Dr. Edgar Morgenroth:

I thank the Deputy and Senator for the questions. They are very broad ranging questions, which reflect the fact that the semester document itself is rather broad ranging. I will deal with the issues in turn, as they came up, because I took notes along the way.

Deputy Durkan asked about taxation returns, the variations therein and the underlying factors. We have conducted some work at the ESRI looking at tax volatility by tax heading. We put a lot of our effort into income tax to start with so we are close to finalising a report on value added tax. We also conducted another study where we looked at a few different tax headings. When one looks at the relationship between tax revenue and the underlying economic activity of GDP in the State there are very large differences across tax headings. Income tax tends to be a relatively stable tax. Within broad income tax there is the basic income tax and there is the USC. The USC will actually be a much more stable source of income than the basic income tax. Customs tax is very stable as is excise tax. Capital gains tax and stamp duties are very volatile. We discovered during the crisis that tax revenue under those headings really collapsed. Corporation tax is also volatile, within the year, so it is hard to predict the exact timing of some of their receipts. There is also some volatility across years. Some of this is due to how multinationals operate within their overall business as tax changes in other countries are much harder to predict. VAT is also a reasonably stable source of income. In looking at this we are developing our understanding of it.

The question of foreign direct investment attractiveness and Brexit is a very interesting one and is one we have analysed. Current thinking is that Brexit will have something of a positive impact on FDI as the UK becomes less attractive. The UK is the second most important destination for FDI in the world. The UK has a very significant stock of FDI, some of which could move after Brexit. The harder the Brexit the more likely there will be a move. There is also new FDI going into the EU that might otherwise have gone to the UK. It is now available for the remaining EU countries to compete on. It is interesting that Ireland punches well above its weight when it comes to attracting FDI. We pick up some 6.8% of the FDI that goes into the non-UK EU, which is quite substantial given the size of the economy. We should, therefore, also be expecting that Ireland will pick up additional FDI because of Brexit. The degree to which we are able to do this depends on the sectors that are looking to move. The UK, for example, has a very large car industry and Ireland is not terribly competitive in that sector. On the services side, including financial services, we are reasonably competitive and are one of the better performing countries. One would expect that the benefits could be on that type of investment. That is where we are likely to see some positives.

More generally of course, the Brexit issue is very likely to have a net negative effect on Ireland. Even if we pick up some of this foreign direct investment, FDI, the negative effect through trade and other aspects is likely to be substantially larger than the benefits we might get through FDI. Again, we have carried out quite a substantial amount of work and research on this. Of course, there are very big sectoral differences in terms of the negative effects. Our estimates at the moment suggest that the agrifood sector is particularly vulnerable to any imposition of tariffs. That is very important. At the sectoral level, if the World Trade Organization, WTO, tariffs were imposed on the current trading patterns, the average tariff for food and beverages would be approximately 35%. That would be pretty significant.

The Deputy asked a question about water charges and whether they are a negative. I was in this very room a number of years ago giving evidence to the Joint Committee on the Environment, Transport, Culture and the Gaeltacht. In general economists would favour pricing something that has a value and pricing it explicitly rather than implicitly through general taxation. Clearly, water charges would have been an opportunity to generate additional revenues that could have been used for investment. Their introduction is, of course, ultimately a political decision, but it certainly would have generated some additional revenue.

There were very good questions on continued membership of the EU, Brexit, uncertainty in the US and how individual member states are treated. Clearly Brexit and the electoral successes of some, perhaps more extreme, parties should give rise to questions about some of what we are doing at EU level. Clearly, we need to think about what is going wrong that has led so many people to be dissatisfied and how we should respond. In general, I see the EU continuing to look towards being a proponent of free trade. I do not think the EU will itself take any initiatives to reduce free trade. Of course, as other countries or blocs of countries impose barriers or make life more difficult, it is imperative that the EU protects EU jobs and businesses. That will be important in the future. There will have to be reactions to the hostile actions of others.

I will let my colleague, Dr. Barrett, in at this stage. I might come back.