Dr. Tom McDonnell:

It is a small figure. In response to the question why would we not phase out the USC, it is a great tax. It is extremely well designed and is well regarded internationally for that. It is very simple, extremely progressive, there are a minimum of reliefs and it brings in €4 billion per year. We are looking at an ageing population. At the beginning of the next decade there will be increasing calls on spending for pensions and health care. The €11.3 billion in fiscal space over the next five years looks like a lot of money but price and demographic pressures will eat into that. Given, as I have said, our already low levels of spending on infrastructure, research and development and other areas, such as child care, which is extremely important for labour force participation, particularly for women and lone parents, and all the other calls on spending and tax cuts, and given that maximum effective tax rates for low and middle earners are not particularly onerous by international standards, it is not clear to me what the economic rationale is for dismantling the USC.

Moreover, with all these other calls on spending - as well as potential calls in terms of tax cuts - and given that maximum effective tax rates for low and middle earners are not particularly onerous by international standards, it is not clear what is the economic rationale for dismantling the universal service charge, USC. As I pointed out in the presentation, there would be a stimulus to the economy from getting rid of it because it would increase disposable income. It would not do anything necessarily to increase the productive capacity of the economy, which is from where long-term economic growth over decades comes. It is the long-term picture at which one must look. It is how does one inculcate growth in ten, 20, 30 or 40 years' time. Consequently, early learning education and so on are areas with much greater returns. In the case of research and development, for example, Ireland is very low. Countries such as the United States that are supposed to be market economies essentially have built their economies over the past 150 years by public capital investment and investing in those areas. These are much more important calls.

As to whether the levels of investment increase are credible, it obviously is positive that they are increasing but I believe the mid-term expenditure report that came out in the middle of the year envisages capital spending as being €7.1 billion in 2021. One is talking about GNP being approximately €260 billion by then and GDP will be more than €300 billion. While I acknowledge those figures are polluted, even so, one is looking at quite a small amount, even as a ratio of GNP. In our view, which is shared by a number of organisations including IBEC and even the European Commission - and which has been pointed out by the IMF and the London School of Economics - one thing that has been holding back growth and generating secular stagnation in the West is very low levels of public capital spending. Obviously, politically they are the easiest things to cut because one simply does not do the next project but the returns in respect of medium-term economic growth probably are higher for infrastructure spend than they are for anything else. Research and development, child care and education can be more long-term.

It is not necessarily a good idea to aim for a particular percentage of economic output because it depends on where one is in the economic cycle. One would do less when one's economy is overheating and more when it is under heated. The idea of a rainy-day fund was mentioned. That could be an alternative to cutting USC, for example, whereby the money allocated for that would go into a rainy-day fund which would be spent on infrastructure when the next recession came. However, I certainly would not be contemplating rainy-day funds or infrastructure spends as alternatives; infrastructure spend should happen. The correct number is not 3%, 4% or 5%, although 2% certainly is low. It will depend on the cyclical position of the economy. It should be above 3% when the economy is doing poorly and it could be as low as 3% or even 2.5% when the economy is doing very well. One uses it as a Keynesian demand management metric. A rainy-day fund potentially would allow one to get around the fiscal rules, were it set up properly and independently run. If, let us say, the Government had equity stakes in a special purpose vehicle, that perhaps would allow one to massage it long-term. However, I agree that infrastructure spending certainly has been disproportionately targeted in the austerity measures and must be disproportionately restored as the recovery takes hold. Even if we do start overheating to a certain degree, there still must be a certain minimum level of infrastructure spending on the public side. We must address the fact that we have a growing population, which means we must increase our infrastructure spend and not be in a position, as we are now, in which we are just maintaining what we have.