A Good Problem

In the third series of the acclaimed US crime drama, The Wire, an aspiring gang boss Marlo Stanfield is discussing his ambitions.

One of his underlings reflects on the challenges of leadership, asking Marlo: ‘What you gonna do when you sittin’ at the head of the table? Once you there, you got to hold it down.’

Marlo is unperturbed, replying that it sounds like ‘One of them good problems.’

The Republic’s Finance Minister, Michael McGrath, now finds himself in a similar position to Marlo.

His ‘good problem’ is how to make the best use of extremely healthy public finances without stoking inflation in an economy which is close to functional full employment.

Mr McGrath is expected to deliver his budget on 10 October. His departmental forecasts would be the envy of any finance minister: they show that on current spending plans there will be a surplus of €10bn this year with that surplus growing to almost €21bn by 2026.

Before getting to Mr McGrath’s choices it’s worth reflecting on how Ireland got to this happy position. Some of it is policy but a lot is luck and unintended consequences.

Those surpluses come almost entirely from corporation tax being paid by multinationals on their global profits.

Last year Ireland raised €22.6bn (£20bn) in corporation tax, 182% more than the €8bn (£7.08bn) it took in just five years ago.

You may dimly remember plans to reform global taxation rules which would see companies paying less tax in Ireland and more in larger countries where they make the bulk of their sales.

Those plans are still being worked on but it is some of the interim reforms which have landed this tax bounty in Dublin.

Those reforms had the principle that companies should declare profits in locations where they have substantial real operations or activities rather than just a low-tax location where they happen to have an office with few employees.

In other words a brass plate office in the Caymans wasn’t acceptable anymore, instead companies would have to look at jurisdictions where they have more economic substance.

Ireland fitted the bill – it was a taxfriendly jurisdiction but companies like Apple and Pfizer had long had real operations in the country, employing thousands of people.

What came next was the legal relocation of intellectual property (IP) assets to Ireland – the most valuable profit-earning parts of these businesses.

The Republic’s government has acknowledged that these are windfall gains which can’t be relied on in the long term and so a large chunk will be used to establish a sovereign wealth fund.

But that still leaves the question of what Mr McGrath will do in October.

In theory he is bound by the National Spending Rule which limits net spending growth to 5% each year so that permanent policy measures match trend growth rates and are broadly sustainable.

The Fiscal Council has urged him to stick to this rule given what it says is ‘the exceptionally tight labour market, high inflation, capacity constraints, and the risks related to tax receipts.’

That has been echoed by the ESRI think tank which said there is ‘no rationale’ for tax cuts.

But of course members of fiscal councils and think tanks don’t have to face an electorate. This could be the last budget before the Republic’s next election and it is therefore inconceivable that there will not be something for people who feel they are not sharing in the current prosperity.

Or as Mr McGrath has put it: ‘We will consider advice carefully. But, the Government, of course, has a broader mandate in that we have to consider the needs of the people we represent and the needs of businesses.’

One personal tax change has already been well advertised – the indexation of tax bands and credits so as they keep pace with rising earnings. This is the reverse of what the UK government is currently doing – freezing tax bands in order to stealthily raise more money.

The thing I will be looking out for with most interest is what happens on the capital spending side. Some of the capacity problems the Republic is facing now stem from the near collapse of public investment in the aftermath of the financial crisis, particularly on housing.

In fact there is a long record of skimping on investment. That is not going to be remedied in the short term but more detail on a direction of travel and firm financial commitments would be welcome.

The particular interest from a Northern Ireland perspective is that capital investment is likely to have all-island benefits. This needn’t be direct spending north of the border on projects like the A5, the Narrow Water bridge or the Magee campus. Instead look out for commitments on health, transport or renewable energy which will likely have relevance wherever they are built.