability, and
- the need to address the very significant information asymmetries between the bank and the individual consumer.
As part of this regulatory regime we must insist that individual customers are getting superior protections and better treatment.
We want to work in partnership with the Central Bank and the financial sector, as a change of culture will only work if there is buy-in on all sides.
Rules can change, but it is up to banks and firms themselves to put in the work to change attitudes and practices.
To that end, we are throwing down the gauntlet to industry to rise to the challenge and ensure the necessary internal changes are made.
This involves industry working constructively with the Central Bank.
Nevertheless, the Central Bank must fully rely on the credible sanction of enforcement to deter potential wrong-doing. However, this should not be to the detriment of cooperation.
Firms, and the individuals working within them, should feel confident in approaching the regulator with concerns at an early stage.
We want industry and individuals to take ownership and learn from mistakes.
I think this is something the Central Bank itself recognises, as the culture review gave it plenty of food for thought on how it interacts with industry.
It was back in October 2017 that I said it was clear to me that there were significant cultural failings in the banking sector.
In the year since, I’ve put much thought into what ‘good’ culture might look like.
There are three key principles which I believe the changes should focus on in order to impact banking culture.
- Accountability; and,
These three principles set out many steps, which I will now set out in further detail.
Responsibility should exist at both a personal and organisational level.
At the personal level, individuals must be empowered to speak up – within their own organisations, and to the Central Bank.
At the organisational level, responsibilities should be clearly defined and ownership taken.
The Responsibility Maps envisaged under the Senior Executive Accountability Regime should not be bringing new or ground-breaking concepts to industry, but rather formalising good governance practices as a regulatory requirement.
It is worrying to think that any organisation is not already clearly documenting its key management and governance arrangements, reporting lines or interaction with its parent company.
My own Department publishes its own Governance Framework on its website.
Regardless of whether there is a legal requirement to do so, it should be a basic management tool. And for any firm not already doing these things, it should be a wake-up call.
Accountability means not only being responsible for something but also ultimately being answerable for one’s actions.
A great deal of work has gone into making non-executive directors accountable for their actions, now this needs to be carried through to the executives, making senior management and middle management accountable for their decisions.
Accountability is not about scapegoating, and should not be used to create a fear of failure.
Regulatory powers to enforce individual accountability will not be used prosecutorially. Intent and actions taken are at the core of accountability.
This regime should be designed to call to account those taking unnecessary, uncalculated risks; who engage in moral hazard, who refuse to follow the correct protocols and processes, who lie to or mislead their colleagues and clients, and who knowingly commit wrongdoing.
It is for the protection of firms’ own reputations and the industry as a whole.
This regime is not about taking action against any individual who has taken all the steps, caution and due diligence that could be reasonably expected, and is acting in good faith.
Finally, and most importantly, it is clear that changes need to be made to foster diversity and inclusion in the banking sector.
When we are cultivating the ‘right’ type of culture in banks, it must be one that is reflective of the broad spectrum of our society.
The Ireland of today is vastly different to the one Edmund Burke inhabited, but often, it seems, that the balance of power remains in the hands of a homogenous few.
As the financial services landscape and society itself evolve, firms need to learn how to adapt.
For banks and other financial services firms, it can be difficult to strike the delicate balance between adhering to the strict obligations imposed by virtue of operating in a heavily regulated sphere, and the need to be nimble and responsive to customer and market demands in order to stay relevant.
Indeed, the Culture Report found that the banks have much more work to do in terms of ensuring their organisations are sufficiently diverse and inclusive, particularly at senior level.
Then again, the stringent regulatory requirements for suitably qualified individuals can often be self-limiting on the diversity front, and this is something that the Central Bank must also consider.
Without diversity – of experience, perception, and thought – firms will be unable to prevent group-think, guard against over-confidence, or promote internal challenge; all characteristics that were seen in banking in the lead-up to the financial crisis.
For the long-term future of the industry, there is a need for firms and those working in the industry to take an active part in mentoring and outreach programmes that encourage participation by a more diverse range of people.
This is also the time for firms themselves to step up, and we can see that some banks are taking the lead by publically setting themselves diversity targets, which is to be applauded.
But these efforts need to go beyond a single dimension of diversity, and must be at all levels, particularly senior and middle managerial positions in order for the benefits of diversity and inclusion to truly be reaped.
The practical implementation of these measures will play a vital role in determining whether culture changes or not.
I will await the Central Bank’s recommended approach but the following broad thrust would appear to have merit:
- A phased introduction – over time and across financial sectors;
- A consultative approach – hearing from all sides so as to identify potential unintended consequences. Industry should engage with the Central Bank and my Department at an early stage to ensure that any valid and reasonable concerns about the regulatory changes are addressed.
- Clear guidance from the regulator – however, this can only be guidance as the very spirit of changing culture is to foster a different and better approach, and firms must take the initiative to improve themselves.
There needs to be a clear move by banks and industry away from incentivising short-termism and rewarding behaviours that negatively impact on individual customers, and the wider economy and society.
This will require changes to performance related salary structures, to how firms view and treat their employees, and to organisational strategies and goals to move towards more holistic priorities.
I am interested to hear the views of participants on how best to implement a regulatory approach to culture.
There are challenges here for the Central Bank, for Government, and for industry.
The culture review has been described by some as a watershed moment for Irish banks.
I think the true test of whether this is a turning point for Irish banks, and the financial services industry more widely, will be if we find ourselves with firms who truly do consider the impact of their business decisions on individuals, the economy and society as a whole.
I trust there will be plenty of spirited debate from today’s panellists and I look forward to hearing the variety of opinions on culture and behaviour, and learning from them.
As I finish, I will leave you with a few more words from Burke, which I hope will colour your perspective on today’s discussions:
“It is not what a lawyer tells me I may do; but what humanity, reason, and justice tell me I ought to do.”
Thank you very much for your attention.
23rd October 2018
Check Against Delivery
Speech on the Finance Bill 2018 by the Minister for Finance and Public Expenditure & Reform, Paschal Donohoe TD
A Cheann Comhairle, I move that this Bill be read a second time.
Two weeks ago I made my Budget statement in this House.
I noted that a decade had now passed since the financial crisis.
In a dynamic and ever-changing global environment, the Irish economy continues to strengthen and grow.
A record number of our citizens now have jobs.
Our public finances are balanced for the first time in a decade.
We have made remarkable progress and the dark days of crisis have passed.
But many risks remain, in particular, the political, economic and diplomatic challenge of our generation that is represented by Brexit.
That is why it is critical that we continue to enhance the underlying strength and resilience of our economy.
In order to build resilience we must continue to manage out public finances responsibly and keep our tax base broad, stable and sustainable.
When I made my Budget statement in this House two weeks ago I said that Budget 2019 was designed to secure our future.
It is a progressive budget with an emphasis on strengthening our national finances.
It is a responsible Budget for a modern and caring Ireland that aims to position us at the centre of a changing world.
Many of the changes required by the Budget are contained in Finance Bill 2018.
I will shortly set out the Bill in more detail but firstly I would like to look at some of the key themes running through it.
FINANCE BILL THEMES
Income Tax and USC
This Finance Bill delivers on our commitment to continue to make targeted changes to the income tax system within available resources and make steady and sustainable progress in reducing the income tax burden, focusing on low and middle income earners.
To ease this burden, the Bill will increase the entry point to the higher rate of income tax for all earners by €750, raising it from €34,550 to €35,300 in the case of a single worker.
The third rate of the Universal Social Charge will be reduced from 4.75 per cent to 4.5 per cent to give a further targeted benefit to low and middle level incomes.
As I said on Budget day, this Government believes that workers enter the higher rate of income tax at too low a level of income. The impact of these changes means that the top marginal rate on incomes up to €70,000 will be reduced to 48.5 per cent and fewer people on incomes around the national average will have any income subject to the 40 per cent rate of income tax.
