A New Long-Term Vision and Plan is Required
Prof John Fitzgerald, Professor Emeritus, Economic & Social Research Institute (ESRI), member of Royal Irish Academy
During the week this Summer School has discussed a wide range of topics. As with my school reports, the continuing refrain from different sessions and different speakers is “could do better”. Since it began, the Summer School has provided a vital forum for considering the challenges facing Ireland and how they may be addressed. Now, at the end of the week, it is probably time to look forward with some confidence. We have dealt with huge problems in the recent past: undoubtedly we could have dealt with them better. Nonetheless, the very fact that we have moved on to discuss new opportunities is a sign that Ireland adapts.
When I first came to the school in 1990 I was faced with one of my difficult challenges as a speaker – how to make the economics of monetary union interesting to an audience that included my 3 daughters aged 10 to 15. I failed on that occasion: the eldest still remembers how enjoyable it was – listening to Seamus Heaney reading his poetry, and the youngest remembers the boredom of it all.
Tonight, the audience may be less demanding but the challenge I am faced with is to talk about a long-term plan and vision. As an economist I don’t do vision – so I will concentrate on three different challenges we face over the coming decades, the opportunities that they provide and how we may plan to deal with them.
Halting climate change is a massive task for Ireland, as it is for the rest of the world. Focusing on our current problems allows us to ignore this vital policy issue but, unless we begin to make changes today, at some cost to the current generation, future generations will suffer huge losses.
The economic model that has seen the standard of living in Ireland converge and even exceed that of our EU 15 neighbours will need to evolve. Europe and the wider world are changing and we need to change with it. We need to find new ways of organising ourselves consistent with a changed European environment and inevitable demographic changes at home. Already we have made significant progress down this road.
I should begin by saying that, while I am Chairman of the Climate Change Advisory Council, I am not, on this occasion, speaking on behalf of the Council. Next Wednesday (July 26th) the Council will publish its Periodic Report which will provide advice on how Ireland should tackle the task of decarbonising our society by 2050.
Climate change poses very difficult challenges for the political system in Ireland and elsewhere. This is because inaction today will have major consequences over centuries to come, but the really serious effects will only begin to become apparent from the middle of the current century. However, taking the necessary action today to halt climate change by 2050 will prove costly for today’s generation. In addition, action by any individual country will make little difference – it needs most countries in the world to act together to effectively halt climate change.
Governments rarely go to their electorates and tell them that they are going to make life more expensive for them and that there will be little or no financial reward for their pain. In the case of climate change this is the challenge governments face. It is our grandchildren and great grandchildren who will benefit from applying the brakes today to bring the momentum of climate change to a halt. Like development aid, action on climate change involves an appeal to altruism on the part of voters – there is not a lot in it for people living in Ireland today.
To make the case for urgent action one has to argue that it is our moral duty to do so. For politicians this is difficult – they don’t normally appeal to the electorate on such grounds and voters are not used to looking to their politicians as moral arbiters.
While earlier generations in Ireland may have looked to the Catholic Church for moral guidance, and often got it wrong as a result of the failings of the institutional church, today we have to develop our own guidance on what is the right approach to climate change. This requires a much broader discussion in society to come up with the right answer.
The Pope, in his encyclical Laudato Sí, On Care of Our Common Home, provided a very eloquent appeal for action on climate change, drawing on the history of the human race for inspiration and providing a range of arguments on why action is a moral imperative. Unusually, the appeal was addressed, not just to believers, but to the world at large.
Unfortunately the Pope’s economics are not as strong as his ethics: he does not believe in markets and is sceptical of the role of technical change. If we are to halt climate change we will have to harness markets to drive down emissions of greenhouse gases. It is only by so doing that we will drive the technical changes that are needed to allow the world to halt global warming, while still maintaining a good standard of living.
As a first step, to encourage a reduction in greenhouse gases emissions and the introduction of carbon-saving technologies, we need to make carbon emissions much more expensive. Today, the prospect of higher costs in the future from burning fossil fuels is driving investment in renewable electricity. In addition, major investment is being undertaken in developing new technologies for cars with the prospect that the cost of emissions will make such investment worthwhile.
