The interview is ending. For the previous hour, Paschal Donohoe has given a forthright defence of Budget 2022, swatting away criticism that it was unambitious in its vision and uninspiring in its construction. He has talked at length about the importance of economic gradualism, and the nature of incremental improvement for both the public finances and for society.

We have explored the Zoned Land Tax, interrogated the various supports for business, and delved into what this Budget, and its successors, would have looked like in the absence of Donohoe securing the concessions that allowed Ireland to agree to the recent global deal on corporate tax reform. He has explained how inflation and the cost of living impacted many of the budgetary decisions and outlined how computer games are the art form for the generation of today. Throughout all this, the Minister for Finance has barely broken stride.

Now, however, the conversation has moved to a question that forces him to pause for thought: has his political and budgetary philosophy changed since he was first appointed as public expenditure minister in 2016 and finance minister a year later?

The answer, when it comes, is both yes and no. Donohoe says that his core view around political economy and the importance of the centre-ground in politics remains steadfast. But he has also learned that the centre must change too – both to remain relevant and to avoid simply becoming the status quo.

“Where my views have definitely evolved is on the need for that centre to continue to make an accommodation with those that, ultimately, the centre will depend upon for political support,” he says. “The best example of that would be the zoned land tax. The zoned land tax is the kind of policy that I would not have seen myself do in 2016. But I am now absolutely clear it is the right thing to do. Absolutely clear. 

“That is an example of how the political centre can become vulnerable if it is seen to be the same as the status quo. It is the kind of journey that I am trying to make the case for, and indeed lead.”

*****

Paschal Donohoe and Ian Kehoe

We met in Paschal Donohoe’s office on the ground floor in the Department of Finance, located in a wing named after Richard Cantillon, an Irish French economist who authored the Essai sur la Nature du Commerce en Général, a book considered by many to be the “cradle of political economy”.

The Budget is the focus of the interview, but it is far from the only thing on Donohoe’s mind. On Wednesday night, in his capacity as president of the Eurogroup, he dialled into the G7 meeting of finance ministers. When the interview ends, he is departing to introduce legislation to the Seanad. 

His dual life as both finance minister and head of the Eurogroup was evident in recent months – his time split between developing the budget with expenditure minister Michael McGrath and negotiating with world leaders on the recent OECD tax accord. 

“The Budget is the most important economic event of the year. But the OECD decision was the most important economic decision for years to come,” he says.

However, as he acknowledges, the two were highly interconnected. He admits a failure to reach a deal would not have dramatically impacted this budget, but it would have cast a long shadow over it and reframed Budgets to come. Likewise, the surge of taxes coming from multinationals in corporate tax this year, allied with the resilience of income tax, reframed the economic conditions for Budget 2022.

The granular detail of this Budget has been the subject of much discourse. But the most remarkable thing about the Budget was the economic numbers that underpinned it. In the middle of July, the Department of Finance published its Summer Economic Statement, a document designed to set the parameters, and limitations, around budgetary negotiations. The document forecast a deficit of just over €34.5 billion for 2021 and 2022 combined, a hefty number largely attributable to the weight of Covid-19 economic supports. On Tuesday, the number was revised to €21.5 billion for both years, a reduction of 40 per cent.

For this year, modified domestic demand (a proxy for the domestic economy) is expected to grow by 5.25 per cent and by 6.5 per cent in 2022. Employment is forecast to grow by just under 8 per cent or around 150,000 jobs this year.

According to Donohoe, the theme of this Budget was the improvement in the public finances, and the decision not to spend the newfound largesse. “We had a big bang budget last year. Having a big bang budget this year would not have been the appropriate thing for what is now happening in our economy,” he told me.

It was on this topic – the dramatic rebound in the economy – where we began our interview. 

*****

Ian Kehoe: One of the really striking things that emerged during the Budget was the scale of the economic rebound in the months leading up the Budget. In July, you were being criticised by the Fiscal Advisory Council for being reckless, to October, when you are being criticised for not spending enough. When did the scale of the recovery emerge, and the subsequent impact it would have had on the Exchequer numbers? 

