Oireachtas Joint and Select Committees
Wednesday, 16 July 2025
Joint Oireachtas Committee on Finance, Public Expenditure, Public Service Reform and Digitalisation, and Taoiseach
The Impact of Tariffs on the Irish Economy: Nevin Economic Research Institute
2:00 am
Mairéad Farrell (Galway West, Sinn Fein)
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Níl aon leithscéalta faighte againn. We have not received any apologies. Is mian liom na riachtanais bhunreachtúla seo a leanas a mheabhrú do chomhaltaí agus páirt á glacadh acu i gcruinnithe poiblí. Caithfidh comhaltaí a bheith i láthair go fisiciúil laistigh de theorainneacha shuíomh Theach Laighean. Ní cheadóidh mé do chomhaltaí páirt a ghlacadh i gcruinnithe poiblí nuair nach bhfuil siad ag cloí leis an riachtanas bunreachtúil seo. Mar sin, má dhéanann aon chomhalta iarracht páirt a ghlacadh ó lasmuigh den suíomh, iarrfaidh mé orthu an cruinniú a fhágáil. Maidir leis seo, iarraim ar chomhaltaí a dheimhniú go bhfuil siad i láthair laistigh de phurlán Theach Laighean sula ndéanann siad aon ionchur sa chruinniú ar MS Teams.
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Cuirim fáilte roimh Theach Oscail ó Contae an Chabháin. I welcome Teach Oscail from County Cavan, who Senator Tully has brought in to witness our proceedings today.
Today the committee will engage with Dr. Tom McDonnell from the Nevin Economic Research Institute, NERI, on the impact of tariffs on the Irish economy. The imposition of tariffs on the EU by the Trump Administration will significantly impact trade between the EU and the United States of America and has implications for the Irish economy. The USA is one of Ireland's most important trading partners and a key market for our exports, particularly for pharmaceuticals, medical devices, and food and drink products. The 10% tariff for EU products entering America announced by President Trump earlier this year will drive up the price of certain Irish exports to the US and potentially reduce future economic growth and job creation. The 30% EU tariff rate indicated by President Trump last week could have a significant adverse impact on Ireland with potential job losses in those areas that are proposed to be subject to tariffs, such as the drinks industry. This could lead to reduced revenues to the Exchequer. It is imperative that the European Commission and the Trump Administration come to a comprehensive trade agreement in the coming weeks that avoids the threat of 30% tariffs, or even higher, from next month. In this context, I welcome Dr. McDonnell to today's meeting and invite him to make his opening statement.
Dr. Tom McDonnell:
I thank the Cathaoirleach, members and staff of the committee for the invitation to appear today. I am co-director of the Nevin Economic Research Institute, NERI, and am grateful for the opportunity to present the institute's views on tariffs. While the final landing point of the US tariffs is uncertain, the minimum we can expect is 10% on most goods. There is a very significant possibility of higher rates, potentially varying by sector and potentially including services, depending on how the EU responds to the US provocations.
In attempting to understand how events might play out, we first need to understand the motivation of the US Administration. In essence, alongside its value as a bargaining tool and lever for political pressure, the Administration has four arguments justifying tariffs. First, tariffs will lower import prices, before tariffs are counted of course, thereby shifting the cost onto foreign producers. This will improve the US terms of trade in a welfare-improving way for the US. Second, tariffs would lead to a relocation of manufacturing production to the US, which would boost domestic employment and the quality of that employment. Third, tariff revenues would allow the US Administration, as we have already seen, to reduce taxes in other areas, including taxes on income, corporate profits and billionaires, for example. Fourth, tariff revenues will reduce trade deficits with foreign countries, which is something the US perceives, correctly or not, as a security issue.
It is important to emphasise that tariffs are not an inherently left-wing or right-wing policy. They are supported by many progressives, for example, Bernie Sanders, in the US. Whether a tariff or industrial subsidy is progressive or not, depends on the role it plays in the overall development strategy. It can legitimately be used to counterbalance imperfect competition or where a country has lost ground in global competition. However, as it happens, the likely impacts are very different from those anticipated by the US Administration. Economic theory, which is contested, broadly suggests that import tariffs have a number of economic transmissions to which I have pointed in the appendix and that the outcome will include weaker domestic and trade partner GDP, potential improvements to the trade balance which are conditional on exchange rate movements and, ultimately, weaker average productivity in both countries as markets shift away from the most productive exporting firms to less productive domestic firms.
In addition, empirical studies consistently reveal negative impacts from tariffs. Based on the empirical literature, we can expect that prices will increase in the US, economic output and productivity will fall on both sides and unemployment and inequality will rise in the tariff-imposing country because it is a regressive tax on imported goods. There will be a decline in real incomes and aggregate demand. Unemployment will also rise in the countries facing the tariff because there is a reduction in external demand. Global value chains will start to fragment, which creates all sorts of distortions. Supply costs will be disrupted, as will trade flows, and exports and imports will both shrink. There will also be a slowdown in business investment because of the uncertain nature of the tariffs. We see that they are changing every week and even if there is an agreement in August, they are still very much open to being changed on a monthly or quarterly basis. This means that businesses hold off on investments. There is an abeyance, which will be bad for productivity in the medium term and employment in the short term.
A further issue is the extent to which there are diverted exports from other tariff-hit countries. If, for example, China is not able to sell its goods to the US, it might divert them, albeit at a lower price, to places like the EU, which could cause issues within EU markets. Overall, protectionism is expected to distort production and resource allocation, erode competitiveness and, ultimately, generate welfare losses on both sides. These effects are magnified if the affected countries retaliate. Effectively, if we do the same thing, the same effects happen to us. It is important to note in passing that the trade union related economists network, or TUREC network, of which NERI is a member, used the NIGEM model and found very similar results. Higher inflation, declining domestic demand, falling imports and exports were all anticipated, with reciprocal tariffs making things worse.
In order to understand why these negative effects happen, we can think in terms of four shocks. The first shock of course is the direct impact of the tariffs themselves. This means distortions to existing supply chains, shifts in demand, lower average productivity and job losses over the medium term. The second tariff shock that cascades from the first is the inflation effect. Specifically, the higher prices which research indicates will ultimately be borne by US consumers will reduce their purchasing power and reduce imports into the US even further. In addition, this could cause a monetary policy shock within the US, that is, higher prices will cause an increase in interest rates and that will have a further negative effect on GDP and employment. It is worth noting that these things do not happen instantly. They tend to happen over months, quarters and even years.