For the developing world they will only invest in clean technologies if they are the cheapest option. The developed world, by appropriate investment, has to make clean technologies the cheap solution.
Even if voters accept the validity of the moral case for action, too often the distractions of current problems will make it difficult for governments to take action. For this reason it was good to see the government devoting much of a special cabinet meeting recently to the challenge of Climate Change.
So far, Europe has sought to take the lead in implementing measures to slow or halt harmful greenhouse gas emissions, but to date the policies adopted have not been very effective. However, the best strategy remains for Europe to gradually raise the cost of emitting greenhouse gases. By so doing, the EU will signal that the cost of carbon will continue to rise into the future, providing incentives for investors to research how best to reduce carbon. In addition, governments themselves can finance research into new technologies using tax-payers’ money.
Without Europe, our actions would have no influence on investors in new technologies. That is why we need more EU action not less. In the case of climate change, we should not be talking about what the EU makes us do. Instead we need to welcome EU action as the only way of meeting Ireland’s goal of tackling climate change. The EU rules are our rules and we need to try and have them strengthened.
Western altruism may also receive a little help from Asian economies beginning to tackle their carbon pollution problems in their own self-interest. As Asian economies continue to grow, reducing the level of air pollution becomes an important quality of life issue for their citizens. Measures to make Asian economies more energy-efficient will also help slow the growth in greenhouse gas emissions. However, the rise in global emissions is only likely to be halted when new sources of carbon-neutral energy are developed.
Evolving our economic strategy
Over the last 40 years Ireland’s competitive advantage has changed and to some extent this evolution has been moulded by public policy. The task now is to identify how it should evolve over the coming decades and to adjust domestic policy to facilitate this change.
Underlying Ireland’s evolving policy priorities in the economic sphere has been a reliance on the relative impartiality of the EU Commission, which meant that the initiatives of the Commission were the focus of attention. Today, EU governance has changed for Ireland and policy initiatives often tend to come from key governments, with the EU Commission playing a more minor role. This change has been necessitated by the nature of the recent economic crisis and the inadequacy of the EU institutions to deal with the crisis. However, now that the current crisis is over it is to be hoped that there will be some reversion to previous practise. In particular, the EU Commission’s lead role in negotiating Brexit on our behalf is to be welcomed.
In pursuing these longer-term objectives there will also be a need to reconsider old alliances and work to develop new coalitions of interest within the EU.
In the 1970s Ireland’s vital national economic interest was centred on protecting and developing the CAP – we hid under a French umbrella. From the late 1980s through 1992 the focus was on maximising the level of EU transfers under the structural funds – a German umbrella proved useful. However, since the mid-1990s the focus has shifted to defending Ireland’s tax system from EU harmonisation; in particular, defending the low rate of corporation tax – in this regard the UK have, betimes, been a useful supporter.
For the last fifteen years Ireland’s vital national economic interest has been defined as the protection of our low corporation tax rate. As part of this policy, Ireland has resisted all encroachment on our independence in the sphere of taxation. Even where it may have been in our interest, we have resisted consensual harmonisation in any area of taxation.
However, there is an increasing diplomatic cost to maintaining the corporation tax system as more and more of our neighbours and potential allies become irritated by the regime and perceive that they are suffering as a result of it. Diplomatic capital was sacrificed to get protection for the tax regime in the Nice Treaty. Over the crisis years we saw how this issue affected the attitude of some key EU partners to the need for assistance to Ireland.