Paschal Donohoe: In the early part of the summer, the indicators began to get more and more positive. The very big story of where the Budget stands overall is about two figures. A €7 billion gain in our Exchequer position, and 400,000 jobs that we believe we will get back this year and next year. And then government has not used the benefit of that to either tax less or spend more – and holding our Budgetary position stable. That is the big macroeconomic development of this Budget. It gets us to a place that by 2023, for example, the national finances could be in a far more secure place than many would have expected. But, already, it will get us to a place that by 2022, we will not be borrowing for day-to-day spending. If you have a look at the Tax Framework document that we published, it indicates that corporate tax will only grow marginally, but that income tax will grow by €10 billion by 2025, and if we can manage our expenditure and taxation sensibly moving into Budget 2023, it offers a really good prospect for our country. 

IK: Was there an expectation or a pressure as the money began to flow in to go for a more expansionary budget?

PD: There was no temptation and actually no pressure from our party leaders. Was there pressure in the Estimates process? Yes, there always will be. I have done the Estimates process four times myself and I know exactly the kind of pressure that is built into it. But if we want to be able to repeat the kind of changes that we made in this Budget – despite the higher level of debt that we have had to carry because of the pandemic – the vital cog on the wheel, the vital element that can reconcile a higher level of debt but will still make improvements in public services and in standards of living, is taking down your deficit.

IK: You are closing the deficit. But the size of the state has never been bigger. Are you worried about the increasing size of the state, and also about ensuring the money is spent properly?

PD: I would put your question in a different light. Yes, we are spending more. But the economy is getting bigger. If you look at the share of government expenditure as a percentage of GNI* or DDP, the story of a state that is growing at an accelerated pace is one that is more nuanced. if you look at the Budget Day package that we announced, the €4.7 billion, and if you compare it to the Budget Day packages of the last government, there are differences of increment rather than magnitude. Yes, the state is going to be bigger than it would have been in the pre-pandemic era, for example, we have had to do things like running tests and tracing, running vaccination programmes, having in place policies that we did not believe were needed in the pre-pandemic moment. But if you put that bigger state in the context of an economy that is recovering, and then look at the scale of the Budget Day package, and then index it for inflation, a slightly more moderate story emerges. 

But to answer your question as to ensure that money continues to be spent well, the two big elements will be having a public service pay agreement that continues to have a strong reform element, and then secondly, having procurement frameworks that are performance-based. 

IK: The previous Budget was about Covid. The one before was about expansion. It strikes me this Budget is more in keeping with your earlier budgets in that it is incremental. 

PD: We had a big bang budget last year. Having a big bang budget this year would not have been the appropriate thing for what is now happening in our economy, I read the article by your excellent columnist Stephen Kinsella on the Budget, and he asked where was the big moment? But look at what we did last year. That was basically Michael and myself going into the Dail and saying that, whatever it takes, we would get the economy through the pandemic. This Budget, by necessity, had to be a very different Budget to where we were last year. And even to link this back to the earlier question you put to me regarding the bigger state, the government will be spending less across the next two years than it spent last year. This is a Budget about how we can make the way to a lower pandemic environment while still looking to make progress to where we are with housing, where we are with climate, where we are with the standard of living, it won’t surprise you to hear me making the case for gradualism in the context of where we were last year. 

Dealing with inflation

“The art form of choice for the generation below is digital gaming.”

IK: How much of this Budget was framed around inflation – I am thinking about the cost of living, fuel poverty. And when did inflation become such a key issue within the construction of this Budget?

PD: That would have been later in the summer when the economic indicators really showed the price pressure. I attended, into the early hours of this morning, the G7 finance meeting – it was in Washington but I attended here as the president of the Eurogroup. The issue of supply chains and inflation was a core topic. For me, it is one of the main reasons why this Budget had to have a personal tax package in it. Because in the absence of it, you and many others will be pointing to the fact that the stealth taxes involved in our tax policy would be really considerable in a year’s time. It was the reason, for example, why there had to be a social welfare package in the Budget. So, inflation became a real area of focus for the government as we came through the summer.

