Minister McGrath’s Speech at the Irish Tax Institute Annual Dinner

Friday, 3rd June, 2022

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Introduction

Good evening ladies and gentlemen and thank you Martin for your very kind words in your introduction.

It is a real pleasure to be here with you tonight at your annual dinner and I would like to begin by thanking Karen Frawley, President of the Institute, for inviting me as your Guest. My colleague Minister Donohoe sends his apologies from the United States where he has a series of engagements including a meeting with the Treasury Secretary Janet Yellen, and he sends his regards to you all.

The last time the Institute held its annual dinner was 28 February 2020, the weekend the first case of COVID-19 was detected in Ireland. Nobody knew then, nor could they have imagined, what lay ahead of us over the following two years. Over that time, we have suffered loss, but we have endured, and we have learned more about ourselves, about the value of community and the importance of social solidarity.

The experience we’ve been through makes us appreciate occasions like this all the more - the opportunity to come together in person and enjoy each other’s company.

This has been a very significant week in our emergence from the pandemic. The Employment Wage Subsidy Scheme officially came to an end on Tuesday. The EWSS or its predecessor, TWSS, had been in place for over two years, since March 2020.

These schemes formed the backbone of the Government’s economic response to the pandemic and helped to protect the vital link between employers and employees.

The strong economic recovery we are witnessing re-enforces our view that a graduated exit from the scheme was the correct approach. The total level of support provided under the wage subsidy schemes was unprecedented at €10.7 billion. Over three quarters of a million employees and 52,000 employers benefitted from EWSS during the period when it was operational.

Devising and implementing the range of support schemes was not a straightforward task, and I want to acknowledge the key role the Institute played during Covid and the positive engagement with the Department of Finance to work through the complex taxation policy choices we had to make over the last number of years.

The view of the Institute is always a very valuable input to public debate in the country and I want to thank the President of the Institute, Karen Frawley, CEO Martin Lambe and the immediate past President, Sandra Clarke for their leadership particularly during this extraordinary time. Your Institute made a difference, and on behalf of government, I thank you for it.

I also want to thank all the members of the Institute, the tax advisers, for all the hard work throughout the last number of years. I know many of you worked long hours, speaking with clients and engaging with the Revenue Commissioners and I want to thank you all for your dedication. We asked a lot of you and those you serve, and in return, we did our best to provide enough support to sustain all the impacted businesses.

I also want to take this opportunity to pay a special tribute to the Revenue Commissioners for the outstanding role they did through COVID – often in incredibly difficult and demanding circumstances. They demonstrated extraordinary agility and innovation in helping to design and then implement schemes that were unimaginable in the past.

Who would have thought the government would step in and pay a large part of a company’s wage bill, or that we would pay businesses while they were shut by law in an effort to protect public health?

I also want to thank the civil servants in the Department of Finance, across government and indeed all our public servants – particularly in health - who exemplified all that is good about the Irish public service when our back was to the wall as a nation.

Responding to the national challenge which Covid presented required the harnessing of efforts across a vast range of Government Departments and agencies partnering with the private sector and voluntary and community groups. Decisions had to be made quickly, often with incomplete information. While we didn’t get everything right, all of the emerging evidence is that Ireland’s handling of Covid compares very favourably internationally.

The Economy

Assessing the economy now, however, it is clear that the Government made the right judgment call in supporting incomes, jobs and businesses.

While the COVID-19 crisis posed unprecedented challenges, the Irish economy has proven to be remarkably resilient.

Having initially contracted during the first year of the pandemic, domestic economic activity rebounded strongly last year, in fact exceeding its pre- pandemic level for the first time in Q4 2021. Modified domestic demand grew by 6.5 per cent in 2021 - making Ireland one of the fastest growing economies in the EU.

Ireland’s economic bounce back has surpassed pretty much all expectations. Unemployment stood at just 4.7% in May while last week’s CSO figures show that over 2.5 million people are now in employment. Over 150,000 more people are employed now than immediately prior to the pandemic.

We have exceeded the targets we set in the Economic Recovery Plan we published a year ago.

Public Finances

Reflecting the strong recovery in the economy, tax revenues as a result have remained positive. The Exchequer returns published this afternoon showed that tax revenue to end-May stood at €30.1 billion, which was €6.4 billion or some 27% ahead of the same period last year.

The increase is driven by VAT which was 29% ahead of last year, corporation tax which was 77% ahead of last year and income tax which was 17% ahead of the same period last year.

