State needs to ‘rethink fiscal policy and halt giveaways’

The State needs to rethink its fiscal policy strategy to move away from "simply dishing money out in terms of tax breaks and expenditure giveaways", according to economic commentator Chris Johns.

He said the country is in a position where it can be “relatively relaxed” about the levels of debt sustained as a result of the Covid crisis over the near term. However, he added there are concerns about managing levels of debt over a longer time period.

Strategy

Speaking at a PwC-pre-budget hosted webinar on Tuesday, however, Mr Johns, a former Bank of Ireland asset management chief executive, said more thinking needs to be put into the issue of managing the country's finances in the coming years.

“The debt mountain will become a problem when global interest rates go up, particularly if the interest rate the State pays is the all-important Government Bond yield,” he said.

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Mr Johns said he would like to see the Government reveals its strategy in dealing with debt over the longer term, preferably in Budget 2022.

Speaking against a backdrop of huge uncertainty over the future of Ireland’s 12.5 per cent corporation tax rate as the State comes under pressure to sign up to an OECD deal that would put the minimum global rate at 15 per cent, Mr Johns also said he did not think this would have a dramatic effect on levels of foreign direct investment (FDI).

He suggested the Department of Finance’s estimate that a move to a 15 per cent rate would cost the State €2 billion, was little more than a guess.

“I think it is a number plucked from the air because no matter how you model this, we don’t know how the hit is going to be or when it is going to be. It could be orders of magnitude smaller or larger than that.”

Tax

“I think the corporations that typically come to Ireland are relatively relaxed about [the rate] and understand the global context in which this is happening. And they’re not going to have a particularly negative view of Ireland if we fall into line with these global tax proposals. So I’m amazingly sanguine about it,” he said.

Mr Johns went on to point out that investments in areas such as infrastructure would be worth considering by the State given that any investments made would, in the current environment, have a higher return than the cost of the debt.

"We need better infrastructure, starting with broadband, but we can invest in all sort of imaginative things like moving Dublin Port for example. I think now is the time to follow up on radical ideas in terms of capital spending given the low cost of borrowing," he said.