I would, however, embed it in two broader macroeconomic points. a persistent feature of the euro area, and some would argue a potential weakness of the euro area, has been persistently low levels of inflation. Secondly, we are coming out of a pandemic that by and large shut down so many global supply chains for so long. I am not excusing where we are for a moment, I am just making the point that from a macroeconomic viewpoint, there are many reasons for it. What we now need to do is help businesses, taxpayers and those who depend upon the state for income, to try and help them through this period.

Taxing land, not taxing banks

IK: I will come to the business package in a moment. The Zoned Land Tax has got a lot of kickback. Some of it was a misunderstanding in relation to it. Do you think it will succeed where its predecessor failed?

PD: Yes, and I think the reason for that is because of the scope. It is a real disappointment that just over 200 properties were on the vacant site levy. The aim that we have for this tax is broadly 8,000 to 9,000 hectares of land. The scope gives me confidence that it will succeed. Then, it will be executed through the Revenue Commissioners and not local authorities. 

IK: The two to three years window seems light given the scale of the emergency, surely?

PD: The challenge of doing it quicker is the amount of preparation we need to do to be able to do it. 8,000 hectares of land? In scope, this is comparable to the local property tax in terms of actually doing this. So what we will need to do is produce a map for every local authority in the country indicating what land is serviceable and zoned, and then allowing an appeals process for that. I have no doubt at all that those TDs who are arguing that the tax is ambitious and taking too long to do, will be the same TDs who will be arguing against this tax in the next 18 to 24 months. 

IK: Why did you take KBC and Ulster Bank out of the bank levy? 

PD: Because they are going to be leaving.

IK: Exactly, so leave them in in it until they leave?

PD: Their exit from the market in the second half of this year is going to become more and more visible. The focus on where we are with banking policy is an orderly exit and an orderly transition of their customers to the three remaining banks, and I, therefore, felt this was the appropriate decision with the bank levy.

A business budget?

IK: The EIIS scheme has been a bugbear of entrepreneurs for many years – it has not worked. You are changing it, but we don’t know the details. Can you shed some light? 

PD: It will be in the Finance Bill, which will be published on Thursday. I see it got a guarded welcome from Scale Ireland and from Brian Caulfield, but they also want to see the detail. We are finalising it. They will have it next Thursday.

IK: But will it address the big issues where people feel they can’t put enough money in and it is too cumbersome?

PD: I really do think it will. I have made lots of changes to the scheme over the last couple of budgets and it has not delivered the supply of private capital that I would have wanted. So, this is a real effort for me to respond back to criticisms of the scheme that I accept. 

IK: You were not tempted to cut CGT?

PD: I wasn’t, and the reason why is when I look at the general level of economic activity in the economy at the moment, and I would question with the risks that we have in constraint and overheating, whether a change in CGT would be appropriate for now.

IK: The cider sector did well. But so did the digital games, who have received a significant tax break. Why single out this sector?

PD: The art form for the generation before us was the novel. The art form of choice for our kind of generation was the film, now morphing into the epic television series. The art form of choice for the generation below is digital gaming. The number of people who now watch live music through Fortnite, the number of social conversations and social engagements that happens though playing FIFA, the number of lives that have been lived through Grand Theft Auto, this is what is happening. If you look at our economy at the moment, we excel at film production, we excel in content supply for Amazon Prime, Apple Plus, Netflix, we are doing very well in animation. We are looking to join the dots between the two. I would love to think that in two years, the next Fortnite will be made in inner-city Dublin, or the next Grand Theft Auto will come out of Kilkenny, this is a play for me to make that happen. 

IK: The various Covid supports have been extended. Given the artificially low number of insolvencies we have had this year, are you concerned that we will see a glut of failures when the reliefs are tapered off?

PD: It is certainly a risk that I am aware of and what I wanted to do was get the balance right between how we manage our national finances, and also the real risks of premature exits from support schemes. To put EWSS in context, it is €1.4 billion. That is equivalent to the entire package for new Budgetary measures. It is the single biggest economic decision in the Budget, and our modelling indicates to us that by the time we get into the first quarter, we will still have between 200,000 and 240,000 people on the scheme, and anywhere between 15,000 to 20,000 employers. We believe it is a risk. To manage that risk, we have kept it in place for a further six months and to graduate the exit. I have always said that we would not go from 350 to zero and I always said that having no cliff edge was not the same as letting the scheme run forever. 