An Exchequer surplus of €1.4 billion was recorded in the first 5 months of the year, compared to a deficit of €6 billion in the same period last year. We have now moved in to a position where we have a small exchequer surplus on a rolling 12 month basis.

While the improvement in the public finances is extremely welcome, we must remember that the action taken during Covid to protect lives and livelihoods gave rise to significant borrowing.

Public debt increased by €33 billion during the two years of the Covid-19 pandemic and is now close to a quarter of a trillion euros or €47,250 for every person in the country. This is a clear limiting factor which Government is acutely conscious of in setting public policy.

The Economic Outlook

While the economy has emerged from the pandemic in a strong position, the risks in the short term are – as economists would say – tilted to the downside. The brutal and inhumane invasion of Ukraine earlier this year has drastically altered the economic outlook. 34,000 people who fled Ukraine have arrived in Ireland and our first priority is to look after them as best we can.

Ireland is playing an important role in the humanitarian response and we have been to the fore in advocating for the strongest sanctions against Russia. We must stand up for our democratic values, despite the unavoidable price that has to be paid in return. Global economic uncertainty is never a good thing, and we have in response seen various international bodies downgrade their forecasts for the world economy.

As a small, open, trading economy that sells its goods and services to the world, Ireland is not immune from the effects.

This is perhaps most evident in consumer price inflation, which has risen sharply, reaching 8.2% in May according to the Eurostat’s flash estimate, a level of inflation not seen in many decades. This is a global phenomenon.

In the UK, the rate is 9%. In the US, it is 8.5%. 12 of the 19 eurozone countries have rates of inflation that are higher than Ireland's.

We have been clear in our public comments that the Government cannot fully off-set the impact on people's lives of this terrible war. These are extraordinary times and it is not possible to fully insulate the country from this level of inflation. It is important to be honest with the Irish people. But we know that many people are struggling with increased costs, especially energy costs.

It is for this reason we have introduced a range of exceptional measures. Between Budget 2022 and the measures announced earlier this year, €2.4 billion has been provided to help people and businesses. We have announced a series of measures such as the electricity credit, once off payments to recipients of the Fuel Allowance and reduced VAT and Excise Duty rates on various fuels and electricity.

Budget 2023

The forthcoming Summer Economic Statement, which will be published in the coming weeks, will set out the broad economic and fiscal parameters for Budget 2023.

The National Economic Dialogue will take place on 20 June. This will provide an opportunity for a wider set of stakeholders and opposition parties also to set out their position.

As Budget 2023 approaches, a careful balance will need to be struck between meeting the various demands on the Exchequer and ensuring we manage the public finances in a responsible manner. Crucially, we will also have to ensure that we do not make inflation worse or do anything to damage the competitiveness of the Irish economy in the medium to long term.

Budget 2023 contained a personal tax package of over €600 million. We were in a position to increase the main tax credits, raise the entry point to the top rate of income tax and make changes to the USC. The benefit of these changes is being felt month by month in people’s take home pay. The government will continue to implement our Programme for Government commitments on income tax. The Summer Economic Statement will set the scope we have available for a further tax package in 2023 as well as the envelope for expenditure increases.

Commission on Taxation and Welfare

As members of the professional body exclusively dedicated to tax matters, you will be very aware of the ongoing work of the Commission on Taxation and Welfare.

The Commission was established by the Government last June. It has been tasked with independently considering how the taxation and welfare systems can support economic activity and promote increased employment and prosperity – while at the same time ensuring there are also enough resources to meet the costs of public services and supports in the medium to long term.

Members of the Commission were drawn from a broad cross-section of relevant backgrounds including from your own membership, bringing a diverse range of skills and experience to the table.

The unique aspect of this grouping is that it is the first time simultaneous examination of the social welfare and tax systems is being undertaken.

The Commission’s medium to long-term perspective will be invaluable as we seek to strengthen both systems and build towards a stronger, fairer, and more sustainable economy.

The group has been meeting at regular intervals and is due to report shortly to Minister Donohoe and as a Government we look forward to considering the report once it is published.

International Corporation Tax Reform

Last October, Ireland joined 136 other jurisdictions in reaching an agreement on a two-pillared approach to corporation tax reform. This agreement represents a fair compromise reflecting the interests of the many countries involved in the negotiations, large and small, developed and developing. Ireland didn’t just sign up to the agreement – we helped to shape it – in particular through the work of Minister Donohoe.

The decision to join the global agreement was not taken lightly. It will, however, bring certainty and stability to the global trading environment and move away from the unilateral measures and the risk of trade wars, the impact of which would be magnified in the current time of economic challenge.