The Bill will also provide for a modest increase in the ceiling of the second USC rate band from €19,372 to €19,874. This is to ensure that the salary of a full-time worker on the minimum wage will remain outside the top rates of USC, following the increase in the hourly minimum wage to €9.80, which will take effect from 1 January 2019.
Also, for families where one spouse works primarily in the home to care for children or other dependants, I am happy to announce an increase to the Home Carer Credit of €300. This brings the value of the credit to €1,500 per year and is expected to benefit around 85,000 working families.
For self-employed workers who make up an important part of our economy, the Earned Income Credit will be increased by a further €200 to €1,350.
To support the single affordable childcare scheme, I propose to amend section 194A of the Taxes Consolidation Act 1997 to ensure that payments to childcare providers under the scheme do not give rise to tax liabilities for the parents. It is not my intention that payments under the scheme should give rise to tax liabilities for parents or guardians.
In the absence of any legislative relieving provisions, the payments made under the scheme would fall to be taxable, as they are made on behalf of the parent/guardian as a contribution towards the crèche fees. The effect of the proposal will also be retrospective to ensure that payments already made under similar administrative schemes are also exempt.
Moving now to the areas of employment and enterprise, it is timely to recall the commitment set out in the Programme for Government to support a leap forward in the capacity and performance of our enterprise sector. The Bill contains a number of measures relating to the Key Employee Engagement Programme (KEEP), the Employment and Investment Incentive (EII) and the Start-up Refunds for Entrepreneurs (SURE), which seek to advance the agenda.
The take-up of KEEP has been limited so far so I intend to double the ratio of share options to salary and increases the total value of options from €250,000 to €300,000. Currently the company can grant options to the particular employee/director up to a maximum of €250,000 in any three year period. I now propose that the company can grant options to the particular employee up to a maximum of €300,000 in any period, i.e. a lifetime limit from that company for that particular person. The €3,000,000 overall KEEP limit remains for companies, and employees are not restricted from entering into future KEEP arrangements with future employers.
As deputies may be aware, following significant changes to the EII and SURE in last year’s Finance Act, I asked my department to arrange a comprehensive review of these incentives with a focus on their efficiency and effectiveness.
Having considered the recommendations contained in the recent report by Indecon Economic Consultants, I am proposing a package of measures.
Firstly, I am proposing changes to the application procedure for the incentives to a largely self-certification model. This will address the most significant problem with the current design of the scheme relating to delays in the application process. While primarily self-assessment, it is important to note that under the proposed new arrangements, companies may ask Revenue to confirm that they have met the requirements for General Block Exemption Regulation (GBER) compliance. I think that this is a fair support for many companies and investors given that they may not be familiar with EU State aid rules.
Secondly, the new text also provides for a specific investor eligibility regime for investment in very small enterprises – the Start-up Capital Incentive. In particular and in accordance with EU State aid rules, connected persons are permitted greater freedom to invest, in limited amounts, in very small start-ups.
Thirdly, the section includes a very substantial consolidation and updating of the current text of Part 16 (EII and SURE) of the Taxes Consolidation Act 1997. The aim is to make the scheme more intelligible for stakeholders. In addition, the draft brings forward a number of technical adjustments to the incentives, which seek to simplify and clarify the legislative provisions.
It also includes an anti-avoidance measure where, in the case that a holding company sells a subsidiary and the money is returned to the holding company, the holding company must now return the capital to the investors immediately rather than, as at present, where it can retain the proceeds for the remainder of the four years without triggering a clawback of relief.
Finally, in light of the substantial review just undertaken, I also propose extending EII and SURE by an additional year to the end of 2021; this is consistent with the procedures set out in my Department’s Tax Expenditure Guidelines.
This is a priority package to address the main shortcomings identified with the scheme. I intend that other issues raised in the Indecon report will be addressed in a subsequent Finance Bill.
Looking now to the film industry, the film tax credit acts as a stimulus to the development of an indigenous audio-visual industry, to support the expression of Irish culture and the creation of quality employment opportunities in the State. The relief is currently scheduled to end in 2020. In view of the long lead-time for film productions, I am providing now for a four-year extension of the credit, until December 2024, to provide the certainty the industry needs in order to continue to grow.
To support the development of the sector beyond the current established hubs, I am also introducing, subject to State aid approval, a new, short-term regional uplift for certain productions made in areas designated under the State aid regional guidelines. The regional uplift will commence at five per cent and will be phased out over four years on a tiered basis.
Turning now to the farming sector, I acknowledge that income volatility is a very significant difficulty for farming families and that 2018 is turning out to be a particularly difficult year. I propose to make the income averaging scheme available to a greater range of farms.
Income averaging allows eligible farmers to calculate their taxable income as the average of their income in the current year and the previous four years, on a rolling basis, thus smoothing their tax liability over a five year cycle. I propose extending the Income Averaging Scheme to farmers with self-employed, off-farm income/farmers whose spouses have off-farm, self-employed income (with averaging only applying in respect of farm profits), so as to ensure its availability to the entire sector.
In addition, the Bill renews for a further three years:
- the 25 per cent General Stock Relief on Income Tax;
- the 50 per cent Stock Relief on Income Tax for Registered Farm Partnerships; and
- the 100 per cent Stock Relief on Income Tax for Certain Young Trained Farmers.
Before I move on to look at the Bill in detail, I wish to address our commitment to the ongoing process of international tax reform. I announced in Budget 2019 the introduction of two new measures from the Anti-Tax Avoidance Directive (ARAD), an ATAD-compliant Exit Tax regime and new Controlled Foreign Company (CFC) rules. CFC rules are designed to prevent the artificial diversion of profits to offshore entities in low-tax or no-tax jurisdictions.
The new ATAD-compliant Exit Tax regime will impose a charge to tax at 12.5 per cent on unrealised gains where companies migrate or transfer assets offshore, such that they leave the scope of Irish tax. It replaces a pre-existing, focussed anti-avoidance exit charge with a new broad-based Exit Tax.
The introduction of both these measures, in addition to the commitments to further action set out in the Corporation Tax Roadmap published in September, clearly demonstrates Ireland’s commitment to ensuring that our tax regime is stable, legitimate and transparent, to support continuing investment and job creation in the State.
FINANCE BILL 2018 – SECTION BY SECTION
I will now take you through the Finance Bill from the beginning. However Deputies will appreciate that in the limited time available to me it is not possible to cover every single section in detail.
Part 1 of the Bill deals with the Universal Social Charge, Income Tax, Corporation Tax and Capital Gains Tax.
Sections 2 to 5 deal with the income tax measures I have already outlined.
Section 9 extends the benefit-in-kind exemption for electric vehicles until 31st December 2021 to support policies to reduce carbon emissions in the transport sector. Having regard to value for money and tax equity considerations, it also applies a cap of €50,000 on this exemption such that an electric vehicle with an original market value exceeding €50,000 will be subject to BIK on the amount in excess of €50,000.
In section 14, I propose amending section 205A of the Taxes Consolidation Act 1997 to extend the same tax treatment for awards under the restorative justice process to women who were resident in institutions associated with the Magdalen laundries.
Section 15 is a technical amendment and Section 16 introduces a new Accelerated Capital Allowances scheme for gas-propelled vehicles and refuelling equipment, which I signalled in my Budget speech.
Section 17 amends and commences a relief, introduced last year in Finance Bill 2017 subject to a commencement order, which allows a benefit to employers who incur capital costs on equipment and/or buildings used for the purposes of providing childcare services or fitness facilities to employees.
Section 20 relates to the relief available to certain start-up companies in their first three years of trading. Following a review performed by my Department, I am extending the relief for a further three years, to 31st December 2021. This relief is designed to support employment creation and broaden the corporation tax base.
