Danny McCoy’s recipe for Ireland’s future success is to tap the corporate tax ‘money tree’, bring back social partnership and push for big government.
And he wouldn’t mind a “short, sharp recession.”
The spirited economist has been CEO of Ireland’s largest employers’ group, Ibec, for 13 years and has never been short of big ideas.
But his tax advice is completely at odds with what the government, the EU, the state budget watchdog and his former employer, the central bank, are saying.
The accepted narrative is that record corporate tax receipts – which were already a third ahead by this time last year – could disappear at any time.
While for Mr McCoy they are here to stay – for now.
“They could be volatile going forward, but they’re not volatile right now, and they’re not even showing any signs of going down,” he says.
“The way we set up what is currently the world’s most successful business model means that there is a money tree, so to speak.
“For the economy, this is the equivalent of winning the lottery. The Irish economy is a resource economy – it has found the modern equivalent of oil.”
Spending more of that windfall on ‘social capital’ – rather than accepting the Irish Fiscal Advisory Council’s (IFAC) proposal to dump it in a bad-day fund – is the best use of the money, he argues.
“The Rainy Day Fund is utter nonsense because it is raining today in Ireland’s social dimension. We have huge problems in our social infrastructure.
“Your mindset should be much more expansive. This is sustainable, unlike oil or gas. Intellectual property is a renewable resource.”
More money should be spent on housing, health care, education and infrastructure, he says, as well as more public servants to ensure building permits are issued on time and passports are not delayed.
“It is clear that our public sector is now too small for the size of the Irish economy.”
He advocates some form of sovereign wealth fund, similar to what Norway has for its oil revenues, which has been used to finance public spending – within strict limits.
Ireland’s corporate tax revenue has grown more than tenfold over the past decade, rising 50 percent in 2015, the year Apple moved around $250 billion in intellectual property to Ireland, resulting in record GDP growth of 26.5 percent – an event that led to US economist Paul Krugman coining the term “leprechaun economics”.
According to Revenue, 10 companies now account for more than half of net corporation tax revenue in Ireland, up from a third a decade ago.
If corporate tax revenues rise at the same rate for the rest of the year, the government expects a windfall of almost 20 billion in 2020.
But Finance Minister Paschal Donohoe has repeatedly argued that Ireland is a heavily indebted country and that he had planned to run a budget surplus next year.
He believes additional revenue should be used to pay off the debt Ireland racked up during the 2008 financial crisis and the last two years of the pandemic.
“Debt isn’t an issue in Ireland – all kinds of debt,” says Mr McCoy. “The national debt is not even significant.
“Corporate tax receipts in Ireland are like the Westminster subsidy equivalent in Northern Ireland. Irish households have not been pocketing for Covid.”
But the central bank warned this week that if few large firms leave Ireland or if the booming IT or pharmaceuticals sectors are hit, there could be a major shock to public finances.
It’s not just corporate tax revenues that will be affected, the central bank said. Foreign-owned multinationals accounted for about half of all income taxes and VAT paid in 2020.
Outside Ireland, recession forecasts are rife, with the OECD saying the UK could face zero growth next year, while Bloomberg raised the risk of a US recession to 38 percent.
The Central Bank of Ireland has lowered its forecast for this year’s domestic economy by about half a percentage point, but raised its outlook for the broader economy on the back of buoyant IT and pharmaceutical exports.
“Recession is definitely imminent,” says McCoy, “but in the case of Ireland, there may be a downgrade in growth forecasts.
“Can it really go back significantly? I do not think so.
“It may be that certain sectors could be hit very hard if people’s disposable income falls, so much of the hospitality industry, or unfortunately the experience economy, could be on the verge of a second slump.”
But Irish growth is still about twice as fast as our European counterparts, at least this year, and well ahead of the UK and US.
And IDA Ireland’s half-year results this week showed investment in Ireland’s economy has risen 10 per cent from record pre-pandemic levels and job admissions have risen by a third.
Unemployment has fallen below pre-Covid lows and is now at 4.8 per cent – essentially full employment.
Before the outbreak of the coronavirus pandemic, the Economic and Social Research Institute – Mr McCoy’s alma mater – warned that Ireland’s economy could be at risk of overheating.
Mr McCoy believes a recession – or ‘restart’ in Ireland’s case – could be a good thing to slow the economy and curb price increases.
The European Central Bank will try to do just that as it begins raising interest rates later this month. Other central banks have moved faster, embracing the pain of the recession in order to benefit later.
“There’s an argument for actually getting inflation under control quicker, and if one of the consequences of that is putting us in a short, sharp recession, then that’s a debate that should be had, because the world needs to definitely going to be rehired,” said Mr McCoy.
“A recession is partly what is needed for a reset. People might say why would you want a recession? Well, not getting inflation under control is a lot more socially divisive for everyone.”
Irish prices rose 9.6 percent in June, according to EU measurements, with the central bank forecasting they could average 7.8 percent for the year, well above previous estimates.
This has led to record wage demands in both the public and private sectors, which McCoy says could make Ireland “uncompetitive” compared to other countries.
“At this point, the power lies with the workers – people who are basically making lists of demands that are often unrealistic for companies and certainly not sustainable in the long term.
“There will have to be wage increases, but they must not be at the level of peak inflation.
“We can get through this inflation spike without a dramatic drop in living standards, but there has to be realism here.”
It’s not a surprising position from Ibec.
Neither does Mr. McCoy’s often-voiced desire to resume large-scale social partnership talks between employers, unions and government.
The process gives company leaders a seat at the table and numerical strength. And a way to raise grievances about labor costs.
“Employers are now being asked to do a lot more social engineering through their wage rates,” he says.
“Some of these things are important to employers: automatic registration, statutory sick pay, the right to separate, the right to work remotely. These are de facto PRSI increases for employers.
“Employer PRSI appears to be rising between five and nine percentage points higher than it is now. It is effectively a duplication of the employer PRSI. Let’s make that explicit.”
Ibec’s budgetary demands aren’t surprising either: capital gains tax reforms, exempting more people from higher income taxes, better corporate tax credits.
What the government shouldn’t do is “waste resources” by paying off richer households, he says.
In fact, he says wealthier young people, particularly students — who along with women over 35 have fueled the pandemic’s hiring boom — should pay more income taxes.
However, the budget is unlikely to help businesses and households deal with a potential energy shortage this winter, especially if the UK decides to turn off the taps on Ireland to prioritize its own population.
“The notion that Britain will keep its word cannot be accepted. Recent experiences are not good. The rationing risks are significant. Demand management is your only option,” he says.
https://www.independent.ie/business/irish/in-person-theres-a-recession-coming-but-in-the-irish-case-its-going-to-be-a-revision-downwards-of-growth-forecasts-41819705.html Personal: “There is a recession coming, but in the case of Ireland there will be a downgrade in growth forecasts.”