THE NEW, NEW ECONOMY – Speech by Minister Donohoe at Ibec
THE NEW, NEW ECONOMY
Speech by Minister for Finance and Public Expenditure and Reform, Paschal Donohoe at Ibec
Check Against Delivery
Good morning everyone.
As we approach the bicentenary of the birth of Karl Marx – a milestone I am not sure is marked very festively in this building, or maybe it is- his famous observation from The Communist Manifesto of 1848 feels relevant, when he wrote that ‘All that is solid melts into air’.
We are not experiencing the melting of investment and trade, but we are seeing a change, even if that change is to less solid, but no less real, investments.
I want to talk to you this morning about that change in an Ireland that, compared to twenty years ago, has changed profoundly.
New communities of new Irish people live, work and thrive throughout our country.
New technologies have transformed the way we work, rest and play.
And new companies – new in every sense of the word – trade and operate here.
New in the sense that some companies- some of your companies- are long established, but new to Ireland – international brands choosing to locate in this country.
New in the sense that long established companies now engage in new forms of investment.
And finally, new in the sense that many companies did not exist even a few short years ago – nearly 88,000 companies were registered in the 2012 to 2016 period.
When last year’s numbers become known, it will likely rise above 100,000 registrations since the depths of our economic crisis.
Our modern economy has added layers of investment and success at different points in our recent history.
Our journey away from a closed economy was led by the export of goods.
To this we added excellence in the trading of services across many different sectors.
The more recent layer of development has been the increasing importance of investment and trade in intangible assets.
Of course, all of this has allowed a journey away from our historical status as an exporter of our own people.
So what are these intangible assets and how valuable are they in our global and Irish economy?
The OECD describes an intangible asset as something;
- which is not a physical or financial asset,
- which is capable of being owned or controlled for use in commercial activities, and
- whose use or transfer would be compensated in a transaction between third parties.
So by intangible assets we mean branding, product design and development, working systems and the type of intellectual property synonymous with the modern high-tech sector but in fact existing in industries way beyond just that- the innovation we have seen in our food and drink sector being a case in point.
The very recent Capitalism without Capital by Jonathan Haskel and Stian Westlake adds greatly to our understanding of intangible assets.
As well as explaining what intangible assets are- the design, branding and so on to which I have already referred- it also talks about the qualities of these assets and what they can bring to the companies and the economies that nurture them.
The authors focus on four qualities in their work, the ‘four Ss’ of
- spillovers and
All of these qualities make investment in intangible assets very different to investment in physical or tangible assets.
Indeed, intangibles are now the largest component of headline investment in Ireland.
In the first three quarters of last year, for example, almost 35% of modified investment – that is, total investment with the distortionary effects of globalisation removed – was in intangible assets.
That is up from just 9% in 2000.
It is a similar story in our nearest trading partner.
A report published by the UK Government in 2016 suggested UK investment in intangible or knowledge assets has been greater than that for tangible assets since the early 2000s.
In 2014 it stood at £133bn, as opposed to £121bn in tangible investment.
Looking at it differently, from an industry rather than country perspective, sectors like computer technology, entertainment and media, consumer products and services, and healthcare have huge levels of intangible, rather than tangible, assets on their balance sheets.
This move is hugely beneficial to the so-called “frontier firms” who know how to make the most from the investment.
This frontier element is now a vital part of our economy.
And with all this in mind, I want to address three key questions;
- The first is about how to measure, how to properly capture this new type of economic activity.
- The second is how to deal with the political questions this new economic activity poses- and I mean political in the broadest sense of that word.
- And thirdly, having sought to answer those questions, or at least mapped out a path to answering them, I want to talk about how Ireland can continue to win in the new, new economy.
MEASURING THE NEW, NEW ECONOMY
Measuring and interpreting the size of the Irish economy is particularly challenging given that our economy is so deeply embedded in global supply-chains.
The 26 per cent growth rate recorded in 2015 is the clearest example of this challenge.
This growth rate was driven by movements from the multinational sector, in particular from the on-shoring of intellectual property and outsourcing of production – two key features of the new, new economy.
But just because it is difficult to measure, does not mean this new, new economy is not real.
