Interview Series: 11 Questions for the Minister of Finance

Ireland was the fastest growing economy in Europe in 2015, ranked by percentage change in Gross Domestic Product (GDP), the economic indicator which captures the value of all goods and services in an economy. While there has also been a major improvement across a range of other economic indicators, significant challenges and risks remain.

The ECB’s record low interest rates have brought reprieve for many individuals and businesses mired in debt, as well as the heavily indebted State. The decline in the Euro exchange rate has boosted exports, and as an open ended economy we will have felt more than a ripple from the improvement in the economies of our main trading partners such as the UK and US. Therefore, we are heavily reliant on external factors.

At the same time, domestically, we are yet to emerge from the legacy of the last crisis, the implications still being felt across all elements of public policy. Earlier in the year, I put 11 questions to the Minister of Finance, response pending, which I believe touch on the main challenges and risks facing the Irish economy.

As I put it to the Minister in my e-mail I have no political affiliation or political agenda. My interest is simply from an economic and financial markets perspective, to get the views of the man at the helm of this recovery.

1. Ireland is now the fastest growing economy in Europe, and the increase in tax revenues in 2015 even caught your own department by surprise, and you are now expecting to balance the budget earlier than expected, in 2017. During budget season back in October, one Fianna Fail minister called you the “lucky general, another said you simply ‘took Brian Lenihan’s plan and tweaked it’. What do you think about this?
2. Leaving aside the local politics, as a small open economy don’t we owe much to developments abroad, not least the actions of the European Central Bank (ECB)? Most spectacularly, the interest rate the Irish state can borrow at has plunged, the Irish 10-year yield is currently 1.04%, down from the peak of 14.49% at the height of the Eurozone debt crisis in 2011. Debt servicing costs in 2015 were €7.1 billion; are we completely reliant on the ECB keeping rates low to sustain our debt burden?
3. By cutting interest rates – deposit rate is -0.30% & main refinancing rate is 0.05% – the ECB has also provided reprieve for highly indebted individuals and companies. However, what do you make of the view that keeping rates so low actually impedes the Eurozone recovery, delaying what Joseph Schumpeter called the “process of creative destruction”? Should more businesses have been allowed to fail?
4. Multinationals have come to Ireland for a number of reasons, but we all know the significance of our favourable corporate tax regime. As pressure mounts in Europe for greater fiscal union, will the 12.5% corporate tax rate always be considered sacrosanct and could a European fiscal treaty ever force the government’s hand?
5. Even before we have dealt with the mess of the last crisis, the long term arrears crisis is not going away, the OECD is warning us about another property bubble. What are your own thoughts on the renting versus buying debate, and should there be a limit to the number of residential properties one individual or company should be allowed accumulate? Is a house a home or an investment?
6. You spent some time in hospital over Christmas. It is only when we get sick that we appreciate the value of quality healthcare. Unfortunately, 2015 has been another year of horror stories on the state of our healthcare system. Did your time in hospital inspire any reflection on what is wrong with our healthcare system and how resources could be allocated more efficiently?
7. As we look forward, one of the biggest challenges yet to be addressed is the looming pension crisis, as a large group of the population faces retirement with inadequate pension provision. Those relying on the state pension might be surprised to learn that all we have is a massive unfunded state pension liability, backed by no assets. As the population ages, it will become unsustainable. Do you think it is now time to set up a new National Pension Reserve fund, one that cannot be raided by the government?
8. In 2011, when you took over as Minister of Finance, Ireland was considered one of the “PIGS” of Europe. Have you been received differently at the monthly Eurogroup meetings, from the days of being perceived as a problem child to now being the poster child of Europe?
9. An election beckons over the coming months. The famous Clinton-Gore campaign slogan in the 1992 US President Election was “It’s the economy, stupid”. Will that be the Fine Gael approach and do you believe the economic recovery has been broad enough to get you back into power?
10. What do you see as the biggest risks to the Irish economic recovery? What is your gut feeling on the UK Brexit vote and do you think we are prepared for an exit?
11. Finally, 2016 marks the centenary of the birth of the Irish Republic. David McWilliams recently wrote the “the heroes 0f 1916 were economically clueless…and it wasn’t until these men were dead that this country began to deliver economically for its citizens”. What do you think the revolutionaries would make of the Irish society we live in today?

Vincent McCarthy, CFA

www.macromarkets.ie

*(E-mail sent January 7^th, follow up January 14^th)