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Time to start changing the game

Posted on March 30, 2018 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

The story goes that there was a slightly inebriated person found under the light of street lamp searching for something. When asked by a police officer about what was happening, the person replied ‘I’m looking for my house keys’. They both searched together but found nothing. When the police officer asked ‘are sure you lost them here?’, the person revealed that the keys had been lost in the park. ‘Why look here, so?’ said the officer to which the person replied: ‘this is where the light is’.

Irish economic, tax and social policy are driven in a significant way by a model that places huge reliance on Ireland’s attractiveness as a low-tax economy – not just for multinational corporations who pay tax on their booked profits here but also for individuals who live and work here.  Under the light and glare of controversies about proposals to introduce new forms of digital taxes and a common consolidated tax base across the European Union, it seems that the Irish Government is pressing hard on all diplomatic fronts to block or delay progress on these proposals.  The departure of an ‘ally’ in the member of the United Kingdom is seen as highly regrettable for this as well as other reasons.

There is no denying that a policy of tax-facilitated relocation of corporate activity to Ireland plus reclassification of certain activities such as ‘contract manufacturing’ in Asia by ‘Irish’ firms has worked wonders for Gross Domestic Product especially during the ‘Great Leap Forward’, when GDP grew by 26% in 2015. Suffice it to say that living standards and wages did not grow by 26% in 2015 or in any subsequent year.

There is a serious and important point that Ireland must continue to attract investment to Ireland and that tax is one element in a package of things that matter.  Many jobs depend on a long-term strategy of investment-friendly public policy that offers transparency, fairness and stability (given that investment decisions are often long-term and premised on some level of certainty about what to expect).

In Knocknaheeny, Cork, over 5,000 jobs depend on the sales, distribution, manufacturing and technical support activities of Apple located there (though most of the workforce probably hail from around Cork county and city). Add to this an extra hundred jobs at the Apple customer service office in Lavitts Quay in the city centre.

Apple is only one example of a wider reality. However, its presence in Cork where it employs possibly a quarter of its entire European workforce is a very significant factor in the economy of Cork and county. It is reasonable to conclude that many of the jobs directly generated by Apple are relatively well-skilled and well-paid.

Whatever way Irish tax, enterprise and social policy is construed over the coming decades we need to abide by the first principle of ‘do no harm’.

But, that will not lead us to the ‘house keys’ in the park.

Irish enterprise policy has been hampered by an undue focus on foreign direct investment to the relative neglect of growing a strong, export-orientated and high value-added domestic sector. The backbone of our economy is small and medium-sized enterprises (enterprises that employ 250 or less): they employ two out of three workers in the Republic of Ireland and they contribute almost one half of Gross Value Added to the economy. These are, according to available research, the most vulnerable to a British withdrawal from the EU and all that is likely to go with that.

While there are exceptional and well-known cases of outstanding domestic enterprise success on world markets, the overall picture is not impressive. Levels of productivity are mediocre especially when comparing like with like across European states. Other European countries have taken a different policy approach. In the case of Finland and Denmark, for example, there is a strong tradition of public investment in research and development as well as in the economic and social supports that foster entrepreneurship, innovation and success on world markets. In the case of Germany, Austria and Switzerland, there is a centuries-long tradition of the Mittelsand of small and medium-sized enterprises that have weathered the storms of recession by playing to their strengths in terms of workforce skills, marketing and quality brands.

Building, investing in, and re-orientating domestic enterprise is a long-term strategy. There is much happening through various supports, schemes and initiatives. Included in this is the great work of agencies such as Enterprise Ireland and Bord Bia. Yet, we need to move enterprise policy forward in a much more coordinated and ambitious way. Tax breaks, loans, advice and other supports are not enough.  The policy of taking equity stakes in new start-up enterprises such as happens through the Ireland Strategic Investment Fund needs to be broadened and ramped up. Our relatively low level of business (especially domestic) and government expenditure for research and development needs to be addressed.

We need to up the game and change the game. This will take time and social consensus. Defending what we have cannot be the only game in town.  In any case, others will change the game for us. We have no alternative.

(the above appeared in The Irish Examiner on 2nd April 2018. The article can be viewed here.)

 

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