A key challenge related to mobile intellectual property, and globalisation more generally, is measuring economic activity.
In response to the well-known limitations with GDP and GNP figures as measures of economic activity, an Economic Statistics Review Group was established by the CSO in late 2016.
One of the key recommendations of the Group was for the CSO to develop a new indicator of the size of the economy that excludes the effects of globalisation.
In July, the CSO published for the first time an alternative measure of the size of the economy, so-called “modified Gross National Income”, i.e. GNI-star.
Without getting too technical at 10.30 on a Wednesday morning, GNI-star excludes:
- the depreciation of foreign-owned intellectual property assets located in Ireland, which was one of the main reasons for the 26 per cent growth rate in 2015; and
- the depreciation of aircraft owned by aircraft-leasing companies.
The level of GNI-star is estimated at €189 billion in 2016.
This compares to GDP of €276 billion and GNP of €227 billion.
This has important implications.
For instance, if this new measure is used to scale our debt, the debt ratio was 106 per in 2016.
It can be seen easily then that the debt-to-GDP figure of around 73 per cent paints an overly benign picture.
So just like other forms of capital, intellectual property generates income flows which boost GDP.
However, unlike most tangible assets, intangibles and their associated benefits are highly mobile – intellectual property can move very quickly.
My key point is that despite this complexity, we can measure this new economic activity.
However, we will need to look at our economy through a different lens to get a clear picture of performance.
QUESTIONS THAT THE NEW, NEW ECONOMY POSES
So, we are making progress in understanding how and why the knowledge economy works.
We must champion it as a driver of a better country and a better society.
Not everyone will immediately benefit from technological progress and increased global integration and the transition towards the knowledge economy.
There will be both winners and losers.
Which leads to me the second question I posed- how do we solve the political issues that new, new economy raises?
How do we build a stable consensus for the new, new economy?
The key way to share the wealth, as it were, is through our tax system.
So I want to make two points – one on international tax and one on our domestic taxation system.
I am on record as saying that the OECD is the place to deal with this issue, as it will in the coming weeks.
The key principles for me are;
- That we tax where value is created.
- That any new rules on taxation are supported globally.
- That we define what a digital transaction is.
I am on record as having spelled out these principles as the best way to make progress in this area.
The third principle is of particular importance.
Too often, we speak of “digital companies“ or the “digital economy“ , as if it was something different, something external to the economy in which we operate.
In fact, we now live in a digitised economy, where digital transactions are a big part of every company’s business, be it an American tech company, an Irish food producer or a German car manufacturer.
The future of digital tax is important to all such companies- and to all of us.
These taxing issues are the result of the disconnectedness, of the discord, of multiple tax systems.
This really matters because, to quote from David Pilling’s new text, The Growth Delusion;
There are many competing explanations for what has caused popular rage in countries that have, judged by conventional measures, never been richer. There is, though, a common thread. People do not see the reality of our lives reflected in the official picture, painted principally by economists.
This lack of recognition could only fester amidst talk of concepts like intangible qualities and assets.
And this is why our system of domestic taxation must be seen to be fair.
Of course, Ireland is recognised as already having a highly progressive and redistributive tax system.
The OECD said so in 2016, and this will not change during my tenure as Minister for Finance.
Indeed, in 2018, it is estimated that the top 1% of earners in Ireland, in receipt of 12% of total income, will pay over 25% of all income tax and USC.
But the need for our economic system to be fair, and seen to be fair, will only deepen in the future.
HOW IRELAND CAN KEEP WINNING IN THE NEW, NEW ECONOMY
So with issues of measuring the new, new economy and of ensuring that is fair and equitable on the table, the next obvious question is how to make it work for Ireland.
How do we keep on winning?
Is there an economic Johnny Sexton drop kick?
Or, instead, are there not multiple phases, coordinated over a long period, that we must participate in?
In my view there are five key policies for success.
The first is the need to focus on so-called public goods that will support the new, new economy.
It is essential that our economy sees continued investment in public infrastructure that facilitates the priorities like high-speed broadband and public transport in better cities and in better communities.
The Taoiseach and I, to that end, will publish the National Development Plan in the coming weeks.
These investments – totaling over €100 billion in the next ten years- will be transformative in nature, supporting our economy and society in the most ambitious manner in the history of our young country.