The third and fourth shocks, which can happen much more quickly, are linked to uncertainty and loss of confidence. The erratic, inconsistent and unreliable behaviour of the current US Administration is obviously causing significant uncertainty. That uncertainty mixed with higher than expected inflation ends up causing a term premium on US Treasury bonds. The interest rates required on the bonds goes up and that means the cost of servicing US debt goes up. In addition, the cost of corporate credit goes up because there is more uncertainty. Banks do not like uncertainty when they are lending, which means what they demand from businesses goes up. All of this is bad for investment. The IMF estimates that uncertainty shocks could double the negative effect of direct tariff rate shocks, with investment plans in abeyance. The fourth shock, a loss of confidence, can have a number of impacts. The most obvious is an increase in precautionary saving because people are worried they might lost their jobs. This means a decline in household consumption and business investment. These confidence effects are non-linear. It is not simply a case of a little bit less spending and a little bit less investment. At some stage, we reach tipping points. A full-blown trade war could precipitate a shock, an abrupt loss of confidence in the US or the EU, leading to a recession which, in turn, would further damage exports.
How does this all play out for Ireland? As everyone knows, Ireland is one of the most highly globalised economies in the world. It has very significant two-way linkages with the US economy and is itself the most exposed economy to tariffs within the EU, relative to its size. We have one of the largest trade surpluses with the US in the entire world. The €72 billion in goods exported to the US last year was the second largest in the EU, despite our minuscule population. Germany had the highest. Ireland's exposure to the US was illustrated fully in the first quarter of this year by the surge in pharmaceutical exports just to get ahead of the tariffs. This caused an enormous shock to our GDP, which is so large it affects data for the EU as a whole, despite our small population.
As members know, the US is the top export destination for the EU, with a massive goods exports surplus of close to €200 billion. On the other hand, there is a services deficit on the other side. Germany, Italy and Ireland have the largest surpluses, which explains their very cautious or dovish attitude. Other countries that are less exposed are able to be more hawkish. It is noted that most of the Irish exports are from US companies selling into other US companies. We know about the €58 billion last year concentrated in pharma and chemicals and it will probably be higher again this year, notwithstanding the tariffs. The US makes up more than half of extra EU exports from Ireland, which is more than double any other EU country.
What does this all mean? It means that the proposed tariff increases and potential reciprocal escalation are a potentially game-changing threat to the Irish economic model. Tariffs reduce trade and disproportionately affect small open economies, which Ireland is, and the uncertainty around the timing, scale and extent of tariffs will slow investment location decisions until such time as there is greater policy clarity, which may not come until 2027.
As we know, the large trade surplus specific to the pharmaceutical sector makes it a particular target for the Trump Administration, albeit one that it is not quite clear or sure how to deal with. While it is possible that jobs could be moved to the US in order to circumvent tariffs, the practicalities of this are not particularly feasible in the short term because of the nature of the product. Relocating pharmaceutical plants to the US could take five to ten years, and hopefully the tariffs will be long gone by then. It is a highly specialised sector with complex supply chains that needs a skilled workforce and so forth. What is more realistic is the loss of future foreign direct investment and slower employment growth. In addition, multinationals may choose to shift their intra-company payments, that is, transfer pricing, between different parts of the same company to reduce their tariff exposure. They would charge a lower price, which would mean there is a smaller tariff on it, but that means the corporate profits are made in the United States instead of being made in Ireland, which obviously would affect corporate tax receipts. Overall, pharma companies may shift some production to the US over the medium term in order to serve that market, but moving production makes it more difficult to serve the EU market. In my view, the uncertainty over whether tariffs will outlast the Trump Presidency or 2027 might reasonably induce those companies to take a wait-and-see approach.
When it comes to tariffs it is important to understand that all goods will react differently to a tariff regime. Inelastic, non-price sensitive, essential goods, where you cannot get something else, for example, a different type of drug because you need that type of drug to live, or whatever might be the case, and items with limited substitutes, such as many pharma goods and medical instruments, are unlikely to see much reduction in export volume in the short run, whereas elastic or very price-sensitive goods, which are also non-essential, with easy substitutes, such as dairy, butter, beef and alcohol, are likely to see much more significant reductions in their export volumes and in the prices producers can obtain. Therefore, that means short-term job losses are more likely in food and drink than in pharma and this is where we expect them to occur.
In addition, an escalation of a trade war would further expose our economy. If a different tariff obtains in Northern Ireland or Scotland than in the Republic of Ireland, this would create a competitive disadvantage, for example, for whiskey produced here. They do not care in the US if "Irish whiskey" comes from the North or the Republic. That is obviously a challenge south of the Border.
Ultimately, whether tariffs are unilateral and set at 10%, reciprocal or escalatory, they will lead to higher levels of inflation. This could induce central banks to slow or reverse interest rate cuts, which would be a mistake. In addition, they will lead to reduced scope for multinationals to make profits in Ireland, and might ultimately lead to slower rates of foreign direct investment and lower employment levels as well as lower corporation tax and income tax revenues. The silver lining is the higher revenue from the tariffs themselves.
I am sure the committee knows already about the research done earlier this year by the ESRI and the Department of Finance. It looks like the tariffs will be reciprocal in nature. They will be at least 10%, and they are potentially likely to last for four years. In that outcome, we are looking at modified domestic demand falling by 1.3% and consumption by 2.4%, while prices rise by 0.2% and Government debt rising by 0.9%. Employment would fall by close to 2% relative to the baseline. If we imagine that employment was due to increase by 1.5% each year for the next four years, it would instead fall to about 4% instead of 6%. According to the analysis, we are not talking about job losses, per se, as would appear in the data; we are talking about slower employment growth, albeit to the tune of about 50,000 fewer new jobs.
That is also borne out by results from the Aston school. Béla Galgóczi estimates that a 20% tariff on EU goods exports would put 750,000 EU jobs at risk, most of them in manufacturing. Countries like Germany would be particularly badly hit.
In terms of the policy response, there is not necessarily agreement between economists as to what one ought to do in terms of whether the EU should respond. A trade economist would simply say tariffs are bad for business and the economy, just do not respond and de-escalate the situation as much as possible so as to prevent the extension of tariffs to services, including indirectly via the anti-coercion instrument. Ireland is very much exposed.
On the other hand, a behavioural economist or game theorist, if you will, who plays the game more strategically, might suggest going toe to toe with the Trump Administration in the short run, in order to get a better deal. In other words, the hope is that the US is badly hit and that there is a Trump recession which, in a way, discredits tariffs as a policy and over the medium term leads to the ending of tariffs as a policy tool being used by the United States.
