Greek alphabet is holding economic recovery hostage

It has been quite a week. The economic recovery is being held hostage by the Greek alphabet – specifically Delta, though there may be an Epsilon and more to come. And it is clear after 130 countries signed up to a corporate tax reform plan that Ireland's economic model of attracting foreign direct investment (FDI) here is under pressure, presenting a diplomatic path of the greatest delicacy for Minister for Finance Paschal Donohoe to walk.

And so we see dangers to the twin engines of the Irish economy. The lingering epidemic threatens consumer-facing domestic businesses, reshaping key sectors which employ tens of thousands of people. Standing back from the rows about how this was all decided and communicated, the message is clear – we are not out of the woods yet.

The corporate tax changes pose questions about the thriving multinational sector and whether future investment might be lost, as well as vital tax revenues. This week Ireland decided to join just nine other countries in refusing, for now anyway, to sign up to the new landmark deal. Given the massive US push for a deal, this was a big political call.

Forecasting, in these circumstances, and setting out plans in areas such as the public finances is really difficult. The challenge for the Government is to try to be strategic – and not just reactive.

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Any longer-term thinking as the pandemic rolls on is really difficult. A few weeks ago, the Department of Finance published some research, based in particular on what had happened in Israel, suggesting that a critical point was reached when about 40 per cent of the population was fully vaccinated.

But as the virus rampages through the UK, it is clear that much higher coverage levels will be needed to suppress the more infectious Delta variant. The unanswered question is whether, with most of the vulnerable population jabbed, countries like the UK and Israel will now see big rises in hospitalisation and deaths.

You would suspect indoor dining will not reopen here on July 19th. And Delta has raised new questions, too, about both the pace of recovery in the next few months and the longer-term prospects of economic life after Covid-19. The reopening of schools and college campuses requires urgent thought and planning – and examination of tools such as quick testing. Widespread rapid testing in Germany, for example, seems to be having a positive impact.

The Government’s job is to underpin stability as best it can – and to do all it can to get sectors open safely in the weeks ahead. The speeding up of vaccination – now in the “come and get it” phase for all – is welcome and vital. But we may now need to plan for a longer interim phase – when vaccination provides rising protection but not enough to remove all restrictions – and this will require serious preparation to try to keep as much of the economy and society open as possible while also keeping people safe.

Damage

The longer the pandemic goes on, the greater the damage to key sectors of the economy – hospitality, retail, leisure, tourism – and the more questions are raised about how consumers will act in future. Online shopping may become permanent, travel will be slow to recover and so on. Fortunately, the signs are that consumers are adjusting and the revival has been strong. But everyone is now again asking whether it will ever be “over” and that affects behaviour and spending.

Fortunately, tax returns on Friday show that income tax returns are ahead of expectations. The incomes – and savings – are there to boost spending. And corporate taxes, which have paid for so much in recent years, are again ahead of target, even if some threat now lies ahead. The big multinationals are paying more and more tax here, ironically in part due to the first phase of OECD reforms. But the second phase, now under discussion, brings dangers.

Paschal Donohoe will be aware of the reputation risks to Ireland from holding on from signing a deal along with eight other smaller players. Ireland – or Estonia and Hungary, the other two European Union hold-outs – cannot block an OECD deal. However, everyone will be conscious that one country can probably veto EU implementation of the OECD deal, even if bigger EU countries threaten to find a way around this.

Uncertainty

The key issue for Ireland – and why the State has not signed up – is the uncertainty about what happens in the United States, the key source of FDI here. With significant debate in Congress, will the US be able to agree its own minimum rate for the international earnings of its companies – and if so will it be at the same level as the effective tax rate agreed by the OECD? This is the key reason Paschal Donohoe is holding fire for now – despite the reputational dangers of being outside the tent. It points to a vital period of diplomacy with the US, as Ireland is pushed to sign up, but the Government first looks for clarity about what the US will do.

With or without a deal, massive changes in global corporate tax are now on the way. In the absence of agreement, countries will move unilaterally. Like Covid-19, this presents the Government with challenges of preparation, albeit longer-term ones. How are we going to fund third-level education and further research? What are the key infrastructural issues we need to address to keep investment coming here – affordable housing being clearly one?

It is hard to see through the fog here, but difficult to escape the conclusion that we are at an economic turning point . There are plenty of underlying strengths to build on and plenty of positive evidence of the resilience of the economy. But there is work to do as well with key issues facing both of the engines of growth.