THIS ARTICLE APPEARED IN IRISH EXAMINER OCTOBER 26th 2018

In the overall scheme of things, Ireland is a tiny country with a population of just 4.7 million people, albeit a population that is rising strongly. As a country we do many things well, such as attracting foreign direct investment, providing a decent enough education to our children, and we are pretty good at tourism as demonstrated by the fact that this year is likely to see another record number of overseas visitors coming into the country. We have also produced some world-class companies such as CRH, Smurfit Kappa, Glanbia and Ryanair. In recent days the Taoiseach boasted/joked that Ireland would be able to help out the UK after Brexit. I hope he was joking, because the one thing we cannot afford to be in this country is arrogant. We have way too many institutional failures to even contemplate arrogance.
On the debit side of the balance sheet, there are a lot of issues that we seem incapable of dealing with.
In terms of minding our environment and meeting our international environmental obligations, the country just does not cut the muster and unfortunately is languishing towards the bottom of the EU league table. Ireland will go nowhere close to achieving its Carbon emission targets and we will then be exposed to potentially very significant EU fines, or at least I hope that is what will happen, given our abject failure and unwillingness to tackle the issue in a meaningful way. The total failure to address the issue in the recent extremely populist budget, is proof positive of this fact.
This week the Environmental Protection Agency (EPA) reported that 38 towns and villages across the State are discharging raw sewage into the environment, and 28 large towns and cities are discharging inadequately treated sewage into the environment. Is this acceptable in a supposed first-world economy? I think not.
The ongoing failure to provide a broadband service remotely approaching acceptable standards across many parts of the country is also a total joke, but unfortunately one that has serious consequences for regional businesses across the country. The recent political controversy over this issue is just the latest instalment in what has been a tale of woe and gross ineptitude stretching back over many years.
The housing situation is another very significant debit entry on the national balance sheet. Having built thousands of houses in the run up to the crash, unfortunately many of which were in the wrong locations, we then virtually stopped building for a number of years, despite the fact that natural population growth was never likely to die away. We now have a serious crisis in supplying owner-occupied and rental housing and it is starting to do significant damage to the economy and its competitiveness. Earlier this week we were treated to a story about thousands of local authority properties lying idle and unoccupied. This is totally unacceptable. The responsible local authorities need to ensure that such houses turn over and are occupied within a matter of weeks. Perhaps that is too much to ask for, but I remain to be convinced.
On the health side, there is also a litany of failure. Hospital waiting lists are at unacceptably high levels, people are dying waiting for treatments, the primary healthcare system is creaking at the edges and is set to get much worse as the supply of GPs dwindles, and important regional cities such as Waterford cannot provide cardiac care at weekends. I could go on, but it is clear that despite all of the money we throw at the health service, the ability, or lack of it, to deliver an acceptable service is quite depressing. If we cannot deliver an adequate service at the moment, one shudders to think about what it will be like over the coming years as the population ages at a significant pace.
Predictably, some will argue that we simply do not spend enough money in addressing these issues, but there would appear to be little correlation between money expended and improved public services.
On cannot but jump to the conclusion that our institutional structures are all wrong and are not fit for purpose, and that our political system and our political elites are letting us down very badly. Instead of being arrogant about what we achieve, we should recognise and address that which we appear incapable of achieving.

APPEARED IN THE IRISH EXAMINER NOV 9th 2018

The motor industry provides a very good barometer for the overall economy, and particularly how business and consumers view the world. Following the severe economic correction that occurred back in 2008, new car sales literally drove over a cliff and went into free fall in 2009 to reach just over 57,000. This created serious problems for what is a very important sector of the economy, and one that provides employment in every small town around the country, not to mention the larger towns and cities. Then in line with the broader economic recovery, new car sales recovered strongly and almost 147,000 new cars were registered in 2016. At this stage the future looked bright for the market, but then the Brexit vote happened and new car sales declined by over 10 per cent in 2017 and in the first 10 months of 2018, a decline of 4.4 per cent has been recorded.

The decline in new car sales since 2016 has occurred despite what has been in theory a very supportive economic background. Employment is growing strongly and reached a record high in the second quarter of this year; the unemployment rate has come down from 16 per cent in 2012 to just 5.3 per cent at the moment; and growth in gross domestic product has been very impressive.