Dependence on the corporation tax regime is a risk. Much of the advantage the low corporation tax rate confers could be wiped out by foreign (or even EU) legislation. It also irritates our neighbours and is a cause of friction with our allies in the EU and elsewhere. While the manufacturing tax regime of the 1980s did not attract much opposition, because it involved major jobs as well as profit transfers, the extension to the financial sector in the late 1980s was always likely to provoke more opposition. By extending it to the financial sector it held the potential to divert profits to Ireland without diverting any real economic activity (FitzGerald, 1989). The further extension of the low corporation tax regime to cover all economic activity in the second half of the 1990s, as required by EU law, further entrenched this possibility. While it brought very significant economic advantage to Ireland, (Conefrey and FitzGerald, 2010), it left the economy even more vulnerable to a sudden dramatic change in circumstances in a way that is not under our control. Changes in foreign tax legislation can now, theoretically, impose very substantial costs on Ireland.
While EU law, the interests and lobbying power of multinationals and our good relations with our neighbours make such a demarche very unlikely, the presence of this irritant to our friends is clearly affecting our external economic relations; it has an ongoing cost.
In addition to this danger of external action that might damage our economy, there is a well-recognised long-term trend for all countries to reduce their rates of corporation tax. Thus, absent any policy change in Ireland, this competitive advantage will continue to be eroded over the coming decade. For these reasons it is important for Ireland to reduce rather than increase its exposure to the corporation tax regime. Patrick Honohan, in 2005, said that we need to wean ourselves off dependence on the corporation tax regime and this prescription remains valid today.
Dramatically reducing our dependence on the low corporation tax regime by reorienting domestic policy is a long-term project. However, the best approach to reducing dependence is to at least avoid promoting new ways to further leverage this low tax advantage and, instead, to concentrate on other ways to enhance Ireland’s competitiveness. Also, eliminating or reducing any remaining loopholes that attract low value added – high tax avoidance activity to Ireland, in a way that further damages our relations with our key partners, would be beneficial. The cost of such tightening could be small (or even positive).
In planning for the next twenty years we need to consider how best to reduce Ireland’s dependence on the corporate tax regime, while not destabilising the current structure of the economy. Blanket opposition to all EU tax proposals is most unwise and, where they could benefit Ireland, or at least do no damage, we should support them. Also, in some cases it could be opportune to make some change, which might involve limited cost or even no cost, in order to strengthen Ireland’s long-term bargaining position.
In fact we are already quite a distance down the road to developing an economy that is independent of the corporation tax regime. The Multinational Enterprise (MNE) sector currently accounts for 15% of our real income and about 15% of employment. They also pay much higher wages than domestic firms so they remain very valuable to us. However, since the recovery began in 2012, the bulk of the growth in the economy has been generated by Irish firms. If this growth continues the role of the MNEs will become less important.
We still need and welcome the presence of major multi-nationals but there are signs that domestic firms may be, as is desirable, taking over the baton of growth over the coming decade.
Demographic Challenges and Opportunities
In the 1940s and the 1950s the “population problem” was often featured in discussion of the Irish economy. This phrase summarised the concerns that the population was continuing to fall through continuing high levels of emigration. Today the “problem” is very different.
I will just mention two issues that are likely to be important for the future: old age dependency and retirement; migration.
Because so many emigrated in the 1950s, the number of retired people in Ireland today is very low – they are retired in the UK. This has meant that the burden of paying pensions to the over 65s is very low in Ireland today. However, this is set to change over the coming decades. The combination of rising life expectancy and the fact that net emigration ended in the 1970s means that the numbers aged over 65 will rise rapidly over the coming decades.
In 2011, those aged over 65 amounted to 20% of the working age population whereas by 2046 they will account for 40% of that population. This will mean that the taxation required to provide today’s level of public pension will have to double.
To begin dealing with this problem the pension age has already been raised to 66 and it will rise to 68 by the end of the next decade. However, the government did not raise the compulsory retirement age. This produces the bizarre result that people who would otherwise have been working are forced to register as “unemployed” till they are 66.
While raising the retirement age reduces the numbers drawing pensions, it would be much more beneficial to the public finances if the individuals continued to work, paying taxes. With the share of those retiring who have a good education gradually rising, they should be seen as an important economic resource. Research for the UK shows that the tax revenue effects of longer working lives is likely to be more important than the savings in pension payments.