Section 21 proposes that the amount of interest paid in respect of loans used to purchase, improve or repair a residential property that may be deducted by landlords will be increased to 100 per cent from 1st January 2019. This change is an acceleration of the rate of the restoration of the full value of this relief.
Section 23 relates to EII and SURE, Section 24 deals with film relief and Section 25 deals with controlled foreign companies (CFCs), I have described these measures already.
Section 28 amends section 603A of the Taxes Consolidation Act 1997 TCA 1997. In broad terms, section 603A provides relief from Capital Gains Tax on the transfer of a site by a parent or civil partner to a child of the parent or a child of the civil partner, where the transfer is to enable the child to construct his/her principal private residence on the site. The section is being amended to allow both a child and his/her spouse/civil partner to benefit from the relief available under the section.
Part 2 of the Bill deals with Excise.
Section 31 amends the definition of a ‘sugar sweetened drink’ to ensure that certain categories of beverages will be subject to sugar sweetened drinks tax where they do not meet a minimum calcium content of 119 milligrams per 100 millilitres. The amendment fulfils the commitment made to the European Commission as part of the formal EU State aid notification process for sugar sweetened drinks tax.
Section 32 confirms the Budget increases in the rates of Tobacco Products Tax and Minimum Excise Duty for cigarettes in support of public health policy.
Section 33 provides for an increase in the rate of betting duty and betting intermediary duty with effect from 1 January 2019. The rate of betting duty is increased from 1 per cent to 2 per cent for bookmakers and remote bookmakers while betting intermediary duty is increased from 15 per cent to 25 per cent.
Section 35 provides for a Vehicle Registration Tax or VRT surcharge of 1 per cent on diesel cars in recognition of growing air pollution concerns from pollutants emitted in high amounts by diesel vehicles.
Section 37 extends the VRT relief for Hybrid Electric vehicles until 31st December 2019 in support of climate change policy.
Part 3 of the Bill deals with Value-Added Tax, or VAT.
Section 41 gives effect to the Budget increase in the VAT rate applying to tourism activities, with services and goods currently applying at 9 per cent increasing to 13.5 per cent from 1st January 2019, with the exception of newspapers and sports facilities. This section also provides for a reduction in VAT on digital publications from 23 per cent to 9 per cent.
Part 4 of the Bill deals with Stamp Duties.
Section 46 provides for, as I announced in Budget 2019, the extension for a further three years to 31st December 2021 of the young trained farmers’ stamp duty relief. This extension must be notified to the EU authorities and is therefore being made subject to a Commencement Order. This section also contains a number of amendments to ensure a number of stamp duty related provisions in the legislation comply with EU State aid regulations and reflect current practice.
Section 47 provides for taxpayers having a right of appeal to the Appeal Commissioners against a decision made by Revenue in relation to a claim for a repayment of stamp duty which is not currently provided for in the legislation.
Part 5 of the Bill deals with Capital Acquisitions Tax, or CAT and includes Section 50 which amends the dwelling house exemption to ensure that properties which have been placed in a discretionary trust are brought within the assessment criteria for determining if the beneficiary meets the conditions to qualify for the exemption.
Section 51 addresses my Budget announcement to increase the Group A tax-free threshold which applies to gifts and inheritances from parents to their children from €310,000 to €320,000. This will apply to gifts or inheritances received on or after 10th October.
Finally, Part 6 of the Bill deals with miscellaneous matters and here I just want to mention that Section 53 makes a number of technical amendments to facilitate the operation of the tax appeals process.
As is customary with the Finance Bill there are still a small number of matters under consideration that I may bring forward at Committee Stage and of course I will also consider any suggestions put forward during our debate here over the next couple of days.
Deborah Sweeney [Press Adviser to Minister Donohoe] – 086 858 6878
Aidan Murphy [Press Officer, Department of Finance] – 085 886 6667
Press Office firstname.lastname@example.org – 01 676 0336
I would like to thank the Committee for the invitation to appear here today to discuss the forthcoming Budget and I welcome the contributions you will have to make in this regard. This year the Budget will be presented to the Houses of the Oireachtas on Tuesday, 9th October.
Over recent months, many elements of our reformed budgetary process have taken place. In June, the Summer Economic Statement was published and the National Economic Dialogue also took place. In July, my Departments published the Mid-Year Expenditure Report and the Tax Strategy Group Papers in respect of Budget 2019. These new and transparent features of our annual budgetary process ensure that all stakeholders can have an input into the way in which our budget policies are formulated. Earlier this month, my Department published its second annual debt report and an analysis of demographic trends and their input on sustainability of the public finances.
As I set out in the publication of the Summer Economic Statement, I am committed to not adopting a budgetary policy that would increase the deficit and result in additional borrowing.
The focus of Budget 2019 will be to sustain our recent progress and to maintain our careful management of the public finances.
The Summer Economic Statement makes clear that budgetary policy will be designed on the basis of what is right for the economy. From a budgetary perspective, this facilitates the building-up of fiscal capacity, which can help mitigate against future negative risks and potential shocks.
In terms of our current economic outlook, we are in good shape. With GDP up by 2.5 per cent in the second quarter of the year, quarter-on-quarter, and 9.0 per cent year-on-year, it is encouraging that robust growth is being recorded across all sectors of the economy, both domestic-facing and exporting. There was an annual increase in employment of 3.4 per cent or 74,000 jobs in the year to the second quarter of 2018, bringing total employment to over 2 ¼ million – we are close to approaching what could be termed ‘full employment’.
The next set of official macroeconomic forecasts will be produced as part of Budget 2019, following the IFAC endorsement process which is currently underway.
We must be mindful, however, of new challenges in the wake of the growth we are now experiencing in our economy.
From an international perspective, some of the other risks are being widely recognised now as the general rise in protectionist policies and the unpredictability of the international tax environment. Ireland, as a smaller, open economy, is particularly exposed to these risks, and we must ensure that we continue to implement sensible fiscal policies and strive to steer our public finances along a sustainable path.
In 184 days, our most important trading partner will formally leave the EU. Whilst a transition period remains our baseline assumption, there will still be a major structural change in our economic relationship with the U.K.
It is important to be clear that the actual agreement on a future relationship can only be finalised and concluded once the UK has become a third country, that is, after it leaves the EU on 29 March 2019. This is why agreement of a status quo transitional arrangement is so important. Of course, it is in the interest of everyone that a future relationship agreement is concluded as quickly as possible after the UK leaves the EU, to provide certainty sooner rather than later.
I note that your Pre-Budget discussion document points to the possibility of a ‘no deal’ Brexit outcome as a potential fiscal risk. With Brexit some things are going to change and we are planning accordingly. The risk of a more adverse outcome than expected is one of the principal reasons that the Government has put in place prudent measures in the case of a failure to reach any Brexit agreement.
These measures include:
- Targeting a balanced budget over the cycle, including using windfall receipts to reduce public debt;
- Measures to rebuild our fiscal buffers, including the establishment of the Rainy Day Fund;
- Increasing capital expenditure to enhance the productive capacity of the economy; and
- The significant suite of measures to support SMEs announced in previous budgets.
In terms of other risks, I note the Committee’s recommendation that the Government consider using fiscal policy to decrease Ireland’s dependence on imported oil and gas. As an energy importer, Ireland is adversely affected by increasing oil prices. However, the prudent economic and fiscal policies implemented over recent years have placed Ireland in a stronger position to weather any shock which may materialise, including an oil shock.
Reducing our public debt and its servicing costs remains a key priority. Our current debt level equates to €42,000 per capita and is the third highest in the developed world. This Government is steadfast in its commitment to the pursuit of sound budgetary policy. Legislation has been drafted on the Government’s proposal for a Rainy Day Fund.
The Government has committed to initially seeding the fund with monies from the Ireland Strategic Investment Fund, as well as setting aside some of the historically high levels of corporation tax for the purpose of creating the fund. This means the risk of permanently increasing expenditure on the basis of transient receipts is reduced. With this in mind, a contribution of €500 million to the rainy day fund will be provided for next year, in addition to the €1.5 billion planned this year.