The key factor that has undermined new car sales has been the substantial decline in the value of sterling. The weakness of sterling has made used imports from the UK very attractive. A car costing £14,480 (sterling) in 2018 would be €3,553 cheaper in 2018 than in 2015. In 2017, we imported just over 93,000 used cars, mostly from the UK, and in the first 10 months of this year, an annual increase of almost 9 per cent has been recorded, taking the total to 86,418. For 2018 as whole, it is likely that close to 125,500 new cars will be sold and used imports look set to come close to 100,000.

For the car buyer, the savings to be made on a used import are significant based on currency and taxation differentials. However, there are a number of downsides for Ireland as whole. Cheaper used imports are devaluing the price of domestic second hand cars and this is widening the financial gap between the value of a trade in and a new car. Used imports are displacing new car sales and this is squeezing new car dealers. In addition, the cost to the Exchequer is substantial. For the average new car sold, the Exchequer collects €9,348 in VAT and VRT, whereas for the average car imported from the UK, the Exchequer collects just €3,300. There is also a negative environmental impact. New cars typically are more environmentally friendly than older ones, so there is a distinct risk that we are just filling up our roads with older higher emission vehicles.

Government is obviously oblivious to these downsides, as evidenced by the increase of 1 per cent in the VRT rate for all diesel cars registered from January 1st 2019. Surely it would have made more sense to apply the increase to used cars alone?

In 2017, diesel cars accounted for 65.2 per cent of total new registrations compared to 70.1 per cent in 2016. In the first 10 months of 2018, diesel cars accounted for 54.5 per cent of total new registrations, with petrol cars accounting for 38.5 per cent of the total. There is a move away from diesel, but electric cars remain an exotic rarity.

On a more positive note, Light Commercial Vehicle (LCV) registrations have expanded by 5.9 per cent in first 10 months of the year, which is a strong and positive indicator of business confidence and investment.

Looking ahead to 2019, it remains to be seen how the new car market will evolve. The doubt revolves around the trajectory of sterling, which in turn will be heavily influenced by that great imponderable, Brexit. Meanwhile, the overall motor industry will continue to deal with a personal sector that is craving value for money and which is still financially pressurized due to a combination of the high personal tax burden, rising expenditure on housing and subdued wage growth. Furthermore, consumer confidence is still quite fragile as Brexit concerns continue to dominate.

Based on what we know at the moment, it appears likely that new car sales will decline further in 2019, but at least the environment for the industry is still a lot better than a decade ago. Apart from the ongoing pressure on new car sales, the biggest problem for the sector will most likely be posed by labour shortages and specifically the lack of technically qualified workers.