The second important demographic consideration is the size and direction of migration flows. Experience of the last 30 years suggests that Ireland is a country where net immigration is the norm. It is only in periods of economic crisis that the flow has been reversed with significant emigration. It seems likely that this pattern will persist for some time to come.
Up to 2012, excluding returning emigrants, the bulk of the immigration came from other EU countries. Those coming to Ireland were generally well educated and they came to Ireland to work; they also tended to leave if they didn’t have employment. Thus immigration added significantly to output per head of population.
However, since 2012 there has been a substantial increase in immigration from non-EU countries. It would appear that they are also well educated. However, the impact of such immigration on the labour market needs further assessment.
Ireland has benefited hugely from developing a cosmopolitan economy. We need to build on this success by learning new ways of organising ourselves, benefiting from the experience of our EU neighbours.
One of the key channels through which the Irish economy and wider society was transformed was the return of emigrants in the 1990s. Many young people had left during the 1980s crisis and gone to work elsewhere in Europe or the rest of the world and many expected never to return. However, the bulk of them did so in the 1990s. Research shows that, as a result of the experience they gained abroad (including sometimes learning a foreign language), they were significantly more productive when they returned to Ireland. As a result, returned emigrants earn 10% more because of their additional experience and they produce 10% more than those who never left.
Much of the management expertise of successful firms in Ireland today, whether foreign owned or domestic, are returned emigrants bringing specialised skills.
Another very important innovation has been the Erasmus scheme which has allowed many young Irish students to study elsewhere in the EU, broadening their expertise. In addition, the presence of foreign students in Irish universities helps to raise standards by bringing different experience to classes.
While this transfer of skills in the business community and the third level sector has been important there is a need to expand it. In particular, the public sector could benefit from skills transfer with countries such as Germany, France, Finland, Denmark and the Netherlands. Already there are a few German and French public servants working temporarily in the Irish public service. This needs to be expanded and mirrored by Irish public servants working abroad.
The major obstacle to this is the language barrier. While many public servants in these countries can speak English they do not work in English. To benefit from the experience in another administration Irish public servants would have to speak the language.
Finally, a multicultural society is much broader than the economy. Twenty years ago a very prominent Australian politician who was interested in the Celtic Tiger phenomenon asked me what role Irish music had in the Irish success story. At first I was nonplussed. However, the Australian had made an important point.
One of the important factors in Ireland’s success since 1990 was that we attracted bright young foreigners to come and work in Ireland. We tend to focus on what they are doing for the Irish economy. However, we should also look at why they were coming to Ireland.
Undoubtedly the very high share of the population in the late 1990s accounted for by teenagers and those in their early 20s affected Irish culture. There was a big demand for live music under many guises. In turn, this made Dublin or Galway seem an attractive place for a French or Dutch young person to spend some time. Dublin sounded much more attractive than Birmingham or Bremen and the result was an influx of skilled young workers.
For the future, with mobile populations, it may be more important to consider what attracts young people to live in a location than to worry about the attractions for employers. This could give rise to a range of different policy approaches to maintaining and developing a vibrant economy and broader society.
In the changing world we need to have friends. When Ireland wanted to protect the CAP in the past it was natural to hide under the French umbrella. However, as Ireland’s strategic interests evolve we need to consider new umbrellas, new alliances. Many of our interests are reflected in the interests of the Scandinavian EU members. We need to work on understanding where their interests lie and co-ordinating our response within the EU.
In so many areas, such as climate change, the best hope of achieving our national goals is the development of appropriate policy at EU level. The EU, especially the EU Commission is the answer, not the problem.
We need to reduce our dependence on the low corporation tax regime. It can be an obstacle to strengthening our alliances with friends elsewhere in Europe. Already we are a significant way along this path with most of the recent growth in the economy coming from Irish firms.
The next task is to begin to think what type of economy we want in twenty years’ time and how we can progress such a dream. This will focus attention on where Ireland’s advantage lies within the EU and what other EU members may be likely to share our broad objectives. Building on the multicultural economy we now have will be crucial to success. The only certainty is that the future should be different from the past.