Plan B needed, times three, for the dangers ahead

This is an extended and linked version of an Irish Examiner oped published 24 November 2012

Irish governments over the years , and especially in the last few, have not exactly shown themselves to be shining examples when it comes to contingency planning. Time and again we have seen plans advanced which when they fall apart reveal that little or no obvious alternatives were in place, or if in place paid any heed to. The most egregious example is of course the creation of that vortex of wealth destruction that is IBRC, where despite alternatives being presented to cabinet a bullheaded politicized decision was taken which shot the economy in the head although the full damage took time to be realized.

In planning one plans for the worst and hope for the best. And some things that are planned for, or should be planned for, are what one might call grey swans – low probability high impact events. It is unlikely for example that we will see a tsunami hit Ireland but if it did we would be best advised to have plans in place. Mind you, in a country where the effect of releasing millions of gallons of water from a dam into a flooded river already bursting at its banks downstream seemed not to be planned in an integrated fashion one wonders…

Three major events, none of which one hopes will happen, are now beginning to make themselves felt on the economic stage. It is probably too much to hope that the system which gave us the so far abysmal performance on legacy bank debt can plan for these but at least the public at large might want to think on them. The three main possibilities are the effective removal of our tax shelter for MNC profits, the sundering of the EU via Britain huffing off, and a hard landing in china.

Take the latter : one of the safety valves which we have relied on for a long time is the ability of friendly countries not economically screwed up to take our surplus labour, either legally or to turn an effective blind eye. With over 80 thousand persons per annum emigrating not all are going to the UK, many (possibly as many as 20k) going to Australia and upwards of 6k to Canada. Both Australia and Canada are very dependent on the worldwide commodity boom fostered in large part by the expansion in the Chinese economy. And as the Chinese economy is faltering so too is business sentiment in these countries turning. With uncertainty about the future path of the chinese economy and the knock-on effects on these importers of Irish labor, what is the contingency plan should we have to absorb tens of thousands additional jobseekers?

A further blow could come from the deepening rift emerging between an increasingly euro skeptical UK and a Europe/Eurozone that sees greater integration (sometime, on the cheap ideally) as the only hope of longterm survival. Although not nearly as dominant as in the 1950s and 1960s the reality is that the UK is our largest market – our economies are intertwined. 11% of UK exports go to Ireland, and they source about 7% of their imports from us. Meanwhile. 33% of our imports and 16% of our exports go to the UK. When one looks at the situation excluding chemicals the export dominance of the UK is even starker. There seems to be in the UK a belief that they can selectively withdraw from large parts of the EU, ditching what is known as the Acquis, the body of laws that govern conduct and ensure harmonization. Faced with an intransigent UK and an exasperated EU, the prospects for a nasty split are while low growing. A UK out of the EU would pose massive challenges to Ireland – it would be fundamental decisions to either follow them, and forever accept that we are economically a region of the UK, or to stay with the EU (and be a region thereof). A UK out of the EU would one suspects be treated quite vindictively by the EU and in the shortterm face massive trade barriers. How we would deal with that scenario is no doubt the subject of a detailed think-tank in government…no doubt…

Allied to that and doubled down from the US we see a ratcheting up of the pressure on the tax front. Irish based MNCs are on the face of it the most productive entities in the world making profit per employee four times the EU average. It strains credulity to imagine that at least some of this booked profit does not arise from creative tax inspired planning. MNC’s can plan in such a way that the dell PC’s manufactured in Poland appear as Irish exports…There is a worldwide revolt against corporations and high net worth individuals engaging in legal but costly tax planning. We have seen companies grilled in the UK parliament; the French have simply taken the situation into their own hands and sent tax bills to MNC’s; and the issue of tax harmonization vi the common consolidated tax base has not gone away Meanwhile the US Senate has described Ireland as a tax haven and Microsoft has been used an example of aggressive tax planning in the US debate on clamping down on same. With global scrutiny now on Ireland, with the EU determined to srive forward on tax harmonization, what plans are in place, if any, to determine the fallout were our MNC friendly tax system to come under threat

These issues may never come to fruition. But a mature open debate on them, without calls for green jersey wearing or not talking down the economy or other such guff is required. We were illserved keeping our heads in the sand in the boom years and should learn the lesson that open debate is vital.

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