Speech by Minister for Finance, Paschal Donohoe T.D. to Central Bank, ESRI, EIB at Business Finance & Investment: Recovering from the Pandemic, Preparing for Future Challenges

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Introduction

Thank you for inviting me to speak at this event examining business’ recovery from the pandemic, and preparing for future challenges.

This is particularly timely given the uncertainty that we all are now facing due to the Russian invasion of Ukraine. I want to first acknowledge the immense human suffering that is occurring in Ukraine and assure you that we are doing all we can to support the Ukrainian people. Ireland’s support for Ukraine’s sovereignty and territorial integrity is unwavering.

To this end, we and our EU partners have implemented a range of sanctions against Russian aggression. The sanctions that Ireland, along with many other countries, have imposed on Russia will have a severe and lasting impact on the Russian economy.

The war will not be without cost for Ireland. Although our direct trade links with Russia are limited, the Irish economy remains exposed to the indirect spill over effects.

Some of our key trading partners are highly reliant on Russia and Ukraine for certain goods and Russia plays an outsized role in global energy markets.

So the war in Ukraine, although taking place many miles away, will have an impact on businesses and individuals in Ireland. That is why talking about SME resilience is as important today as it has been over the last two years of the pandemic when SMEs had to deal with the severe economic restrictions that COVID public health restrictions necessitated.

While the last two years saw many challenges for Irish businesses, it also saw, I believe, a strong and coordinated response from Government to protect households and firms from the effects of the pandemic.

Supports such as the Employment Wage Subsidy Scheme, the Covid Restrictions Support Scheme, and tax debt warehousing were vitally important to businesses throughout the pandemic. These measures worked. Without them, we would be facing even greater challenges.

The swift introduction of these schemes in March 2020 and their extension and amendment throughout the last two years was essential to preserve jobs and help businesses to survive. However these schemes have required significant public funds with the EWSS and CRSS alone costing almost €8.5bn. In addition, almost €3.2bn of tax debt has been warehoused by over 100,000 individual businesses.

This response could only take place due to the careful management of the economy in the years leading up to the pandemic and European actions. Our focus is now on repairing the public finances and ensuring economic recovery while responding to the consequences of the war.

However, this recovery is taking place at a time of unprecedented geopolitical uncertainty. It is apparent that, we are at the start of dealing with the economic impacts caused by the war in Ukraine. My Department will continue to analyse and monitor these developments closely and will publish an updated set of economic forecasts in the Stability Programme Update in April.

SME Research

Ireland’s economic recovery and future growth must have small and mid-size businesses at its core.

SMEs are the backbone of the Irish economy providing vital employment across the regions, and are at the centre of Ireland’s towns and villages.

We can see this from the latest CSO statistics; SMEs represent 99.7% of enterprises in Ireland. Two thirds of all persons are engaged by enterprises, generating almost 44% of total turnover in the private sector.

As Minister for Finance, I have seen throughout COVID how timely access to data and economic research has helped Government make better decisions in service of the Irish people. I welcome research that helps us better understand the complex challenges that businesses may face and that can input into the wider evidence-based policy making process, including the research discussed throughout today’s conference.

The Department of Finance-ESRI research paper on SME Investment presented here today is a result of the ongoing Joint Research Project between my Department and the ESRI, using up-to-date information gathered directly from SMEs as part of the SME Credit Demand Survey. Ongoing research into SME investment practices continues to provide important insights into SME financing trends and related issues.

The SME Credit Demand Survey itself, which my Department has conducted biannually since 2011, is an invaluable evidence base that provides significant insight into the firm level performance and behaviour of Irish SMEs.

Resilience through COVID

Irish SMEs have shown remarkable resilience throughout COVID. They were able to adapt and adjust to ensure that they could continue to trade as fully as COVID public health restrictions allowed.

This ingenuity and adaptability will continue to serve Irish SMEs well as we move to face the emerging challenges that we will have to grapple with, including climate change and digitalisation.

The latest SME Credit Demand Surveys show the significant recovery that SMEs have made in 2021. 77% of SMEs reported that they had increased or stable turnover. 57% of SMEs reported a profit, compared to 31% in 2020.

The latest figures confirm the sustained growth in the domestic economy in 2021, notwithstanding the lockdown in the first part of the year and the delta and omicron variants later in the year.

Modified domestic demand, my preferred measure of domestic economic activity, increased by 6.5% in 2021 and now stands around 7% above its pre-pandemic level.

This is in keeping with the rapid recovery in the labour market with a record level of employment of two and a half million people in the fourth quarter last year.

Insolvency Supports

In acknowledging the importance of the Covid supports the government committed to ensuring that there is no cliff-edge to supports for businesses, while also accepting that such supports cannot continue indefinitely.

As the very significant state supports that were provided to protect SMEs and their employees throughout COVID have been unwound, we worked to make sure that they were being removed concurrently in the same phased and gradual manner as restrictions were lifted.

The current exit from the Employment Wage Subsidy Scheme is an example of such a gradual change.

The cumulative effect of government wage supports, deferred tax liabilities, loan payment breaks, forbearance from other creditors, highly accommodative monetary policy, and pre-existing financial buffers have likely held down the insolvency rate.