This Government recognises the clear supply and affordability constraints in the housing market. In my previous two budgets, I introduced significant increases to both capital and current allocations of the Department of Housing, Planning and Local Government. The capital budget has increased by 145 per cent since 2016, to over €1 billion which reflects the Government’s position that the only way to solve the current issues in the market over the long-term is to build more homes, including social housing, student accommodation and affordable homes for first time buyers and people on average incomes.
Some of the measures introduced include the allocation of €200 million for the Local Infrastructure Housing Activation Fund (LIHAF) and the introduction and subsequent increase in the vacant site levy, from 3 per cent in the first year to 7 per cent for the second and subsequent years.
Last year I also increased the rate of commercial stamp duty to help re-balance the construction industry away from commercial construction towards more residential building.
These and other measures are helping to dramatically boost supply. The latest figures from the CSO show a 34 per cent increase new home completions from last year. The number of planning permissions granted for residential development are similarly showing very strong growth, up 39 per cent in the year to June.
Despite these promising figures, there is still a long way to go before the various issues in our housing market can be resolved. Homelessness is an area that the Government is committed to resolving and I will continue to support my colleague Minister Murphy, in the various initiatives his department is engaged in.
To touch on our current fiscal position at end August, €32.4 billion tax revenues were collected – up €1.6 billion (5%) on the same period last year, and broadly on target, highlighting that our fiscal position is continuing to improve and we are closing-in on a balanced headline budgetary position.
Turning to expenditure, maintaining a sustainable public expenditure policy requires focus not only on the quantum of expenditure each year, but also on the quality of that expenditure and the results being achieved. In tandem with the policy of sustainable current expenditure increases is the recognition of the role capital spending can play in mitigating risk, enhancing the resilience of the economy and raising our growth capacity.
Indeed, I welcome the ESRI’s advice published today in their Autumn Quarterly Economic Commentary, highlighting the need for a holistic approach to fiscal policy in this year’s Budget. I agree that given key infrastructural deficits in areas such as housing, along with the possibility next year of a more adverse than expected outcome in the Brexit negotiations, that a non-contractionary Budget is appropriate.
That is why €1.5 billion has been allocated towards increased capital investment next year, an increase of almost 25 per cent, as set out in the National Development Plan (NDP). This allocation will allow us to ensure a sustained increase in the delivery of social housing, offer additional schools places, enable the provision of new transport infrastructure and help progress the delivery of the National Children’s Hospital among other important projects.
Systematic information about the efficiency and effectiveness of expenditure is crucial in assessing the extent to which public expenditure is delivering key social and economic objectives. Over the last number of years, the budgetary framework has undergone significant reform. A number of initiatives are now in place that focus on what is being achieved by public spending. Underpinning this process has been a number of structural reforms that support targeted improvements in the delivery of public services in a sustainable manner.
The Committee has a number of recommendations relating to the Spending Review. The aim of this process is to embed an evaluation mentality in the public service, with the goal of avoiding reactionary budgets and large annual shifts in expenditure. It also helps to maintain an ongoing evaluation of the effectiveness of existing levels of expenditure. I would welcome engagement with the Committee on how the impact of the review process can be maximised.
Other structural reforms include performance and equality budgeting, including establishment of an Equality Budgeting Expert Advisory Group to provide advice on the most effective way to advance Equality Budgeting Policy and progress the initiative.
Ireland has made good progress in the area of climate proofing through tracking climate-related output targets in the annual Revised Estimates Volume and ex-post evaluation of climate-focussed expenditure programmes. These reforms are aimed at increasing transparency and accountability in the Budget process, facilitating meaningful dialogue around our policies and priorities.
Ensuring the implementation of Project Ireland 2040 is of the upmost importance to this Government. As such, the publication of the improved and expanded Investment Project and Programme Tracker last week is to be welcomed. This builds on the work of the Programme Delivery Board, who have identified a number of important initial priorities which have now seen significant progress.
These include: improving information flows for project monitoring, establishing a Land Development Agency, establishing a Construction Sector Group and progressing the four developmental funds. Addressing these issues will ensure that projects outlined in the NDP can be delivered on time and on budget and that the objectives set out in the National Planning Framework are achieved on a value for money basis.
I note the Committee’s recommendation that consideration be given to increasing carbon tax over a number of years. While I consider that the carbon tax can play an important role in helping to reduce national emissions, in any analysis of the carbon tax, it is necessary to consider not just its potential to reduce national emissions, but also wider economic and social impacts. The ESRI, as part of its joint research programme with my Department, has produced initial research providing a perspective on the environmental, economic and social impacts of increases to the carbon tax. I am informed that it is developing a multi-annual model for the same purpose which will inform our views on the impacts of multi annual increases to the carbon tax.
Finally, the Committee’s Pre Budget document makes a number of other recommendations in the tax area which will be given full consideration in the context of the forthcoming Budget.
I would like to thank the Committee again for the opportunity to speak here today and I am happy to address any questions you may have.
26th September 2018
Good evening ladies and gentlemen.
It’s a great pleasure to be here with you this evening, and I would like begin by first thanking Ibec for the invitation to speak, and to mark your 25th anniversary.
I would also like to take the opportunity to acknowledge the contribution your outgoing President, Ms Edel Creely of Trilogy Technologies has given, and to wish Edel the best for the future.
As the new incoming President of Ibec, I would also like to congratulate and wish Mr Paraic Curtis, of TE Medical, the best in his new role, and I am sure the he will make a valuable contribution to the organisation in the years ahead.
As I look around the room and see representatives from across our business sectors, this event provides me with an opportunity to reflect on the domestic enterprise sector, the key role it played in our economy recovery, and the role it continues to play in driving robust growth.
Indeed, Government engagement with business leaders and other social partners is a well-established part of the development of public policy, not just in Ireland but throughout Europe.
The Government recognises the contribution that social dialogue can make to maximising a common understanding across all sectors of society as we respond to the many challenges facing the country.
To this end, the establishment by my department of the Labour Employer Economic Forum (LEEF) has created a direct means through which employer groups and unions can articulate their policy priorities to Government, and long may this continue.
Turning now to budgetary matters, many of you will be aware that I will deliver my second Budget as both Minister for Finance and Public Expenditure & Reform on 9 October.
As we approach this, I am happy to tell you that our economy is in good shape and is expected to grow significantly this year and next.
I am particularly pleased that our recent growth figures are not just a story of the multinational sector, as domestic demand is also making a significant positive contributions, even on an underlying basis.
Indeed there is no story more positive than the one emanating from our labour market, where we saw full time employment growth of over four per cent in the second quarter this year, with more people working in our economy than ever before.
As we look ahead to 2019, real and growing risks exist.
- First and foremost is the potential fallout from a more adverse-than-expected outcome of the Brexit discussions currently under way;
- Secondly, given the importance of the traded sector in the Irish economy, any disruption to world trade, in particular from increasing protectionism, could significantly impact Irish growth prospects;
- In addition, a faster-than-expected normalisation of monetary policy in the Euro area or changes in other jurisdictions that affect the competitiveness of Ireland’s corporate tax regime all have the potential to constrain our growth trajectory.
As Minister for Finance, the best means available to me to mitigate these risks is through budgetary policy, careful management of the public finances and also competitiveness-oriented policies.
In Budget 2019, this is what the Government will continue to do.
So let me use this opportunity to briefly highlight four key areas that touch specifically on my overall approach to the management of the economy; areas that we must continue to make progress in, in order to maintain sustainable growth and renew the social contract that underpins support for our democratic system.
Domestic enterprise, productivity and Future Jobs
As business leaders you know that domestic enterprises are the bed rock of our economy. SMEs in particular are vital to our continued progress. They make up 99.8 percent of all enterprises, and account for 69.9 percent of the workforce.