Of course, Ireland secured a number of important concessions in the OECD negotiations. We received a commitment that the EU Directive will faithfully adopt the October agreement.

We also ensured that the critical R&D tax credit was maintained and that smaller businesses whose turnover is less than €750 million would not be subject to the minimum tax rate.

Work is ongoing at European level to transpose the OECD agreement into European law through the Minimum Tax Directive.

It is hoped that an agreement on this file will be reached soon, and legislation will be brought forward to transpose the Directive next year in the Finance Bill.

Minister Donohoe has launched a consultation on implementation of the proposed EU Minimum Tax Directive and I encourage you to make your voice heard in relation to the implementation of these new rules.

Climate Action

In many respects, the future of the Irish economy is green and digital. Ireland is committed to doing our part to address the climate crisis. Through the Climate Action Plan, we have set ambitious targets, most notably to reduce our emissions by 51% by 2030.

Unlike previous targets, accountability mechanisms are being put in place by way of sectoral carbon budgets. The Ukraine crisis has demonstrated that becoming more energy efficient and displacing imported fossil fuels with domestic renewable electricity will not only contribute to climate action, but it makes the supply of our energy more secure and will protect from future spikes in fossil fuel prices.

To harness offshore wind, the Government has updated our planning code with the passing of the Maritime Area Planning Act 2021 and the Maritime Area Regulatory Authority is expected to be fully established early next year. Minister Ryan is seeking to expand further wind generation on the east coast and begin to introduce for the first time floating offshore wind turbines off the west coast.

On the taxation front, as you are all aware, the Government has committed to carbon pricing through the carbon tax which will be key to moving away from fossil fuels.

In Finance Act 2020, we legislated for a trajectory of annual carbon tax increases leading to a rate of €100 per tonne of CO2 emission by 2030.

Furthermore, the Government has ensured that the revenues raised from these increases are hypothecated for climate action and just transition measures.

National Development Plan

I know you are acutely aware of the importance to business of improving Ireland’s infrastructure. Last year I published the new €165 billion National Development Plan. This is the largest and greenest National Development Plan in the history of the State. The NDP is ambitious but achievable. In today’s world, to stand still is to go backwards. We must continue to invest in our existing infrastructure and to create new infrastructure fit for a modern economy.

Maintaining and enhancing Ireland’s competitiveness will also be key to our long term well-being.

In this regard, a wide range of initiatives are underway including a new Research and Innovation Strategy, a new Trade and Investment Strategy, and improved broadband connectivity around the country.

We are investing over €4 billion per annum to build the homes we need including social housing, cost rental and a number of new affordable housing initiatives. The State’s investment, coupled with the necessary investment in private supply, is resulting in the pipeline of new homes coming on stream increasing at a rapid pace. Providing more house is not just a social need, it is an economic imperative.

Conclusion

To conclude, the government recognises that a strong and stable tax regime is fundamental to the success of our country and this requires us to work in a spirit of collaboration with taxation experts such as you.

I am aware of the major contribution that members of the Institute make to the various public consultations, particularly those run by the Department of Finance. This engagement is a key element of robust policy development and its continued relevance cannot be overstated in the context of the current changes to the tax landscape.

I would like to conclude today on a positive note. It is very clear to us all that we are living through truly remarkable times. Taking any one of Brexit, Covid- 19 or the war in Ukraine, alone would present major challenges for any small, open interconnected economy such as ours. Experiencing all three together in less than a decade is as close to a perfect storm as we’re likely to see in our lifetime.

Despite all of the challenges, the resilience of our people and of our economy mean we have much to be optimistic about. We recently celebrated the 50th anniversary of the vote by the Irish people to join the then EEC, now the European Union. Membership of the EU has allowed us to maximise the benefits of the fundamental change in economic direction led by Seán Lemass a decade earlier in 1960s.

That shift from protectionism to a policy of free trade has opened Ireland to the world, and has opened the door to a world of opportunity for us. We have seized those opportunities in recent decades and Ireland is transformed as a result.

We can never take the success we have enjoyed for granted.

I am confident that the Irish economy will come through the current headwinds in good shape. A strong economy gives us the resources necessary to ensure a fair and decent society, with good public services for the citizens. That is the prize.

Effective public policy – anchored in sensible, prudent management of our economy and our public finances, and a policy environment that is supportive of and rewards private enterprise – is the way to achieve this and is worth fighting for.

Thank you once again to the Institute for inviting me to address you and I hope you all enjoy the evening.

ENDS