IK: But there are worrying sectors, such as retail. What is your big fear in terms of the sector most vulnerable?

PD: The sector I would continue to be really aware of is our hospitality sector. There are a lot of supports, and people will always make the case for us to do more for longer. But if I look at the intensity of jobs that are in the sector, if I look at how important it is to regional development as opposed to just in our larger cities, I am really aware of how important it is.

There are three figures I look at all the time. The first figure is the report I get through around nine o’clock every morning about our yields. The second report I get through every week is the number of people on EWSS. And the third report I get through in the last few working days of every month is the Exchequer position. I put as much focus on the EWSS figures as I do on the other figures.

Corporation tax: When 12.5 became 15

“It was, I genuinely believe, the right decision for Ireland in the long run”

IK: Corporation tax. Much of your time in the build-up to this budget was spent getting a deal Ireland could live with on corporation tax. Had that deal not gone the way you hoped, would you have been looking at a different Budget?

PD: A very different Budget. Or perhaps to be more precise, a very different set of Budgets in the future. The Budget is the most important economic event of the year. The OECD decision was the most important economic decision for years to come. That was the difference.

The last number of months have been exceptionally busy and intense in trying to land for the latter while trying to deliver the Budget. It was, I genuine believe, the right decision for Ireland in the long run, but also the best available decision for us.

IK: It is easy to look at the headline number of 15 per cent. But the negotiations on so much are still ongoing. What will the carve-outs be? How will we judge the effective rate? What happens to IP and inter company debt?

PD: We have at least a year of further work ahead on this. But for me, this was one of the reasons why, ultimately, we needed to be in the agreement. Because in the absence of being in the agreement, we would have been a price taker. We would have been absolutely outside of the tent. I am not saying for one minute that we have the same level of influence in this as America does, or the very largest economies do. But we will be in the tent when those decisions are made.

IK: Because the carve-outs and the nuances about IP are as important for companies as the headline rate?

PD: Very much so – the definition of the R&D tax credit, all of the details around the transition period, how this will be implemented. They matter as much to many companies as much as where we are with the rate. 

IK: I spoke to a number of business leaders. They all said there were issues attracting and retaining staff – at every level in the economy. Accountants are lobbying for visas, for example.

PD: That is why we need to be aware of the relative competitiveness of our personal tax structure for those who are in middle-income salaries within our economy, we need to make the case that our marginal tax rates need to be relatively competitive. And of course, we are aware that there is a battle for talent, and Ireland needs to do well within that. That is why I made the decision in relation to the standard rate cut off point to the higher rate of income tax, and I know that the Tánaiste is aware of the needs that we have from a work visa point of view, and we will work on that.

Holding the centre

IK: You have been involved in Budgets since 2016. Has your political philosophy and your budgetary philosophy changed over that period?

PD: The core views of my political philosophy and my views on political economy have not changed at all. I believe in the political centre – both here in Ireland and in Europe. I believe that is where Ireland is at its best. It is where we can earn a living in the world, and also look after our society. Those core tenets of my views have not changed. Economically, I still strongly believe that those who are at the most risk from national finances – that need the finances to be safe and secure – are those who need the state most in their lives. That is why we have a duty to them to manage our public finances in a safe and secure way.

Where my views have definitely evolved is on the need for that centre to continue to make an accommodation with those that ultimately the centre will depend upon for political support. The best example of that would be the zoned land tax. The zoned land tax is the kind of policy that in 2016, I would not have seen myself do. But I am now absolutely clear it is the right thing to do. That is an example of how the political centre can become vulnerable if it is seen to be the same as the status quo. It is the kind of journey that I am trying to make the case for, and indeed lead.

The other thing that is strengthened from where I was in 2016 is my view of the importance of the European Union to Ireland. If I look at what might yet happen in the United Kingdom, if I look at the broader changes that Ireland is going to have to confront – climate, the security balance of the world, quantum computing, AI – I am more convinced than ever that our membership of the European Union gives Ireland the best way of being able to navigate our way through this period of change.