It is true that the EU has clout due to its market size but we also have greater dependence on the US, which puts us in a weaker position than China. While a TACO - Trump always chickens out - strategy that assumes Trump will back down is understandable, it is obviously very risky and it could induce a global recession. Were this to happen, and were it deemed to be temporary, then an EU-wide response to preserve productive capacity akin to a scaled down Covid response such as, for example, SURE - support to mitigate unemployment risks in an emergency - at the EU level and an expansion of the European globalisation fund, EGF, would be appropriate. Ideally, such a response would be sector-specific. In our case, food and drink would be a good example. If done, we would argue that it ought to be tied to social conditionality with broadened social sectoral dialogues and sectoral task forces for the affected sectors. In addition, monetary and fiscal policy would need to be proactive and supportive. However, such a response can only be a temporary holding position.
We would argue that what governments should not do is use a crisis that affects specific industries, often exporting industries, to rush towards what we call a low-road competitiveness agenda that undermines workers' rights or environmental rights. Such an approach is a developmental dead end in the long term for the Irish economy. NERI has been working on an alternative policy suite, our new economic model, which we would be happy to discuss with the committee either now or at a later date.
In short, reciprocal tariffs will damage the EU and Irish economies but there may be strategic advantages to responding in kind. If retaliation is the decision, then my personal view is that a general approach is preferable to a targeted one. Ultimately, any deal with this US Administration is unlikely to be superior to that offered to the UK, which was a blanket 10% tariff on goods exports. Crucially, we should take the approach that we are willing to respond in kind if the US changes its behaviour. If Congress re-exerts control of trade policy, we should signal to it that we are willing to immediately end tariffs on our side if it is willing to do so in order to de-escalate at the earliest opportunity.
A related point, which perhaps has not been in the discussion in Ireland or at EU level to a great extent, is industrial policy.
It is important to understand that over the past ten years, China's vertical industrial policy has proven much more successful, for example, in terms of the green revolution, than the EU's horizontal industrial policy. As a result, a reassessment of our strategy at European and domestic level is required. In addition, we should realign our trade policy with countries in the global south in order to develop a new trade policy framework.
I will finish on that. There is a final point about our over-reliance on US capital and US multinationals and the need to evolve our model, but I am way over time,. I will be happy to take any questions.
2:20 am
Mairéad Farrell (Galway West, Sinn Fein)
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Go raibh míle maith agat. I will now invite members to contribute. I remind those participating remotely to use the raise hand feature and to cancel it when they have spoken. We have a number of indications already. We will start with an Teachta Brennan, ansin an Teachta Doherty agus ansin an Teachta O'Callaghan. I have everybody down who has indicated.
Shay Brennan (Dublin Rathdown, Fianna Fail)
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Go raibh maith agat, Chair. I did not realise I was first on the list.
Mairéad Farrell (Galway West, Sinn Fein)
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I apologise. The Deputy has ten minutes.
Shay Brennan (Dublin Rathdown, Fianna Fail)
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I am happy to be first. Dr. McDonnell is very welcome. I thank him for his lengthy and detailed introduction. Sometimes, a presentation by a witness covers off all questions. On occasion, however, it can give rise to a lot of questions. I have ten minutes. I will try to get through a few of my questions and perhaps we can come back then later. What area does Dr. McDonnell want to focus on? I am not going to read everything into the record. I will just to point Dr. McDonnell in the right direction.
Dr. McDonnell indicated that research from the TUREC network, of which the NERI is a member, uses the NIGEM model to estimate the impacts. He knows what I am talking about.
Shay Brennan (Dublin Rathdown, Fianna Fail)
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To sum it up, essentially, he is saying that the state or bloc imposing the tariff will be hit and, to a lesser extent, the recipient of the tariff will be hit. This would suggest that a policy of not retaliating in that regard would make a bit of sense. In addition, what is also contributing to short-term volatility and a pause on investment and decisions is the fact that we are in a state of uncertainty. As deadlines keep being extended and as the US Administration keeps throwing out random numbers, there is no end to that uncertainty. Coming to some sort of agreement would certainly bring an end to that uncertainty and allow us to draw a line under the matter at a level we do not know yet. Dr. McDonnell highlighted research on what a 10% tariff would imply. What percentage of a general tariff would be acceptable if we were to choose not to retaliate? Could we pick a figure today and move on from this with a reasonable amount of confidence that it would bring about a best-case outcome?
Dr. Tom McDonnell:
The Deputy provided a good summation in terms of the points he made. From all the empirical research I have seen - and there is surprisingly little of it because there was an assumption among economists that tariffs imposed by advanced economies were mostly of historical interest - but what is there, much of it rushed out in the past year or so, is very clear that the bloc imposing the tariff, if it is a general tariff, will be the worst hit. If we think about it, the US is imposing tariffs on all countries. The EU is imposing a tariff on one country. Broadly speaking, therefore, it is affecting a smaller proportion of its imports. As a result, the impact on prices is not as severe and so forth.
The second thing is that if we are imposing tariffs, we are effectively doing what they are doing, albeit in respect of a smaller proportion of our imports, and, as a result, we will be negatively hit in all the ways described. This will mean higher prices, although that will be competing against lower economic growth. Lower economic growth tends to mean lower prices. Therefore, there is an offsetting effect, albeit it for a very bad reason. If there are fewer people working, there is less demand in the economy. As a result, prices might come down and this will compete with the higher prices. That is why there is some uncertainty as to what happens in respect of prices.
The other uncertainty relates to what happens to exchange rates. Normally, it is expected that a country that introduces tariffs is importing less so its exchange rate will often improve. What happened in this case, of course, is that it did not. The value of the dollar depreciated because the policies were considered so eccentric and there was such uncertainty that there was a loss of confidence in the US economy. Therefore, investors, including hedge funds, pension funds and so forth, were taking their assets out of the US altogether. That is what ultimately precipitated the original climbdown, which was quite a wise move actually.
In terms of uncertainty, the Deputy is correct. One of the four negative transmissions is uncertainty. If we can arrive at a particular figure that we know is going to be the case until the Trump Administration is gone, and assuming there is no Trump Administration, but even if the next Administration brings it in, then businesses can actually make decisions. At the moment, people cannot make decisions. If it is bouncing from 50% to 30% to 10%, they do not know whether it makes sense to build a plant in Ireland, the US or Germany, so they will simply hold off. This means fewer jobs in construction in the short term and lower productivity in the long term. If states can bring certainty, then decisions can at least be made, even if they are not the decisions they might have made six months ago. This will lead to a resumption of investment. It may be pent-up investment and may not be as much as it would have been before, but at least it will be there. Therefore, an agreement would be good for the economy. It would draw a line under the matter, to address the Deputy's point.
