Neil Mcdonnell: We require radical policies to tackle the challenges ahead

Warehoused tax debts have likely forestalled a number of insolvencies but this will change in the New Year. Picture: iStock

We reach the end of 2022 with a cabinet reshuffle which brings a strong Munster flavour to the economic ministries. Just before that reshuffle, the OECD published its Economic Survey of Ireland 2022.

The OECD paper felt like an end-of-term report for a secondary student, where the teacher informs the parents that little Johnnie has been a very good boy, “BUT…” and proceeds with a five-minute monologue of issues the teacher has raised with the parents the year before.

The OECD report comprehensively debunks the “failed state” narrative beloved of the left, while raising concerns around our macroeconomic policy, structural state reform, housing, health and decarbonisation. It is a critique of both Government and opposition policies.

According to the OECD, our Exchequer is spending too much on the current account and should continue putting windfall corporation taxes into a wealth fund. Our state pensions are inadequately funded, and the pension age should rise. We need more spending on apprenticeships, adult training and development. Our housing policy is based on demand-side measures when we need to prioritise supply-side initiatives. Our legal and planning systems are a huge impediment to the development of housing, infrastructure, and decarbonisation.

Ireland’s housing strategy comes in for significant criticism. Demand-side measures such as the housing assistance payment (HAP), rent pressure zones (RPZs) and the help-to-buy scheme are seen as increasing prices in the long run, while doing nothing for supply (or actively decreasing it). Supply-side measures such as “section 23” increased rental supply in cities when it was available, but it has been discontinued.

ISME has noted this absence of supply-side measures in successive pre-budget submissions. It seems to emanate from the corridors of the Department of Finance, and takes issue with “passive income.” We saw that philosophy repeated in this year’s Commission on Taxation and Welfare (COTW) report, which described passive income as “income that is earned without much active involvement e.g. from dividends, royalties, rental income…” Entrepreneurs and the self-employed will be interested in that definition of dividend income since the ability to generate a dividend from one’s business takes far more work than would be encountered in a 9 to 5 job. Similarly, if rental income is earned without much active involvement, both the Commission on Taxation and the Department of Finance have failed to explain the near-total flight of private landlords from the rental market.

In summary, the OECD report does not merely call out some of the many serious problems afflicting Irish society, it provides a breadcrumb trail of solutions to address them.

The decision by Revenue to postpone the collection of warehoused tax debts for a year has likely forestalled a number of insolvencies, however, we expect insolvency activity to pick up in the New Year.

Insolvency practitioners have advised ISME that the fact that this affordable regime is available is leading to a significant number of “informal arrangements” being made.

In Ireland, about 3% of insolvent companies historically went into examinership, a process that (generally) cost somewhere in the region of €80,000 to €130,000. This cost presented a real impediment to the viability of restructuring smaller businesses. The SCARP regime will cost significantly less. ISME has seen a worked example of a restructure carried out for €15,000.

So, while SCARP has yet to bed into the economy in terms of absolute numbers, its presence is already being felt.

The Department of Enterprise White Paper was published earlier this month. While we welcome the Government’s ambition for a green and digital economy, we considered the white paper to be an opportunity for a radical reappraisal of our industrial direction. While Ireland’s policy of attracting foreign multinationals has been hugely successful, there is a huge divergence between the domestic economy and the “multinational economy.” Our domestic economy is just 54% the size of the overall economy, and roughly equivalent to the multinational economy. We know of no other country in the world with such a large divergence between the economic activity of domestic and foreign firms within its own borders.

A rebalancing of the domestic economy is required, reducing the risks inherent in depending on bumper corporation tax receipts and employee incomes from non-Irish, potentially itinerant foreign-owned businesses.

Both the Fiscal Advisory Council and the ESRI have sounded warnings should the multinational sector experience a decline. The current tech job losses suggest this is a risk we must mitigate.

Our continuous focus on high-technology and exporting businesses ignores the fact that our most successful indigenous enterprises: CRH, Kerry Group, Penneys/Primark, Ryanair, and Flutter/Paddy Power have not emerged from these sectors. We need to be more holistic in identifying Irish “winners.” “Steady-as-she-goes” is always a tempting political philosophy. It appears to be the default Government policy not just for this administration, but for many previous administrations as well. In the long run, its success assumes a pacific political, economic and military environment. The events of the last two years have shown us the serious risks underlying such assumptions.

A great country to live and do business in? Ireland still is. But we may require more radical economic policies to tackle the European and global challenges ahead. It is interesting that the two most important ministers in policy terms now inhabit the one constituency in Cork South Central. Interesting times lay ahead.

Neil McDonnell is Chief Executive of ISME