Of course, we also have a number of world renowned Irish owned multinationals, many of whom I see represented in front of me this evening.
The Government sees the domestic enterprise sector, and SMEs in particular, as a key engine of sustained economic growth.
But there are challenges that the domestic enterprise sector faces, particularly in the areas of productivity and innovation, areas that have become increasingly important as we approach full employment, with the scope to utilise untapped pools of resources becoming increasingly constrained.
In order to rise to these challenges, and to the rapid changes in technology and globalisation, my colleague Minister Heather Humphreys, the Minister for Business, Enterprise, and Innovation, has recently received Cabinet approval to launch a Future Jobs programme in the New Year.
This programme, which will replace the highly successful Action Plan for Jobs, will place an increased emphasis on productivity growth, particularly amongst SMEs, while also aiming to broaden labour force participation rates.
It will also aim to develop future skills and talent to exploit opportunities arising from both the digital and green economies.
Housing & land use
Turning now to the second area that I would like to highlight, and where progress is imperative, is in housing.
In order to address the under supply of affordable housing for our citizens, the Government last week established in law a new Land Development Agency (LDA).
This new Agency will help deliver urban redevelopment and housing in strategic locations and help meet broader policy objectives as set down in Project Ireland 2040.
The LDA will have two overarching objectives.
Firstly, by identifying and coordinating the development of State land, either owned by local authorities, commercial State bodies or State agencies, the LDA will drive sustainable urban redevelopment.
Secondly, the new agency will boost the supply of all types of housing, including social, affordable and private housing by providing expertise in the planning, design and development processes and maximising the use of State owned land.
The creation of the LDA marks a new and significant departure for the State.
The State will now play an active and influential role in the design and development of our urban areas.
In applying international best practice in active land management, the LDA will ensure a more proactive management of the State’s extensive land bank, counterbalancing the boom-bust cycles of development that have in recent decades undermined the country’s economic growth.
The LDA will also be able to provide the expert capacity needed for a more strategic and long-term approach to the use of State land, helping to bolster some level of continued commercial and residential construction even in economic downturns.
Overall, the funding earmarked for ‘Rebuilding Ireland’ has been increased to over €6 billion out to 2021.
In total, there has been a 145 percent increase in Exchequer capital funding for new builds and acquisitions since 2016, from €433 million to €1.06 billion.
The private sector is now also responding, with recent home completions figures from the CSO showing a 34 per cent increase, with planning permissions also up substantially.
Although there is still a long way to go, the considerable investment Government is making in housing should be seen as part of our overall plan to continue to maintain and improve competitiveness in our economy, as well as address key a social issue.
Income tax reform
Now to the fiscal side, in terms of budgetary strategy for 2019, I am committed to pursuing an overall Budgetary policy that ensures fiscal sustainability, and a continuation of broadening and reforming our tax base.
Indeed, the third area that I would like to highlight, and where I am committed to making continued improvements, is in the area of income tax reform.
As you are surely aware, Ireland has one of the most progressive personal income tax systems in the developed world.
Our redistributive tax system has consistently been acknowledged in positive terms by the IMF, the OECD and the ESRI.
Nonetheless, I note from a report from the Irish Tax Institute this week that taxpayers here are paying more tax in 2018 than they did 10 years ago.
In response to this, I have two observations.
First, I do not believe that the tax system – or indeed the approach to regulation, fiscal policy or overall economic management – that prevailed in 2008 is a useful benchmark or indeed one that we would look to return to.
As numerous reports and inquiries have shown, the tax base in 2008 was too narrow, there was an over-reliance on transaction taxes and excessive levels of tax expenditures that encouraged economic activity that was not in the public interest.
It is also worth reflecting on the considerable reform to the overall structure of the Irish tax system that has taken place since 2008.
Over the last decade, reforms to the income tax system and the broadening of the income tax base were introduced in the interest of ensuring a stable revenue stream for the Exchequer in order to fund essential public services.
However, it is my conviction that workers in our economy start to pay the marginal rate of tax at too low an income level.
We cannot hope to remain competitive if someone on a relatively low income, and who decides to work a few hours overtime, has nearly half that extra money taken in tax.
Progress has already been made to address this issue in the last number of Budgets by focusing on reducing the tax burden on low to middle income earners, while maintaining a broad tax base.
This has been done by making targeted changes to the USC, but also by increasing the entry point to the higher rate of income tax.
In Budget 2019, the Government will fulfil our commitment to making steady and sustainable progress in reducing the income tax burden for low and middle income earners by concentrating on increasing the level at which workers fall into the higher tax bracket.
Looking beyond Budget 2019, if economic circumstances allow, we will continue to reduce the tax burden on middle-income earners by increasing the standard rate cut-off point over a number of Budgets to a level that is competitive with our neighbouring jurisdictions.
In particular, we must be increasingly aware of the difference in the cut-off point for the standard rate of income tax between Ireland and a post-Brexit UK. Increases in take-home pay have positive knock-on consequences for businesses and jobs in the domestic economy.
The Government is committed to measures that positively benefit workers while also keeping the tax base broad and ensuring that our personal taxation system is both competitive and resilient in the future.
Lastly and perhaps most critically, I would like to conclude with Brexit.
We are entering the most critical phase in the negotiation of the UK’s withdrawal from the European Union.
Ireland will be central to these discussions and the Government is confident that we will achieve an outcome that is in the best interests of our country.
However, irrespective of the future relationship between the UK and the EU, we will face a very different world once the UK does depart.
When we reach agreement on a Withdrawal Treaty, the UK will become a ‘third country’.
The status quo will change.
It will require a renewed approach from the Government as we develop and build our alliances within the EU.
And it will also mean changes for your many sectors too, as your members look to develop new markets and opportunities while managing and mitigating the risks that will arise.
Government and business will embark on a shared journey into this new world.
We will inevitably face many obstacles along the way.
But I am equally confident that working together as we have done in the recent past, we can and will rise to, and overcome, this great national challenge.
And with that I will thank you for your time, thank Ibec for the invitation to address you, and I hope you enjoy the rest of the evening’s events.
Thursday 20th September 2018
17th September 2018
Check Against Delivery
Members of the Chamber,
Ladies and Gentlemen,
It is a pleasure to be back in Belfast. This is a city built on industry and trade, and I am delighted to be here at the Northern Ireland Chamber of Commerce and Industry today.
I know the Chamber has a long and distinguished history, and that your members today are drawn from over 1,200 businesses, representing sectors as diverse as agri-food and manufacturing. I was impressed to learn that, together, Chamber members employ over 100,000 people, supporting families and creating opportunities around Northern Ireland.
I believe that groups like the Chamber play an important role, not just as the voice of the business community, but also as a mirror to society. Because of your size and scope, you can reflect not just the concerns of your members, but also those of society as a whole.
And so it is a welcome opportunity for me to be with you today. I would like to thank Ellvena Graham, President of the Chamber, and Ann McGregor, your Chief Executive, for the invitation to address you, and I look forward to what I am sure will be an interesting exchange of ideas.
The issue I would like to speak to you about today is one of immediate concern to all of us here, , one that will affect all of us on the island of Ireland, namely the United Kingdom’s decision to withdraw from the European Union.
Brexit is an unprecedented challenge; for Ireland, for the United Kingdom, and for the European Union.
It will have significant implications in particular for the island of Ireland. Be it the impact on trade, the impact on agriculture, the impact on tourism, the challenge of Brexit is not something that can be underestimated.
But the very first impact that we have to manage is on the Good Friday Agreement and the avoidance of a hard border on the island of Ireland.
Good Friday Agreement
The Irish Government has, from the outset, recognised this challenge and has been focused on protecting the achievements of the peace process and the Good Friday Agreement, twenty years after its signature, now in its twentieth year. A key element in this approach is to ensure there can be no hard border between us.