What would be acceptable as a tariff? The lower the number, the better. There is no good number for a tariff. There are good reasons for tariffs, albeit these are the types of reasons that South Korea and other countries would have done introduced tariffs in the 20th century. They are not necessarily relevant for the United States in the 21st century, unless the Americans are trying to shut out particular sectors they want to develop over time. Of course, they could simply just ban imports altogether. There are all sorts of mechanisms that can be used. This would mean that a sector-specific tariff might make sense for the United States in respect of particular things, but a general tariff would not.
What would be acceptable? There is no right answer to that question. It is not going to be lower than 10%. We are not going to get a better deal than the United Kingdom. It would appear that 10% is the floor that is on offer, at least for the next two years. The closer we can get to that, the better. Obviously, 30% would be a devastatingly bad outcome. We reach a point eventually where trade simply ceases to become profitable. In that case, what might happen with the intra-company transfers in pharmaceuticals and the like is that they might start selling to their analogues in the US at a very low level. Therefore, it would persist and the US would continue to get it. What would happen then would be that we would have lower corporation tax receipts. However, that would depend very much on the specificities of the companies involved, which are all very different in terms of how they operate. That answer I would give is that the lower we can get it, the better.
Shay Brennan (Dublin Rathdown, Fianna Fail)
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I think I probably already know the answer to this one, and Dr. McDonnell definitely cannot put a firm figure on it. He provided a lot of statistics and potential economic impacts using concrete numbers in respect of a 10% tariff. Is a 30% tariff three times as bad as 10% or is the impact exponential?
Dr. Tom McDonnell:
It is not three times as bad. It does not work exactly like that. In some cases, it will basically fall off a cliff. It simply just becomes unviable. We cannot make a profit unless it is a necessity on this side, in which case we simply just push all the prices on to US consumers. In the context of pharmaceutical goods, if it is a medicine that people need to live, they will pay any price. If, on the other hand, it is whiskey or butter, they are not going to pay 30% extra, in which case it falls off a cliff. It depends. This goes to the point I was making about whether goods are elastic or inelastic. In fact, that is what elastic and inelastic mean in that sense. It is a matter of how sensitive-----
Shay Brennan (Dublin Rathdown, Fianna Fail)
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Understood.
Shay Brennan (Dublin Rathdown, Fianna Fail)
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I would like to ask Dr. McDonnell his opinion. He outlined two potential ways forward or two strategies, one of which is to accept a tariff and move on and the other is to play hardball, take a more strategic approach and hope the other side folds first. Does he have a preference or an opinion as to which would be best for Ireland in this situation?
Dr. Tom McDonnell:
The problem is that it depends upon the whims of a very intemperate person. Ideally, if we were dealing with a rational actor, we might think that the second option to play hardball makes sense because a rational actor would pull back and say they do not want the US economy to fall into recession because, presumably, it would mean their being destroyed in the congressional elections. That would be the logical thing.
With this current Administration, however, its policies are so eccentric compared with norms, it is difficult to say what we ought to do because Trump could push it further, regardless of what the US financial markets think of him when it comes to "TACO"and all that. The decision for the Irish economy is a different from that relating to the EU economy. The EU, as a bloc, could play hardball. The EU economy is enormous. It is as strong as the US economy and is able to hit back. If it sucks this up for a period and destroys tariffs as a policy for a generation, then maybe there would be value in that. If it does that, however, it has to make sure it also puts in place policies that would protect workers. We treat this as a shock like Covid. We try to ride it out for a period. On the other hand, if you are Ireland, it is clearly better not to respond at all and to say we will take the hit and the damage. In other words, we minimise the damage to our economy because we are so exposed. If you end up with 30% for dairy, whiskey and all of these things, you basically shut down the US as a market. We are not in the same place as the other European countries. Our contrary position from a European perspective is completely rational.
2:30 am
Pearse Doherty (Donegal, Sinn Fein)
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I thank Dr. McDonnell for his presentation. What he said at the end was one of the matters I was going to pick up on. Europe is negotiating and has shared objectives with Ireland, which are that we should not be in a tariff war and that we should be back to where we were. The issue is that positions could diverge. The point is that Ireland would exposed by an escalation in any trade war, particularly in the context of pharma, IT and the other sectors mentioned, including that relating to whiskey. From an Irish point of view, what would be the best strategy in a scenario where the US Administration imposed tariffs? There have been threats, bargaining chips and manoeuvres from Trump that many view as negotiating ploys. However, if this is clearly now taking effect, what options does Ireland have? Does it have to argue for a cautious approach on the part of Europe, given what we have seen from Trump? If Europe retaliates, he will retaliate. That is a problem if the sectors here are exposed.
Dr. Tom McDonnell:
The question as to the options Ireland has and whether Trump will retaliate is a good one. First, he has retaliated and has always upped the ante, but it has often been for very short periods. That suggests it is a negotiating strategy rather than something he necessarily thinks is a final landing position. It makes sense to me as a bargaining position, from his perceived position of strength, to say that he will hit us with 30% unless we give him X, Y and Z. That may be the case all the way up to a final deal. It is completely natural, particularly given his background and the industries he worked in. It is important not to necessarily always take his threats as what he intends to do. It is best to step back and look at what our cold interests are. The medium- to long-term interests for the EU and Ireland are that there be no tariffs at all. There are a number of different theories in game theory, but one of the most successful strategies for game-playing is to always play nice until somebody hits you and then you hit them back and you keep hitting them back until they stop hitting you. That goes for board games, financial markets, war games or whatever. If they push back, then you continue to act nice going forward. This suggests that you will play hardball, at least in the short term. I am talking about the EU first, and then Ireland. You play hardball in the short term in the hope of getting rid of tariffs altogether. However, as I said earlier, it is a very high-risk strategy because we are dealing with somebody who is not necessarily consistent and who acts emotionally rather than rationally, to put it that way. When you are dealing with somebody who is acting emotionally, the standard strategies do not necessarily always apply. If Ireland and the EU decide they will just let the US have its tariffs, there is not necessarily any incentive for Congress to give up on those tariffs in 2027 or under a new President in 2029. That is the new norm. They would want something in return. However, if we have tariffs in place, it creates a lever or an angle for them to play it as a victory and say in 2027 that they have got rid of the tariffs on US goods. There are a number of reasons why you might adopt the aggressive strategy, but there is no doubt that Ireland is exposed. While I stated that, by itself and with nothing else changing, it would not be enough to cause a recession or a fall in employment from their current levels, if you are still talking about 50,000 fewer jobs created, that is an enormous impact. There are also obviously the public finance Estimates and so on.
