Driving an economy with a strong momentum
Despite the challenges of Brexit, Trump and a domestic housing crisis, Finance Minister Paschal Donohoe is upbeat and expects growth this year of about 3.5 per cent
Paschal Donohoe, Minister for Finance, Public Expenditure and Reform, at the Department of Finance. Photograph: Nick Bradshaw
Paschal Donohoe strides into the boardroom of the Department of Finance on Merrion Street in Dublin, apologises for running a little late and asks for a few more minutes grace while he makes a quick phone call.
“Would you like a cup of tea?” he says in a friendly tone.
As both Minister for Finance, and Public Expenditure and Reform, Donohoe is a busy man. And we meet on the day of the first Cabinet meeting of the year, dominated by discussion around a certain referendum.
Donohoe is seven months into his time as Minister for Finance, and is in charge of an economy with strong momentum, notwithstanding the challenges of Brexit, Trump and a domestic housing crisis.
“We face the prospect this year of growth of approximately 3.5 per cent,” he says. “We believed last year that the economy was going to grow by 4.3-4.4 per cent. [But] it’s likely to have grown by even more than that due to the strength of the Q3 [third quarter] figures.
“We’ll be updating those figures, probably before April, to give a final view of where 2017 ended up. My sense is that it will definitely be ahead of what we have flagged.”
There was also good news on the labour force front from figures published by the CSO. The headline unemployment rate was 6.2 per cent at the end of last year, down from just over 15 per cent in March 2011, when Fine Gael came to power, in coalition with the Labour Party.
Employment hit 2.2 million at the end of December, just below the 2.24 million peak recorded in 2007.
“We expect an additional 45,000 people will gain jobs this year. We have a strong body of evidence to suggest that our domestic economy is growing by 3-3.5 per cent and that shows the resilience of the Irish economy.”
However, Donohoe acknowledges that Ireland is still a recovering economy rather than a recovered one, following the trauma of the banking and property sector crashes from late 2008 onwards.
Recently, he cautioned that he would be prepared to raise some taxes or hold back on parts of the €3 billion in spending or tax cuts he is expected to have available for Budget 2019, to prevent the economy overheating.
This has puzzled some economic commentators, including Chris Johns. In a recent column in The Irish Times, he suggested Donohoe was seeking to put out a fire that wasn’t yet burning.
“In Chris’s article, he compares Ireland to a region in another country, but I’ve responsibility for a country, not just part of a country. I have said I don’t believe overheating is occurring at the moment. Were it to occur in the future, I would have to respond.
“I look at what happened in commercial property last year. There were two reasons I made that change [to increase the stamp duty tax to 6 per cent]. One was to raise revenue . . . to ensure that we can pay for the additional spending measures.
“The other was that I was looking at the changes that were happening in yields, rent levels and prices and I decided that what I saw, particularly in the second half of last year, I didn’t want to see that continue. Particularly the indirect effects of that in other parts of the economy.
“What I would say to Chris is that I read his column every week and he writes lots of very interesting things. But I’m not talking about acting on a fire that I think is happening now but, if it were to happen in the future, I would take measures to respond.”
One tax that doesn’t look likely to increase sharply in the near future is the Local Property Tax.
A review of the tax was announced this week. Given that it is based on the price of a property, many homeowners are concerned that they will be hit with a big bill when the tax is reviewed in 2019 due to price inflation since valuations were last registered in 2013.
The fact that I think we can deliver an additional 45,000 jobs this year while seeing reasonable wage growth... is a key indicator that we still have productive capacity within our economy
“It’s my objective that we have moderate changes in local property tax across the coming years but I will be coming back to Government later in the year with recommendations on how we will do it,” he says.
“Any changes that we make in terms of the liabilities and bills that people have to pay will be very modest and affordable.”
Donohoe insists that the Local Property Tax is here to stay.
“Overall, I want to have a tax code that is competitive . . . that has a broad base, that includes the taxation of property. We need property taxation in Ireland and . . . it will continue to be an essential part of our tax base.”
On capital spending, Donohoe wants to “take great care” to phase any such spending.
“My view is that if I was to do it in a single surge, I wouldn’t be able to deliver the productive capacity in the economy to ensure that the increased level of expenditure delivered activity at prices that were good value to the taxpayer,” he says. “The second reason is a fear that such a change in itself will generate a change in price levels.
“The fact that I think we can deliver an additional 45,000 jobs this year while seeing reasonable wage growth take place is a key indicator that we still have productive capacity within our economy.”
His view of reasonable wage growth is 2-3 per cent.
Donohoe plans to outline a capital infrastructure programme for the next 10 years in the “coming weeks”, that will include a number of major transport projects, including Metro North in Dublin, which is due for completion in 2027.
“It needs to be conceived as more than a city centre to airport axis,” he says, adding that it should include Swords and other parts of north county Dublin. “One of the major benefits of using such an approach is the ability it has to allow us to see land north of the airport in a different way. There’s really significant development potential from a homes point of view and an office point of view, if we can link up that part of the city better.”
He declines to put a figure on the cost other than to say it will be “many billions” of euro.
What about the Dart Underground, which was shelved on cost grounds during the austerity years?
“The last Dart Underground project was too expensive and over engineered. I want to see something that is more affordable with the same benefit delivered in a different way. I’m confident that it can be delivered.”
Another issue to be dealt with this year is the establishment of an escrow account for the €13 billion in back taxes that the European Commission has ruled that Ireland must recoup from technology giant Apple.
Both Apple and the State have appealed the Commission’s ruling.
We have had a very complicated set of engagements and negotiations with the Apple company and I’ll make a further statement then when the money will come through
Apple’s announcement on Wednesday that it would pay $38 billion in taxes to the US as it repatriates its cash pile changes the nature of this case. Nevertheless, the €13 billion, plus interest, must be collected from Apple in the meantime and held in an escrow account.
Earlier this week Donohoe received the green light from Cabinet to begin the process of hiring managers for the Apple account. When will the money be transferred into the account?
“We will begin to see movement come into that account across the early part of this year. That’s my expectation,” he says. “We have had a very complicated set of engagements and negotiations with the Apple company and I’ll make a further statement then when the money will come through. My objective is to ensure that all of the money will be deposited in that account, and I will deal with the ’when’ and ’how’ in the coming weeks.”
Donohoe is adamant that the State will pursue its own appeal. “We are dealing with protecting the integrity of our tax code so we will continue to be committed to maintaining our defence of our policy and the implementation of that policy. It’s very much a matter for Apple regarding what it would do.”
Looking ahead to Budget 2019, Donohoe has one goal in mind on personal taxation. “I want to continue the pace and the kind of tax reform and change that I made in Budget 2018 into future budgets. I’ve prioritised the standard rate cut off point [the point at which you enter the high tax rate] as being an area that I want to deliver further increases in the future. When I deliver the next budget that will be the area I continue to focus in on.”