This can be seen from Central Bank figures which found that the number of liquidations in 2020 remained lower than 2019; while figures also suggest there was a significant decrease in corporate insolvencies in 2021.

Government has introduced two key pieces of legislation to aid smaller companies who are struggling. The Companies (Miscellaneous Provisions) (Covid-19) Act 2020 now provides for a total of 150 days in the examinership process, and increases the threshold at which a company is deemed unable to pay its debt to €50,000. The legislation is temporary it can be extended if needed.

The Companies (Rescue Process for Small and Micro Companies) Act 2021 provides a new dedicated rescue process for small and micro companies, mirroring key provisions of the existing examinership process but designed to be more cost efficient and capable of conclusion within a shorter period of time.

The intention of these is to give companies additional breathing space to restructure, trade through the crisis and preserve employment.

Inflation

Inflation picked up sharply over the second half of last year and in February stood at 5.7 per cent.

Both domestic and external factors contribute to the increase in inflation.

On the external front, the rise in wholesale energy prices is the key contributor and reflects both the rapid rebound in global demand and, more recently, events in Ukraine.

Domestically, the speed and strength of the economic recovery have led to a mismatch between demand and supply and put upward pressure on prices.

Due to energy price spikes since the Budget and more recently the conflict in Ukraine, there is significant upside to our inflation forecasts for the year.

Indeed, as a result of Russia’s systemic role in energy supply, oil and gas prices have risen sharply. These increases will feed into higher energy inflation over the coming months.

As Minister for Finance, I recognise the added pressure that these rising costs are placing on both households and businesses. This is why I and Minister McGrath introduced a €505 million package in measures to mitigate the rise in the cost of living in February and further recently introduced a cut in the excise duty on both petrol and diesel.

Eurogroup

As Eurogroup President, I am keenly aware that any talk of investment or recovery cannot be seen solely in national terms.

There has been a very strong and rapid recovery across the euro area, where we saw growth of 5.3% in 2021 with unemployment at a record low of 7%.

However, the need to monitor inflation across the euro area and the recent developments in Ukraine are front and centre in discussions.

Policy will remain agile and, in fact, a hallmark of economic policy during the pandemic has been the degree of coordination and consensus, with budgetary and monetary policy working hand-in-hand.

The supportive monetary policy decisions of the ECB were coupled with swift, decisive and coordinated actions by governments to cushion the impact of the pandemic at both national and EU level, not least with the implementation of the ground-breaking Next Generation EU recovery plan.

Through Eurogroup, I continue regular engagement on economic policy matters and work to ensure that the policy mix that we are pursuing supports the recovery, promotes investment, and safeguards debt sustainability.

This is why the work on banking union, economic governance and broader economic policies are all intertwined and co-dependent.

One of my priorities as Eurogroup President is an ambitious Work Plan on Banking Union, a political framework to deliver tangible progress and serve the goals of depositor protection, robust crisis management, and a stable, resilient and competitive banking sector which is capable of facilitating broader economic growth.

It is critical to our credibility, and to the credibility of the financial sector, that Europe’s economic firepower on the global stage is reflected by a competitive banking sector that supports our SMEs and our corporates so that they can deliver on their investment needs.

Challenges going forward

I have already seen the ability of SMEs to adjust and bounce back as they have dealt head on with major disruptors such as the Financial Crisis, Brexit and COVID over the last few years. I believe that the Irish small business community possess a resilience to continue to adapt and to transform in the face of challenging circumstances.

I also recognise the role that our SMEs will play in driving and facilitating change – especially in terms of meeting the investment needs of the digital transition and in response to climate change.

As Finance Minister, my priorities are to ensure that Ireland has the right economic, fiscal and financial services policies to support our climate ambition and, on the international stage, the right policies to support climate action, resilience and adaptation in the developing world.

SMEs will have to adapt and change to ensure that they are ready for the physical and transition risks and the inevitable disruptions they will bring to business operations, services and supply chains.

The SME sector will play a critical role in managing and achieving the transition to a low carbon economy by driving innovation in other sectors, such as transport and agriculture. While building sustainable low carbon businesses is becoming increasingly imperative.

As a Government, we are working to ensure that SMEs are supported so that they can be at the forefront of the changes needed to the digital transformation of business through the Digital Ireland Framework.

Building on the digital transformation that businesses have made over COVID, Government is seeking to increase adoption of digital technologies by all businesses, in particular SMEs. A key target is for 90% of SMEs at Basic Digital Intensity level by 2030.

Conclusion

I would like to conclude by once again thanking the Central Bank, EIB and ERSI for inviting me to speak this morning, conferences such as this are vital in presenting and discussing research that can help us better understand the needs and challenges facing SMEs.

SME policy is a cornerstone of Government policy, given the vital importance of the SME sector to the economy.

The Government is committed to supporting our SME sector who, while emerging from the impacts of Brexit and COVID, are now facing the further unknown economic impacts of the war in Ukraine. However, beyond this immediate challenge, we are focused on also building a stronger, fairer, and more sustainable economy prepared for the next phase of disruptive technologies and on a pathway to a low-carbon future.

Thank you.

ENDS