Pearse Doherty (Donegal, Sinn Fein)
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My view on counter-tariffs is that you should be using them if you believe doing so will strengthen your hand. That is a judgment call, and it is made in light of the individual you would be dealing with. We are probably not in normal circumstances. Dr. McDonnell spoke about game theory and how when somebody hits you, you hit them back. In this scenario talking about tariffs, when you hit them back, you might be landing a blow, but you are landing the sucker punch on yourself and the Irish people.
Pearse Doherty (Donegal, Sinn Fein)
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It is a different model of game theory. There is an issue with Trump to a certain extent where we have been here before, although I do not think past experience is any predictor of future experience in this context. There were 20% tariffs in respect of steel, and they lasted throughout his previous term. There were counter-tariffs that impacted on European citizens, and they were only lifted when a new Administration came in. It is kind of hard to predict where it is going. We are in the budgetary cycle and there is much discussion about a cost-of-living package and the need to support individuals. In a way, I believe Trump is being used as a reason not to bring forward a cost-of-living package. I said earlier that if Trump woke up this morning and tweeted that tariffs were off the table, there would still be no cost-of-living package according to the Government. It is nice for those in government to say there is huge unpredictability and all the rest. I meet people on the street who think we are going into recession. They think we will lose huge amounts of jobs as a result of this. None of us can predict the future.
Is Dr. McDonnell's analysis consistent with what the Central Bank, the ESRI and the Department of Finance have found, namely that, even in the baseline and adverse scenarios, employment and the economy will continue to grow? In some scenarios, the economy will grow faster than those of many countries in Europe have been growing in recent years. This is important. That is not to take away from the fact that if there were no tariffs, which we hope there will not be, it will grow more. The Central Bank has forecast that growth will be 9.7% this year. With tariffs of 20%, it predicts that growth next year will be 2.7%, which is higher than last year. We are probably the envy of many other countries that are not seeing this level of growth, even without tariffs. Will Dr. McDonnell address those points?
I know that the situation is fluid and that we do not know the level at which tariffs will land, but whatever happens is going to have an impact on our potential. It will definitely have an impact on supply chains for businesses and so on. That is why we need to make sure it does not happen. If tariffs do emerge, however, all the predictions are that there will still be growth in our economy, in modified domestic demand and in employment figures beyond what we have at this time. Is that how Dr. McDonnell sees it?
Dr. Tom McDonnell:
It is.
Not only that - obviously, there is a magical realism associated with GDP in Ireland - but modified domestic demand is expected to grow by 2% or 2.5% this year. I think that is quite a reasonable performance and, in fact, it could grow by more, although the tariffs are creating a lot of uncertainty. In terms of inflation, we are looking at something in the region of close to but perhaps slightly below 2%.
In terms of employment growth, we have been growing at a very fast clip. The economy has never been stronger than it is now. We have had many years of strong employment growth, and that employment growth has been faster than in other European countries. Even with tariffs, we are still looking at employment growth in the years to come that is broadly in line with historical norms for advanced EU economies, where the average would be about 1.2%. A lot will depend on inward migration and things like that, which are very difficult to forecast. Nonetheless, the short answer is that our projections are for continued strong growth, albeit slower growth in some respects than we have had in previous years, and I mean real growth, not GDP growth. One of the reasons for that is that we had the inflationary surge and, kind of gliding along behind it, as often happens because wages tend to follow inflation rather than the other way round, after the falling wages at the beginning of the cost-of-living crisis, we have now moved into a period where real wage growth is quite fast. That is because the wage growth was predicated on the higher inflation rates that were in place at the time, because the wage deals or pay bargaining deals often go years into the future. That will add to household income, which is one of the things that is driving consumption at the moment.
2:40 am
Pearse Doherty (Donegal, Sinn Fein)
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I have one last question.
Mairéad Farrell (Galway West, Sinn Fein)
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The Deputy will need to be brief.
Pearse Doherty (Donegal, Sinn Fein)
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Much of the conversation is about the multinationals, which have a huge impact on GDP, as Dr. McDonnell said. However, when we look at GNI*, it strips out the multinational effect. The Central Bank is suggesting that the average growth between 2026 and 2027 will be 2.3% for GNI*. Is that consistent with NERI's analysis?
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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I thank the witnesses for attending and for their opening statement. Regarding the view that any retaliation, if that is the approach that is taken, should be general rather than through a targeted approach, can Dr. McDonnell expand on that?
Dr. Tom McDonnell:
It was simply to the point alluded to by Deputy Doherty. The last thing we want is specific revenge targets, that is, tariffs on sectors like whiskey, butter and things that will be very price sensitive. That could do enormous damage to those particular sectors, and it will be the same in other European countries. To prevent that from happening, I would prefer that whatever strategy we pursue, it would simply be a general tariff across the board rather than, in a way, expanding the trade war to potentially new sectors, which he then ramps up. That would be the logic there.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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Regarding NERI's assessment of the level of risk to windfall corporation taxes, what is Dr. McDonnell's view of the level of risk? Related to that, how urgent is it that we take measures to broaden the tax base?
Dr. Tom McDonnell:
The risk has always been there with windfall corporation tax receipts. I know there is a “boy who cried wolf” aspect to this by now but that does not mean the fragility has gone away. It is a very small number of companies. In fact, a change in a tariff regime creates an incentive to change the transfer pricing within companies, which could have an impact. On the other hand, BEPS pillar 2 would suggest that corporation tax receipts will increase again next year. There is no evidence yet that they are going to fade away.
The big concern is the concentration, the difficulty of explaining it and the possibility of the US changing its own corporation tax rules, which overnight could change how it treats its own IP assets in order to move them to the United States. I am not saying that any of these things will happen, but they are a risk. Therefore, the right thing to do with them is to either save the money or put it into once-off capital spending, which will permanently increase the productive capacity of the economy and generate an asset stream in a different way.