THIS ARTICLE APPEARED IN THE IRISH EXAMINER SEPT 21st 2019

With less than three weeks to go to the delivery of Budget 2019, the pressure on the Minister for Finance is intensifying on many different fronts. At the annual ploughing event this week, considerable dissatisfaction was expressed about the plight of farmers and many of them suggested that Government was not doing enough to help them in what is a difficult year. It is indeed a difficult year for farmers and could become considerably more difficult over the coming months. However, this is due to weather conditions and is certainly not the fault of Government.
It was a very long and difficult winter, during which many farmers ran out of fodder. This was then followed by a very dry summer, particularly in the South East. Silage yields are likely to be down and if a smaller silage harvest is combined with a very low level of fodder stocks carried over from last year, it could be a challenging winter. Of course, the big imponderable will be weather conditions in the coming winter and spring. Another bad winter will cause enormous difficulties for farmers and could cause serious financial difficulties for those farmers who have invested heavily in dairy expansion, for example. Then of course there is the added dimension of Brexit. We still have little idea as to how this will unfold, and while the suggestions are that a compromise deal will be achieved, the agricultural sector is by a country mile the most exposed part of the economy in the event of anything other than a very soft form of Brexit.
Not surprisingly, the view of many farmers is that the Minister for Finance should open the purse strings and help them through their difficult times. The problem of course is that every other interest group across the economy will be looking for more money, with the overruns on the health side of particular concern. The report issued this week by the Irish Taxation Institute contained no surprises, but highlights again the extent to which the tax burden on personal tax payers has increased over the past decade. I could go on, but it is blindingly obvious that the Minister for Finance will find it a real challenge to balance the insatiable demands for more resources with the reality that those resources are extremely limited.
The external risks to the Irish economy will have to be the guiding principle for the Minister in framing Budget 2019 rather than sectoral interest groups.
The International Monetary Fund (IMF) issued a pretty stark warning this week about the impact of a ‘no deal’ scenario for the UK economy. However, it also stated that all the likely Brexit scenarios will have costs for the UK economy. As the single most important export market for indigenous Irish exporters, the risks to the real Irish economy are very clear and very stark.
Last weekend, Nouriel Roubini, who is a professor at NYU’s Stern School of Business, and a guy who proved very prescient a decade ago, issued some pretty stark warnings about the real risks to the global economy. He cited a number of risk factors, including the unsustainable nature of US fiscal policy; an overheated US economy and the consequent upside for US interest rates; rising inflation and interest rates in other economies; Trump’s trade dispute with China, which incidentally saw further tariffs on $200 billion worth of Chinese goods being announced this week; Trump’s policies towards immigration and critical investment; fragile emerging markets; the debt dynamics in the Euro Zone and the still incomplete monetary union; and the vulnerability of frothy equity markets.
His key point is that in the event of these risk factors feeding through to economic difficulties, policy makers will not have much ammunition in their arsenals to tackle the problems, unlike a decade ago when sharp interest rate cuts, Quantitative Easing and fiscal expansion were all possibilities. There is limited scope for any of these policy options today. He concludes that ‘when it comes, the next crisis and recession could be even more severe and prolonged than the last’.
For a country such as Ireland, with a very high and dangerous level of government debt and with a very stretched housing market, the risks are very real. The Minister for Finance will need to be mindful of the vulnerabilities of the small open Irish economy and adopt a very conservative and cautious approach to fiscal policy in Budget 2019.

THIS ARTICLE APPEARED IN IRISH EXAMINER 10th AUGUST 2018

While the Irish economy is performing very strongly on the surface, it is clear on closer examination that the country does have a significant concentration risk. Last week the National Competitiveness Council (NCC) highlighted this fact in a very vivid manner. The NCC expressed concerns that the sustainability of growth could be threatened by the heavy dependence on the performance of a narrow base of firms and economic sectors. It pointed out amongst many other statistics that the top 10 per cent of firms account for 87 per cent of value-added in manufacturing and 94 per cent in services; a third of total exports are accounted for by just 5 firms; and 39 per cent of corporation tax is paid by the top 10 companies.
The obvious risk is that if any of those companies or their sectors experienced a shock, then the Irish economic model could be quickly and cruelly exposed. Just as in the world of investment, having a diversified portfolio is crucial, in an economic context, having a broad-based and diversified economic model is very important.
While there is an inevitability in a small open economy that has based its economic development strategy on attracting foreign direct investment since the 1960s, that a small number of large companies would become very dominant and have a disproportionate impact on the economic and financial metrics of the country, it does create a vulnerability. The main problem and vulnerability for Ireland is the fact that those companies on which we are so dependent are foreign-owned multi-nationals and hence are very much outside of the control or influence of domestic policy makers. In other words, boardroom decisions in Palo Alto or Seattle can have a massive influence on areas such as Cork or Leixlip. We need to strive to ensure that our economic model is as broad and diversified as possible and that indigenous companies and sectors are given as much recognition and support as their foreign-owned counterparts.
There has been considerable speculation and comment recently about the appropriateness of the special 9 per cent VAT rate that applies to the hospitality sector. The Department of Finance research paper written about in this column last week clearly does not think it is a good idea; the trade unions for their own unique reasons do not like it; and Social Justice Ireland does not see much in the way of social justice in the tax mechanism. That body has an ambition to increase the tax take and reduce social injustice. How the abolition of the 9 per cent VAT rate could possibly achieve that ambition I have no idea.
The hospitality sector is the consummate indigenous sector that makes a very significant economic contribution to the whole economy, but particularly to rural areas where there might not be a lot else going on. It is also the most crucial element of the tourism sector. It is all well and good having heavy investment in tourism attractions and lots of beautiful scenery, but if this is not backed up with a high-quality hospitality sector, then tourism will fail. Hotels and restaurants are vital to tourism and should be operating in as supportive an environment as possible.
In 2017, expenditure by tourists visiting Ireland is estimated to be worth €5.3 billion and when spending by domestic tourists is factored in, this jumps to €8.8 billion. Fáilte Ireland estimates that 240,000 workers are employed in the tourism and hospitality industry. This is an incredibly strong economic contribution and acts as a serious counter balance to the small number of dominant firms in the economy.
Many of those businesses, particularly outside of Dublin, do very well during peak holiday season in July and August, but for much of the rest of the year, the environment is much more difficult.
If you tax something more, there will be less of it, and if you tax something less there will tend to be more of it. This fact should be remembered by those caught up in an often-ideological debate about scrapping the very important, supportive and sensible lower VAT rate of 9 per cent.