The second is to foster the correct legal framework for intellectual property.
Ireland has, now, the necessary legal framework that allows inflows of intangible investment into this country.
The Higher Education Authority has been engaging in this work and will shortly publish its analysis of intellectual property policies and their implementation, looking at how Ireland can best strengthen practices in this area, and manage conflicts, for example in relation to commercialization of IP within the higher education sector.
Given that the technology is constantly evolving, it is of paramount importance that we continue to keep this under review and take the necessary steps to ensure that our legal code is fit for purpose.
The third is to have a tax system that fosters the development of intangible assets
Our new, new economy must remain an attractive location for investment in intangibles and the new economy more generally.
That is why our core offering is a competitive, business-friendly regime with a rock solid commitment to the 12.5 per cent corporation tax rate.
It will not be going up, and it will not be coming down.
Certainty in the tax treatment of intellectual property – indeed in relation to our tax regime – is a vital component of our competitive offering; a point which was considered in the public consulation that has just closed on Seamus Coffey’s report on corporation tax that my Department published late last year.
The fourth policy is to develop our human capital as well as our physical infrastructure.
The most important resource in the new, new economy is our people.
It is crucial that we continue to invest in human capital so that our workers have the skills and knowledge to succeed in the new economy.
Indeed, retraining and upskilling will become increasingly important as technological progress disrupts existing industries, in particular, through automation.
Our decision to increase the national training fund levy was an example of our determination to make progress in this area.
And the fifth key policy is to foster the development of clusters in important growth areas in order to attract new investment.
At the moment, clusters exist in Ireland in areas like the technology, pharmachemical and audiovisual sectors as well as many others.
All of you, I am sure, know of our reputation in this area.
Many of you work in just such a cluster.
The Government will continue to nurture the clusters we have and attract new ones.
That way, we win.
Pursuing these five key policies,
- on public goods;
- on the right legal framework;
- on tax certainty;
- on human capital;
- and on clusters;
will best place Ireland to succeed in the new economy and will help re-position the economy further up the ‘value chain’.
We need a national conversation on the new, new economy – on how to make it fair and how to make work for this country- and I hope that this will continue.
READY FOR WHAT LIES AHEAD
I am an immensely optimistic person, and I am immensely optimistic for the future of our great, little country.
The years that lie ahead, notwithstanding the many threats and risks that exist, will be good for us.
They will be good because we have equipped our economy to meet the changes that have occurred and will occur in finance, in technology, in human life itself, and stand at the centre of that change.
Many of you are proof of that.
The question is not “has the economy has changed?”
Because it has.
Nor is the question “is this new, new economy real?”
Because it is.
The question is “what are we going to do to sustain this new, new economy for Ireland in the future?”
Are we going to, as a country, enthusiastically embrace an economy of ideas, based in substantive economic activity that brings jobs and creates wealth that allows for the continued healing of our society after a lost decade?
Are we going to use the new, new economy to make Ireland a safer, fairer, cleaner and a better place to live?
Or are we going to view this new way of doing things with negativity, distrust and skepticism?
Small countries like Ireland- agile and open- are particularly well placed for what lies ahead, as we are more able than bigger countries to adjust to the changes and developments around us.
Small really is beautiful.
And while we are small, we are thinking big.
Many of you have heard it said that Ireland has, up to now, endured a “lost decade”- lost jobs, lost investment, and lost hope.
The next ten years will be about so much more than simply recovering those losses.
Going back Mr Haskell and Mr Westlake’s book Capitalism without Capital again, they point out that two small countries- Singapore and Ireland- have taken the steps necessary- steps like the correct tax code and the development of financial and intellectual clusters- to lead the way on the fostering and development of intangible assets.
With that in mind, the next ten years for Ireland will be about change and ambition to deliver better standard of living, greater fairness and a better life for those born here, and those who choose to live here.
And wanting those things for our people is nothing new.
Wednesday, 7th February 2018
Check Against Delivery
Deborah Sweeney – Press Adviser to Minister Donohoe – +353 (0) 86 858 6878
Aidan Murphy – Press Officer, Department of Finance – +353 (0) 85 886 6667