As to where we are in terms of our tax base, if we exclude the windfall corporation tax receipts, we are obviously running an underlying deficit, and we are doing so at a time when the economy has never been stronger, and on the cusp of a very significant deterioration in our public finances over the next generation arising from ageing demographics, the green transition and other reasons. To shorten my answer, yes, we do need to broaden the tax base.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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I am trying to get an idea of Dr. McDonnell's assessment of how much at risk that windfall corporation tax is. He said we either need to save or invest in infrastructure. I and some other members of this committee are also on the Committee on Budgetary Oversight, where we have met with the Central Bank, IFAC and the ESRI, which all referred to the importance of saving and putting the money aside for countercyclical investment for when there is a downturn. They have not been saying to save or put it into infrastructure; they acknowledged the infrastructure deficits but were arguing strongly for saving on a countercyclical basis. Dr. McDonnell is saying something quite different and, in his view, either is fine. Perhaps he can expand on that because it is quite a different view from what I have been hearing in the Committee on Budgetary Oversight.
Dr. Tom McDonnell:
I would say that either of those strategies, in theory, would generate a new revenue stream for the Government over the longer term. Obviously, if saving the money, it would put it into equities or do whatever with it, and that will generate revenue for the Government into the 2030s and 2040s. The second thing is that if we have a stronger infrastructure, that will mean the economy is more productive and will be generating more receipts in that way, so it is indirectly generating new revenues for the Government simply because we are more productive as a society, and we are producing the same output with the same number of workers, or whatever it might be.
The problems with infrastructure at the moment, of course, are manifold. The most important thing is that we simply do not have the construction workers. One of the reasons we do not have construction workers is that the labour market is so tight that there is no incentive for people to retrain or upskill as construction workers. Also, we do not make it easy enough for people to become construction workers. If we were to do infrastructure, it would possibly involve, for example, bringing in workers from outside of Ireland to do that infrastructure because we do not have the spare capacity in the economy at the moment. That is one of the reasons, at this moment in time, that there is an argument against infrastructure. If unemployment were higher and there were more slack in the labour market, which would enable the ramping-up of construction companies and construction workers, it would be much easier to say we would put it into infrastructure.
We are talking about an economic cycle. Infrastructure projects can take up to a decade. Initiating those projects now with a view to increasing the productive capacity of the economy and dealing with our enormous infrastructure deficits in energy, water and, of course, housing would be very important. What we need to be able to do is identify how we can increase the number of people working in construction. Financing is not a problem now. That is where the issue is. We can unlock infrastructure as a second option for using some of the windfall and save the rest if we can find a way to remove that particular capacity constraint in the economy. If we can remove the capacity constraint regarding construction workers, then we can remove the capacity constraints of not having enough housing and weak energy infrastructure. We have to deal with all of those problems. The question is whether we do it using windfall taxes or by increasing other forms of taxation and doing it that way. Those are what I would see as the options.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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I have two further questions. On the issue of saving for countercyclical infrastructure investment, is there an issue with that in the context of timelines for infrastructure? If we are to save for a downturn, trying to align that spend with the downturn in terms of getting through all of the processes would be very tricky. It is a good theory but the actual practice is problematic. Is that fair to say?
Dr. Tom McDonnell:
The problem with infrastructure is that it takes a long time to do. Even to begin an infrastructure project often involves such a lag that the recession might be over by the time it is done.
The better way to deal with an immediate recession such as a Covid shock or something like that is actually countercyclically. If we were ever going to reduce taxes or increase welfare payments, that would be the time to do it. If a bad recession hits, we want to increase aggregate demand arising from Government decisions, and if we can do that quickly, we can put more money in people's pockets very quickly.
Infrastructure, on the other hand, is helpful for that as well but the main purpose of infrastructure is to increase the productive capacity of the economy over the medium to long term. What we want to do with infrastructure is to have a golden rule, even if it is not an official one, whereby we keep infrastructure spending at a particular percentage of economic output, or projected economic output over the longer term, which is not changed. Rather than cutting back infrastructure, we are protecting it, almost in its own budget, from tax increases or current spending during a recession, as it always is. One of the two savings vehicles is this climate fund, which is meant to be a fund that is protected over the cycle. That in many ways is analogous to the second type of fund I am talking about, a fund that would be used to essentially protect the budget from short-term political decision-making because it is easier to cut the next infrastructure project than to increase taxes, if that makes sense.
2:50 am
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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I thank Dr. McDonnell and will finish there as I think I have used my time. Can I just make one point?
Mairéad Farrell (Galway West, Sinn Fein)
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You have a few minutes so go ahead.
Cian O'Callaghan (Dublin Bay North, Social Democrats)
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In terms of countercyclical spend, in housing we can do more in a downturn with picking up from the private sector and we can get more affordable and social housing. Obviously, we need to keep doing it when times are good as well. If Dr. McDonnell has time later, he might touch on his views on the cost-of-living measures, whether they should be targeted or universal and his rationale for that.
Mairéad Farrell (Galway West, Sinn Fein)
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There is half a minute left if Dr. McDonnell would like to wrap up.
Dr. Tom McDonnell:
I will speak for half a minute on cost-of-living measures. Obviously, the cost of living at present is an extremely difficult situation people find themselves in. Prices have increased by 20% in recent years and, in my view, they are never going to come down again. What will happen now is that prices will increase marginally from that 20% higher level. That means we do not bring in, at this stage, temporary measures. We either decide if a person's standard of living is high enough or not. Is it adequate? If it is not adequate, we need a permanent increase in whatever that might be, whether a permanent increase in the minimum wage or in the welfare rate. That would imply that they are targeted. They would be targeted at the groups that actually need them rather than being universal.
Edward Timmins (Wicklow, Fine Gael)
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I thank Dr. McDonnell for the informative contributions. I have a number of questions so there will be a bit of back and forth. I had seven or eight questions but, thankfully, Dr. McDonnell has answered three of them already. I come from an accounting background and have great respect and love for economics. I will focus on specifics. Dr. McDonnell said that employment and growth will remain and that sounds good, but has he examined the effect on the tax take, primarily corporation tax and the related high income tax take over the next five years? Does he have specifics?
Dr. Tom McDonnell:
Well, yes and no. I do not have projections out to five years. My sense of it would be that if employment continues to grow, albeit at a lower rate with tariffs in place, at 1% or 1.5%, what will happen to income tax receipts will depend on the nature of the jobs that are created and the wages of the workers. If job growth is accompanied by wage growth, we are likely to see higher income tax receipts because labour is where most of the income tax receipts are coming from. It depends on the composition. If we lose high-paid jobs, such as in pharma, and we replace them with poorly paid jobs, such as in fast food, on a one-for-one basis, that would mean lower income tax receipts.