THIS ARTICLE APPEARED IN THE IRISH EXAMINER JULY 27th 2018

As the evolution of the Brexit process lurches from one crisis to the next, we have been reminded again over recent days just how vulnerable sterling is to the vagaries of the whole ludicrous process. Since the middle of June, the UK currency has weakened from 87.3 pence to the euro to just under 90 pence at the moment. Not a dramatic move by any stretch of the imagination, but when viewed in the context of where the currency has come from over the past few years, it does represent a significant move. The sterling/euro exchange rate averaged 72.63 pence in 2015; 81.92 pence in 2016; 87.64 pence in 2017; and 88.1 pence so far in 2018. For Irish companies exporting to the UK, this represents a significant deterioration in the terms of trade over the past four years. It says something about the resilience and flexibility of such companies that they continue to trade successfully with the UK, but the challenge is a very real one and could become much more intense over the next couple of years.
We are still none the wiser about how the Brexit process will unfold from here, but from a currency perspective it seems apparent that sterling’s near-term future will be driven by the Brexit process. Simply put, if a ‘hard Brexit’ were to appear the most likely outcome, sterling would weaken further and vice-versa.
In every sense, Brexit does represent a very significant challenge for the Irish economy, as do global corporation tax trends and the anti-trade agenda being pursued by President Trump. Unfortunately, there is not a lot we as a country can do to influence the outcome of any of these three threats. Hence, we need to ensure that we exert as much benign influence as possible over the things that we can control.
From my perspective it is all about competitiveness. In recent weeks the National Competitiveness Council has published two important reports about trends in Irish competitiveness, namely Costs of Doing Business in Ireland 2018 and Ireland’s Competitiveness Scorecard 2018. Both of these reports should be required reading for policy makers and all other stakeholders in the Irish economy.
Competitiveness is not a straightforward concept to define neatly as it encompasses a wide range of factors including all costs of doing business; the quality of public services such as health and law and order; the cost, quality and availability of housing; the physical and IT infrastructure; the tax environment; the quality of the labour force; regulation; the legal system and much more besides. All of these factors combine to create the environment in which the economy and its citizens can thrive and prosper.
The Council begins its analysis with the premise that as a small open economy, Ireland is very vulnerable to negative price and cost shocks that are outside the influence of domestic policymakers. These shocks could include negative exchange rate developments, higher international energy prices, imported inflation or an interest rate shock. Hence the necessity to manage those factors that are within our control. Not surprisingly, the Council is particularly concerned about the inordinate dependence on a small number of firms who are responsible for driving productivity in the economy.
The Council warns that at the moment competitiveness is being eroded again by rapid house-price inflation, transport congestion, failure to meet climate change obligations, failure to invest sufficiently in Research & Development, and the funding crisis in the higher education system. The costs of residential property, labour, credit, energy and services such as insurance and legal are given special mention.
Ireland is described as an ‘expensive location in which to do business with a price profile which could be described as high cost and rising’. The advice given is that policymakers should not pursue domestic policies that would contribute to overheating and that competitiveness should be placed at the head of Ireland’s Brexit response.
The utterances of the National Competitiveness Council were largely ignored in the build up to the crash in 2008. It is imperative that we do not make the same mistake again. Populist politics is really the enemy of sensible and prudent policy making and the electorate should reject those politicians who pursue naked populism. Some chance!