This is a position shared by the other members of the European Union.
I know that Prime Minister May and the British Government are also committed to avoiding a return to a hard border.
I think everyone in this room will understand why removing the border was integral to the peace process.
Ireland and the United Kingdom’s shared membership of the EU also played a key role, as the Single Market and Customs Union removed the need for customs posts and checks.
With the removal of security installations and checkpoints as a result of the Good Friday Agreement, the border, while still a political fact, became almost invisible, enabling businesses and communities on either side to engage freely.
Every day, over thirty thousand people cross the border, to work, to go to school, to visit friends and family.
As you all know, the border of today is free-flowing and frictionless. This is of critical importance to the 7,400 businesses in Northern Ireland that trade across the border, supporting over 167,000 jobs. Cross-border trade represents the first export market for some 73% of Northern Ireland’s small and medium sized companies.
Many of you will have supply chains, distribution networks, and customers on both sides of the border.
And the border is about far more than just trade, as this audience knows very well. The invisible border allows over 100,000 cross-border relationships, commercial, political and social, to thrive.
Psychologically, it has transformed the landscape and allowed identity to breathe more freely.
Protecting this precious achievement, a backbone to our hard-won peace, is critical for all parties in the Brexit negotiations.
We are at another critical stage of those negotiations. In fact it might be more accurate to say that every stage of the Brexit negotiations have been critical, and that we are now entering the final stage.
It is welcome that talks are taking place continuously, and that both sets of negotiators are committed to intensifying negotiations in the coming weeks.
We have confidence in the European Union negotiator, Michel Barnier, and his team, and are in close touch with him and his staff. He and the other Member States understand the importance of avoiding a hard border.
Our priority now is to conclude the Withdrawal Agreement, including the Protocol on Ireland and Northern Ireland, which encompasses the backstop for the border.
I would urge the British Government to engage with all the issues identified in the Protocol. At various stages in this process, Prime Minister May and her Government have made clear commitments on guaranteeing that there will be no hard border. There is now a short period left in which to deliver on these commitments.
For our part, the Irish Government’s position on the backstop remains clear. While our preference is for an overall EU-UK relationship which would resolve all issues, it remains essential that a backstop is agreed which provides certainty that a hard border will be avoided in any circumstances.
This means that a backstop must be in place unless and until another solution is found. It cannot be temporary. The absence of a hard border has to be guaranteed no matter what the future relationship will be.
This is about providing certainty for businesses and people living on either side of the border and about protecting the gains of the hard won peace. We are not motivated by any other aim.
The European Council made it clear in June that nothing is agreed until everything is agreed. This means that there can be no Withdrawal Agreement, and therefore no transition, without an agreement on the backstop.
So it is my hope that progress can be achieved in the coming weeks to find agreement on a legally operable backstop as an integral part of the Withdrawal Agreement.
It is our wish that these negotiations will be successful.
As a Government and an economy, we are facing the huge challenges posed by Brexit from a position of strength, having laid the foundations for a solid and sustained recovery over recent years. We are confident that our economy is resilient and that appropriate fiscal policies are in place to help us to adjust to the economic effects of the UK’s negotiated withdrawal from the EU.
While focused on reaching an agreement, these negotiations are so important to us, and the consequences so far-reaching, that we are taking all necessary steps to prepare for all eventualities. It would be remiss of the Government not to have the appropriate contingency plans in place for all outcomes given their potential impact.
Of course, I fully recognise that for many of you, England, Scotland and Wales are important markets. East-West trade is significant and important for all of us, North and South. Protecting that trade and commerce is also vital.
It is in all our interest that agreement is reached, that the transition period – so important for providing certainty for business and society as a whole – is put in place, and that agreement can be reached on the closest possible future relationship between the EU and the United Kingdom.
It is the Irish Government’s view that any EU-UK future relationship agreement should be comprehensive, ambitious, and as wide as possible in its scope – avoiding any tariff barriers and minimising to the greatest extent possible any non-tariff barriers, while ensuring a level playing field.
At the same time, the Irish Government is mindful of the importance of protecting the integrity of the EU’s Single Market, which is central to our continuing prosperity.
The closest possible relationship would greatly benefit both parts of our island and, I believe, benefit the UK as a whole, and the whole of the EU. How close that relationship can be will depend on the wishes of the British Government.
Restoration of Power-Sharing
We find ourselves at a key juncture for Ireland, the UK, and the European Union.
The decisions that are taken in the coming weeks and months will have lasting consequences for politics, the economy, and relations in these islands.
It is thus regrettable that the power-sharing Executive and Assembly have not been in place now for nineteen months. This situation means that the North South Ministerial Council provided for under the Good Friday Agreement also cannot operate, at a critical moment for the island of Ireland.
In these final stages of the negotiations, I think everyone recognises the importance of there being a voice for Northern Ireland on Brexit, and on the range of other issues that require attention by the devolved institutions of the Good Friday Agreement.
It is my hope that progress can be found between the political parties to enable an early restoration of the Executive.
I know the Tánaiste and Minister for Foreign Affairs and Trade, Simon Coveney, is working closely with Secretary of State for Northern Ireland, Karen Bradley, even as we speak, on how the two Governments can support a way forward.
We are also committed to maintaining the close and strong ties of friendship and cooperation between Ireland and the United Kingdom. The UK is our important partner and nearest neighbour. I do not need to enumerate the many ties of family, culture, history, and business which we share. It is for this reasons that both Governments have prioritised maintaining the Common Travel Area is the context of Brexit.
Even if Brexit means Ireland and the United Kingdom will no longer be partners in the EU, we will remain indispensable partners.
Our responsibility – as politicians, business leaders, and members of society – is to create a society of opportunity for all, and to build a better future for the next generation.
This means taking forward the vital work of peace and reconciliation between our communities and between the different traditions on this island that we share. This is something the Irish and British Governments are committed to supporting.
The European Union is also making an important contribution in his area, through the funding it provides under the PEACE and INTERREG programmes. Between 2014 – 2020 PEACE and INTERREG will provide €550 million funding, supporting projects which aim to foster reconciliation and cooperation, and to assist some of the most marginalised members of society.
I will visit one of these projects in North Belfast later today. Springboard’s Journeys project aims to help young people who have been disadvantaged, and I look forward to hearing from them about their experiences and hopes for the future.
The Irish Government, the EU and the UK are committed to ensuring the successful implementation of the current PEACE and INTERREG programmes. WE are also committed to putting in place successor arrangements in the post-2020 period. The European Commission’s proposal in May for a special new PEACE PLUS programme, to build on the work of PEACE and INTERREG is thus very welcome.
Brexit is a challenge of historic proportion for the island of Ireland, for all of us in the Irish and British Governments, and this challenge is more difficult because of the uncertainty about the final outcome. This uncertainty makes preparation difficult for any Government or business but I know that we are all preparing as best we can.
While the challenges being faced are clear, so too are the risks of not rising to meet them, and with continued goodwill from all sides and good work in the coming weeks I believe that an agreement can be reached. Future generations will not thank us if we do not reach the right deal.
I think it is probably safe to say that most people in this room would agree with that approach and I hope that when next I’m here it is to discuss how we can make the best of that comprehensive and ambitious agreement.
Keynote Address by Minister for Finance and Public Expenditure & Reform, Paschal Donohoe T.D. to the Dublin Economics Workshop
TRANSCRIPT OF SPEECH:
Good afternoon Ladies and Gentlemen. It’s a great pleasure to be here with you this afternoon, and to have the opportunity to address this Workshop again. I want to pick up on many of the themes that have been articulated there by Ciaran, but before I do that, I want to kick off with some words of recognition myself. I wanted to in particular recognise my former Lecturer and Colleague, Sean Barrett who is here today. Much of what I now believe in Economics, and many of the things which at times I’ve questioned, are in no small way due to him. I spent a year being taught by him when I studied Transport Economics in Trinity College, many many years ago.