Edward Timmins (Wicklow, Fine Gael)
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Have studies been done on specific corporation tax reductions as a result of tariffs?
Dr. Tom McDonnell:
Yes and no - not very specific studies. One of the difficult issues when it comes to Ireland is that because we have a very small number of enormous taxpayers, what happens to corporation tax receipts is extremely volatile. If Apple, Pfizer or - I should not name names - large corporations based in Ireland have a change in their profits based on what happens in China but the IP asset is in Ireland, that can create massive swings in the corporation tax receipts. Pharmaceutical companies would be the area we would look at specifically to do with tariffs as being quite significant.
Edward Timmins (Wicklow, Fine Gael)
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I have a slightly different question, although it is all based around this, really. Has NERI studied Trump's personality to have some understanding of what he might do? No one talks about it, nor is it expressed in here, but that is obviously a key driver of this.
Dr. Tom McDonnell:
Of course it is. Trump believes in tariffs and has done so for more than 40 years, so he has a genuine belief they are a good policy idea for the States. What is important to Trump is that he is seen to have won the deal. That would suggest that he can be talked down by being given something relatively small provided he can present it as a win to his followers. That is difficult then because there is the question of what we would give him and whether it would be enough.
The other thing is that we have not reached the end game here. We do not know how this will play out. Trump saying we are going to have 20% or 30% is very different from getting to a point where the EU is threatening reciprocal tariffs at the same level, which will do a lot of damage to the US economy. Obviously, there has been a lot of discussion about Trump's personality and certain words have been used that I do not believe I would be allowed to use in this committee.
Edward Timmins (Wicklow, Fine Gael)
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That is okay, Dr. McDonnell has answered the question. The general view, and I generally agree with it, is that tariff uncertainty postpones investment for companies. Do corporations not have to make investments somewhere and at some time? I know it leads to greater risk when decisions are made based on an unknown tariff regime in the future, but it could also lead to greater returns for companies so I do not think it is as black and white as people say it is, whereby uncertainty implies no investment. Investment decisions are made or money is put elsewhere and moved to other areas. What are Dr. McDonnell's thoughts on that?
Edward Timmins (Wicklow, Fine Gael)
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Even if it does not end, companies will still make decisions based on not knowing for how long this will go on, having money and having to put it somewhere. Decisions on investments will happen.
Dr. Tom McDonnell:
They will, but perhaps to a lesser extent and perhaps those who have less of an appetite for risk will be more likely to save the money than invest it. It is not necessarily multinationals I am talking about here, but if a company does not know what will happen in food and drinks sector for the next six months, it will be very loath to invest in certain industries at all at the moment.
Edward Timmins (Wicklow, Fine Gael)
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That is fine. I was just making the point it is not as black and white as it has been portrayed.
Edward Timmins (Wicklow, Fine Gael)
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There could be benefits elsewhere.
Edward Timmins (Wicklow, Fine Gael)
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I have a technical question. In his opening statement, Dr. McDonnell states that his initial analysis suggests he would expect tariffs to cause exchange rate appreciation. In practice, the US dollar has depreciated 10%, I think.
Edward Timmins (Wicklow, Fine Gael)
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Why does Dr. McDonnell expect tariffs to cause appreciation? I thought tariffs would damage or weaken the local economy and ultimately weaken the currency. Why would Dr. McDonnell expect it to appreciate?
Dr. Tom McDonnell:
A currency has a price. All currencies have prices against each other. If there is a global recession, all prices might fall but they are all relative to each other. If your price falls by less than the price of the other currency, then your currency has effectively appreciated against it. Often during global recessions, the US dollar is considered a safe haven currency, so that can lead to appreciation. The key point here is that if Americans are buying fewer goods, there is less demand for the foreign currency. Therefore, the value of the dollar might increase and that might counter some of the terms of the trade benefit they would get from the tariffs in the first place. That is one of the assumptions. That has not happened so far and that is why there is a footnote in the opening statement to say that, in fact, the opposite happened.
Edward Timmins (Wicklow, Fine Gael)
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Yes, Dr. McDonnell has acknowledged that it has gone the other way.
Dr. Tom McDonnell:
It has gone the other way and that was not expected. I would suspect it was because things were so extreme and uncertainty was so high that people were afraid to have their money in the US, so they were getting out of dollars and US assets and that caused the decline in the dollar.
3:00 am
Edward Timmins (Wicklow, Fine Gael)
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On page 12 near the end are the figures for the different percentages, the export values and their relevant weightings. Has the institute done a calculation on the employment numbers that would be affected in the different areas? The figures here show the values of exports and percentages but they do not include employment numbers in, for example, the food and drink sectors and what the implications of a tariff would be for those. Has the institute done that?
Edward Timmins (Wicklow, Fine Gael)
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But not the employment numbers.
Dr. Tom McDonnell:
-----and for all of these areas and breaks them down. My colleague Chris Smart has done it for every subsector of the economy and we are going to do it for Northern Ireland as well. It is possible to translate these things but I would emphasise that the projections that people are making have very little empirical evidence. What Trump is doing does not really have modern comparisons. With things like minimum wage, for example, one can see that 50 countries have done a minimum wage and done it in different ways.
Edward Timmins (Wicklow, Fine Gael)
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The world is too complex.
Edward Timmins (Wicklow, Fine Gael)
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Globalisation has made it too complex to reach conclusions.
Edward Timmins (Wicklow, Fine Gael)
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Are the tariffs effectively setting back globalisation? There has been massive globalisation in the last 20 years. Are tariffs just pulling that back, with all the implications of that?
Edward Timmins (Wicklow, Fine Gael)
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Has Dr. McDonnell any thoughts on spreading the tax base? I asked this of our previous guests, who suggested VAT and possibly USC.
Edward Timmins (Wicklow, Fine Gael)
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Perhaps a reduction in the number of exemptions.
Dr. Tom McDonnell:
Indeed. I was on the Commission on Taxation and Welfare and we made a number of recommendations. Those recommendations were subsequently estimated by the Irish Fiscal Advisory Council to amount to €14.5 billion in options. That does not imply that one would do them all. In terms of VAT specifically, one wants a simple VAT system that does not cause any distortions. This would imply perhaps having a zero rate for things that are absolute necessities such as food that people need to live. Beyond that, the optimum tax system for VAT would be a single VAT rate where a preferential advantage would not be given to particular sectors. Getting rid of all of the exemptions would allow the State to have a lower VAT rate overall, which would benefit consumers across the board.
Edward Timmins (Wicklow, Fine Gael)
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In my last 30 seconds, will Dr. McDonnell summarise NERI's new economic model? Is it written anywhere?