I also want to acknowledge and thank all the staff from both the Department of Public Expenditure & Reform and the Department of Finance who are here today. I also want to acknowledge my friend and close political colleague, Minister Michael D’Arcy who is here today. We’re here in his constituency, I joked with him earlier on, that I seem to spend more time in his constituency these days than I do in my own. He replied back to me, he spends more time in Dublin Central than he does in his own! So it’s great to be here with you this afternoon. And to respond back to the agenda that Ciaran has talked about.
What I’m going to do, is I’m going to open up and tell you all about my week. The various needs that I’ve engaged with. The different forces that are there and relevant to our country. I’m going to bring that in then I’ll move into four thoughts that I have about how things are different now in 2018 versus where we were in 2008. I will then relate those four thoughts to four principals that are important to me as I frame Budget 2019 with the Government, and look to the implementation of Ireland 2040, which is our National Development Plan and Planning Framework for our country.
So to begin with my week. I’m sure that many of you who are here this afternoon, when you arrived into White’s here, you do so with a small sign of relief that the week was coming to an end. You’d be able to spend the weekend with friends and colleagues, discussing the finer details of economics over a drink or whatever you like, this evening. And as you were looking back into your week on the way here, I was having a look back at mine. Last Saturday morning, I was in Vienna, on the second day of a two day Informal Meeting of the European Ministers for Finance. Where we spent the morning dealing with two particular issues. The first issue was the future direction of European Corporate Tax Policy. The second issue was an intervention from the Chancellor of the Exchequer, Philip Hammond, regarding the proximity of Brexit.
In the first part of that meeting, we grappled with and debated the changing local and European economy within which Corporate Tax is being developed and the growing debate underway regarding whether those Tax Models are appropriate for the Digital Economy. And if they’re not appropriate for the Digital Economy, how they should be changed. Across that morning when many many Ministers spoke on the issue, we debated and differing views that exist, regarding should we levy taxes on turnover? Should they be levied on profit? If you do want to have a different Tax Model for the Digital Economy, where does the Digital Economy begin or end? Where does the rest of the economy begin and end? If you are going to make such changes in Digital Tax Policy, and did so in a way that’s independent of the direction of Global Corporate Tax Policy, what are the implications for Global Tax Cooperation? What are the implications for Global Trade?
So this was a debate in which there were many different sides. Myself, my Nordic, some of my Baltic Colleagues, advocated our point of view. But a number of other countries advocated a different point of view. That particular debate was bookended by Chancellor Hammond making the point that we’re now entering into a crucial period of Brexit negotiations. And asking questions regarding how key elements of financial risk need to be managed, as this negotiation continues, and hopefully concludes, and we look forward into a very changed 2019.
So that part of my week, dealt with issues that are fundamental to our neighbourhood, and fundamental to a small open economy, that has skin in the game, regarding how trade is organised, regarding how trade flows, and regarding how trade is taxed. And in that whole debate, we can see views that are there, we can see potential changes, and some areas we can see where consensus exists. But this is a debate that is quite fundamental to many elements of our economic model.
Upon returning home from Vienna, and having a brief day of respite on Sunday, I then spend Monday and Tuesday meeting all of the Social and Economic Partners who have a view in relation to Budget 2019. I opened up Monday morning meeting all of the Farm Organisations. Tuesday afternoon I met all of my colleagues in the Trade Union Movement. The next day I met IBEC and the Community and Voluntary Sector. I made the point to each group that the broad theme that’s articulated in each Sector, tends to be the need for more investment or expenditure in their particular sector. And/or unchanged taxes or lower taxes for that sector as well.
My job and the job which I have done, and the job which the Government will continue to do in Budget 2019 is how we move beyond an individual need or a sectoral need, into what the collective journey is for our country and for our society. Across the rest of this week, in between Cabinet, and a number of meetings in relation to Ireland 2040 and the Land Development Agency which we launched yesterday morning, on Tuesday evening I met Kevin Hassett, the Chairman of the Council of Economic Advisors to President Trump. I’ve just come this morning from a meeting with Governor Mark Carney of the Bank of England. Each of those meetings underscored to me, two things. Firstly, the remarkable progress and indeed economic stability at a macroeconomic level that has been secured here in Ireland. And also the horizon of change that lies in front of us. That change consists not just of potential difficulty, but also of great opportunity. It’s a panoramic horizon of change, much of which our country can prosper from. Other elements of which we will need to confront and deal with and look how we make ourselves secure.
So I say all of that, just to frame the engagement and the challenges that are underway, as we move to Budget 2019, and as we look at making decisions that will influence 2019 and beyond. The reconciliation of the individual of a sectoral need with that of the collective. The reconciliation of an open economy, an open society, which sees openness as a source of strength, while globalisation is changing in front of our eyes. Sizing ourselves as a country anchored in the Project of European Political Integration and Global Integration, each of which is now going through a period of change.
That’s the horizon within which this Government is working to secure and try and represent those who we are privileged to lead. But it’s also the framework within which public debate needs to happen. It’s also the framework within which we have to tease off that which we did not confront when we were in a similar period of economic growth, and that’s the concept of Trade Offs. It’s the concept that you can only spend €1 of the Taxpayers money once, and the concept that opportunity cost is real. But when we do have an opportunity cost, you’re also doing something else, that has the potential to serve the State and do a good.
So then I relate that to where we are now, to if I look, briefly sketch out, some of the things that we have to deal with, with where Ireland stands now in 2018, with where we would have stood a decade ago. And what I’m going to do is outline four areas of change. Some good, in fact mostly good. Some that would be a challenge that we need to be conscious.
I’m going to touch on where we are from a Tax and Expenditure point of view. Where we are from a Debt/Banking Regulation perspective. Thirdly the composition of our economy. And then fourthly the Institutional Framework within which political and public policy decisions are being made.
So let me open up with the first point in relation to Tax and Expenditure, or in other words, Budgetary Choices that have been made or will be made across the coming period of time. Let me compare and contrast two different sets of figures. One in relation to Taxation, the other one in relation to Expenditure. If I look at the three year period in the run up to the crash, across that period, we saw public expenditure here in Ireland, increase from €23 billion to €36 billion, across a three year period, a 57% increase. Across the three years in which Ireland has looked to secure itself in the aftermath of the Bailout Programme, the same rate of public expenditure or growth was between 13% and 14%.
If I compare the Taxation and Social Welfare changes, that I have made as Minister for Finance and Public Expenditure and Reform, and the Government has made, over the last three years versus the three year period between 2004 and 2007. Over the last three years, the combined total of Tax and Social Welfare packages in any given year, have been between €600 million to €800 million per annum. In the period between ’04 and ’07, they began at €1.6 billion, they ended at €2.6 billion. So that’s the quantum of change that is taking place, within the two key parameters of budgetary policy, in terms of how we are spending the country’s money, and then in terms of the combined value of Tax and Social Welfare changes.
If I then lead onto a second area of change, in relation to Debt. And if I observe where we are with levels of Public Debt and levels of Private Debt. At the highest point of our Private Debt Cycle, before the crisis period, Private Debt as a percentage of household income stood at 213%. Most recent figures show that now, this stands at 133%. In terms of public debt we’re between the first and third most indebted county per head of population versus many other economies within the Developed World. So we’ve seen a remarkable change in the composition of debt. We’ve seen a decrease of it at a private level. We have seen a significant increase of it on a public level.
Thirdly, if you look at where we are from an Economic Composition point of view, in terms of the shape of our economy. We have an economy that now has a very different composition to where it was across the pre-crisis period. If you compare where we are now versus where we were then, you can see for example an economy in which we need the Construction Sector to continue to grow. But it’s a construction, but it is an overall economy that now has many varied different sources of growth. If you compare us to where we were, and the pre-crisis period, we all know we became too reliant on two Sectors of economic growth. And even when you peel back where we are, in the international and globally traded parts of our economy, that sometimes just captured under the broad heading of FDI, within that FDI acronym, we see a gigantic variety of a multiplicity of Sectors and different forms of economy, all integrated into many many different global supply chains, active in many different parts of the Global Economy. From Pharmaceuticals to Tech, from Services to an increasingly high valued Food and Drink Sector. So we’ve seen an economy that has a very very different composition to what we would have seen a decade ago.
If you just look at the most recent economic indicators, some of which Ciaran touched a moment ago on, in his introduction, we’ve seen a different level of growth, a different pacing of growth, to what we had seen back then. For example, we’ve seen the rate of full time employment growth, now stands at approximately 4%. We’ve seen consumption growth across the first half of this year, on average around 4% to 4.5%. And if you look at where we are with Tax Receipts at the end of August, we’re up 5% versus the same time period a year ago. So we are seeing a different composition to that economy, and greater diversity in the economy to what we had seen before.
Now the final area of change that is very different, is the institutions now, within which economic and public policy is being made. The institutions, the processes are fundamentally different to what they would have been a number of years ago, and before the crisis period. For those of you who have read `Why Nations Fail’ by James A. Robinson and Daron Acemoglu, for those of you who have read books like you know Francis Fukuyama’s book `The Origins of Political Order’, all of those make the point that Institutions matter. If you look at where we are institutionally now versus where we were pre-crisis, we have seen a really considerable change. What are those changes? Institutionally we now have the Department of Public Expenditure & Reform, working alongside the Department of Finance. Different and significant Government Departments with a sole focus on things which can make a fundamental difference to how our economy performs. In addition to the Central Bank, we now have the Irish Fiscal Advisory Council, commenting on performance, offering critique, offering advice, offering rigorous and independent evaluation. And this is before I even begin to get into, fundamental changes of process and fundamental changes at institutional level, within the European Union. If you look at where we are from a Banking Regulation point of view, in addition to the Fundamental Changes of culture and process, that have happened at a national level, we now have institutions such as the Single Supervisory Mechanism, and we now have a completely overhauled, scrutiny and resolution framework, at European Level, that was completely absent in the pre-crisis period. Running alongside this, is a budgetary process, which at European level is more transparent, more meaningful and which has a level of rigour and political profile to it, which it has acquired since the crisis period.
And this is real. This matters. This means that when I’m representing Ireland, at our monthly meetings of Ecofin and Eurogroup, on a regular basis, I have to update my colleagues on the economic performance of Ireland. It means that when we are having discussion on Banking Union, you have the Single Supervisory Mechanism, you have the European Central Bank, all participating in those debates, with the full weight of their Regulatory and Sanction power, and each Member State, having to talk about how their system is performing, and interconnectedness of their Banking Systems, with the European public. So these are all fundamental changes. A process at economic performance level. And then at Institutional level versus now against where we were in the pre-crisis period.
So that then takes me through to where we are now, Budget 2019, three weeks to go next Tuesday. If you look at those four areas of change, how do I relate that to my approach and the themes of the Government as we look to frame the approaching Budget. Well let me begin with point number one. And point number one is, and again has been acknowledged by Ciaran in his introduction, when I spoke to you here last year, and answered your questions, and gave my address, I spoke about the need to increase capital investment in our economy. What needs to be factored into the debate now, is that’s not just being announced anymore, it’s happening, it’s underway. Levels of capital investment, in the economy this year, funded through the Exchequer, have increased by €800 million, in nominal terms versus where it was last year. And for next year, we have already pre-programmed in, and announced, an increase of €1.5 billion in capital investment. And importantly, that level of investment was announced between 12 and 18 months ago, to give Agencies, to give Government Departments and to give the Private Sector, the time and the capacity to organise themselves in response to that higher level of capital investment. So a defining theme of Budget 2019, and the Budgets after that, won’t be about looking to make further changes to capital expenditure, given the level of profiling that we have now announced. It would be making sure that expenditure is used in the proper way. And to that point, in the coming weeks, the Department of Public Expenditure & Reform will be publishing a Project Tracker, to outline Project by Project how that €1.5 billion is being used and where it is going.
The second point that leads into then is the Budgetary Framework for Budget 2019. This relates back to the changes that I touched upon earlier on in terms of what’s happening with Bodies like IFAC and then how this is a consequence of the European Budgetary Framework. I have made the point on many many different occasions that Fiscal Space for me or the Artist Formally Known as Fiscal Space, has now evolved into Budgetary Stats. We have to look at what is the right thing for our economy, at the point in which we find ourselves in the economic cycle. And where we stand now, as I’ve already indicated in the Summer Economic Statement, is that we have a broad Budget Day Package of €3.4 billion, out of which €2.6 billion has already been invested or allocated. So if we want to go beyond that further €800 million in engagement that I will have with Government and with the Oireachtas, we will be required to make changes elsewhere. And that will be the Guiding Framework for this Budget, as was the case with my last two Budgets. Which means that this will be a Budget, which comes on to the next point, a Budget that looks to make gradual and affordable changes. When I’ve been making this case in the past, I’m often then faced with the charge that if you’re making change that is gradual, why bother making change at all? And to which I would ask you to think about, what are the alternatives to that? If we’re saying we’re not going to make the change at a gradual level, or in a way that is affordable, does that then mean we do nothing? And if doing nothing isn’t acceptable, does that mean then we look to make massive increases all in one give and go. Well we tried that before, in the figures that I referenced earlier on, and look how that turned out.
So what that means from a Tax point of view, is the objectives that I have for making changes in the Standard Rate Cut Off point, at which earners move into the higher rates of income tax. Changes that we want to make in Social Welfare Packages, or the implementation of the USC. Expenditure changes that I touched on earlier on, all of those will be, and I’m aiming to deliver it, at a rate that is affordable to the country. And by affordable, it means I can’t do everything at once. And by it being affordable, means I cannot meet all the needs at once. Choices have to be made. And if we are, and as we spend the money of the State, we have to do so in a way that is careful and affordable.
And that leads onto a final point in relation to Fiscal Policy overall. And this is one of my personal learning’s from what we went through in the crisis period, and what it means now for future choices. And at the heart of this, is the contention that in the period leading up to our fall, Ireland didn’t give enough contemplation or recognition to what it means to be inside a Single Currency Zone. We were happy and wanted to take trading benefits of having a stable currency, in the Euro, but the flipside of that, of the responsibilities, and also what’s not available to you, if you’re inside a Single Currency Zone, perhaps did not get the recognition and focus that it deserved. And that means as we move and come into the next phase of our economic policy, a greater realisation that if we don’t set our monetary policy, if we don’t determine what is the value of our shared currency, it means that Budgetary and Fiscal Policy becomes even more important. And means you have to take even greater care, for ensuring that changes you make in Budgetary Policy, are right for the economy at any given point in its economic cycle.
So they’ll be the four thoughts that will be guiding me, as myself, Michael, all of my Colleagues in Government, and both my Departments look to frame this Budget. We’ll be embedding all of this in, a longer term analysis regarding where we believe our country needs to stand. That there are benefits in consciously being an open economy and an open society. That there are benefits in offering key areas of certainty in really important policy areas, when so much else is afflux. That there are benefits in making clear that people who are creating jobs here at home, and to those who are looking to come to Ireland to create jobs, and I’ve been unambiguous and clear regarding our role in the European Union, and our role in the Eurozone. And amidst the horizon that I touched on earlier on, of change, of opportunity, of some difficulty, I continue to remain very optimistic about our ability, if we make the right choices, to navigate our way towards an even more secure and even better future.
Deborah Sweeney [Press Adviser to Minister Donohoe] – 086 858 6878
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