Dr. Tom McDonnell:
It is. I would be very happy to summarise it, but that would be challenging to do in 30 seconds. Very briefly, it is to deal with understanding how we can make an economy anti-fragile and build its resilience out. It is based upon four pillars of productivity: more and better jobs; economic security; economic resilience; and designing an economic system that makes us impervious to the types of shock we are talking about now. It is not just this shock, but climate change, digitalisation, artificial intelligence, an ageing population and other types of policy that one would want to develop north and south of the Border. It is a very similar policy set and we have done it for both. It is difficult to summarise in 30 seconds but, essentially, it is a broad suite of approximately 60 or 65 policies that would complement one another. There is everything from an increased emphasis on adult education to reforms to social insurance, positions about a golden rule on infrastructure, etc.
Edward Timmins (Wicklow, Fine Gael)
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I thank Dr. McDonnell. I am sorry for hitting him with so much in ten minutes.
Mairéad Farrell (Galway West, Sinn Fein)
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By the look of things, Dr. McDonnell could be a TikTok economist with his 30-second clips.
Gerald Nash (Louth, Labour)
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I would look forward to that.
Gerald Nash (Louth, Labour)
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I have a number of questions and observations. Dr. McDonnell referenced the potential for an expanded shore scheme or a European globalisation fund-type initiative in response to the potential impact of certain forms of tariffs on the European Union economy. Dr. McDonnell will be aware that NERI, the Irish Congress of Trade Union and I have said repeatedly - probably since we were staring down the barrel of a difficult Brexit - that the system should consider the establishment of a modernised short-time work scheme, which we could take from the shelf and customise on a sector-by-sector basis to ensure that, in the event of short-term economic shocks that may have particular impacts on certain sectors, we could respond by providing a certain kind of investment to keep, in this case, highly skilled workers close to their employers at a time of economic turbulence, where that responsibility would be shared between the State and the employers. There would be a degree of surveillance and monitoring, arguably by the trade union movement. This happens in Germany with the successful Kurzarbeit scheme. The Taoiseach informed me a number of months ago that he would be happy to consider such a scheme. I have heard nothing since. Whether it is in the context of these tariffs, or the threat of these tariffs and the impact on the economy, or any future threats that might arise, this would be a good public policy response. It is one of the reasons Germany did not suffer deep scarring in terms of Great Recession. It is one of the reasons we still have a shortage of construction workers. We lost those workers when the economy collapsed in the late 2000s into the early 2010s when there were no supports to keep people here and close to their employers and we had to roll through that particular set of circumstances. Does Dr. McDonnell agree that a short-time work scheme, one that is modernised, fit for purpose and potentially funded through the Social Insurance Fund and-or the excess in the National Training Fund, for example, be worthwhile? It is something that IBEC is interested in as well.
Dr. Tom McDonnell:
I would completely agree. That is exactly what we should be looking at at a European level. Trump will not be here forever. That does not mean the next President of the United States will not be pro tariffs as well. If the next President is pro tariffs and just as aggressive, then that obviously means we need to rethink. If, however, we are looking at a temporary shock, even if it is for a couple of years, then there is a rationale, at least for a few months as a holding position, for thinking about that type of policy to keep people in jobs. If we are potentially looking at 750,000 job losses at a European level, that is very significant and very damaging to the European economy. It is very damaging to those companies and means the European economy will fall further behind in industrialisation relative to China, for example. There would be further catching up at that point. There is certainly an argument.
Looking more long term, there is also the case that some of these sectors may become less viable if US tariffs are to be more permanent. In that case, we need to really engage with the idea of retraining funds and think about how to protect people. The original idea for this was as a kind of protection against globalisation in some respects, but it was not done in the UK or the USA. Vast swathes of those countries - in the north of the UK and in the Rust Belt in the US - fell into decline because of globalisation and because these type of policies were not in place.
Gerald Nash (Louth, Labour)
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We see the outworking of that-----
Gerald Nash (Louth, Labour)
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We see the impact on democracy and the impact on social solidarity.
Gerald Nash (Louth, Labour)
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Absolutely.
Moving on from that, it is very hard to disentangle the current US position on tariffs from the G7 agreement on tax and the carve-out that was apparently agreed at the last G7 round of talks in Canada. I have no doubt that Trump was using and conflating tax and tariffs to get an opt-out in terms of the BEPS pillar 2 process on the 15% rate and our ability to be the policeman to collect the top-up difference between the 12.5% and the 15%. Even off the top of his head, does Dr. McDonnell have an assessment - the Minister for Finance does not; I asked him last night - of the implications for our corporation tax base? It is still early days and if this were to come to light at all, it would require new European legislation and for that then to be transposed. We had enough difficulty transposing legislation here in terms of the OECD agreement. Will it have an impact on Ireland's attractiveness for FDI, our corporation tax base and what we actually collect in that regard?
Mr. Gerard Brady of IBEC has said we would collect a little less but that it would be marginal. Does Dr. McDonnell agree?
3:10 am
Dr. Tom McDonnell:
It is worth unpacking that a little. First, the G7 should not have agreed to handle it in advance of the culmination of tariff negotiations because it was an obvious chip to play. That would not give you a lot of confidence. Second, it effectively undermines the OECD deal. If the US is not part of the deal, why would other countries not withdraw as well? In many respects, I see that as the first step, although there was already mood music to suggest the OECD deal was not for the long term. The longer term play is that the EU will push back with digital services taxes again. If this whole thing collapses, the Irish Government might be delighted in the short term with US companies being exempted, but the longer term implication is arguably much more significant for Ireland, with France and Germany deciding to go their own way and hitting in a different way, which again reduces the rationale for a company to be in Ireland. I would not disagree with Mr. Brady on this but I do not have a specific figure for how our attractiveness or corporation tax base would be affected.
The OECD deal was good for Ireland, considering how it played out. We know, of course, that there was much reshoring of intellectual property assets from tier 1 tax havens to tax haven conduits. Let us put it that way. Ireland benefited from that. If the OECD deal collapses, corporation tax rates could go down to 10%, 5% or 0%. Who knows what the likes of Hungary might do? In the longer term, that would certainly be bad for Ireland. However, we are talking about years ahead, potentially. I suspect that the Department of Finance, while its first instinct on the development might have been quite positive, might now be more worried than it is letting on.
Gerald Nash (Louth, Labour)
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Initially, the response seemed to have been as described because the section 899 retaliatory element was dropped.
Gerald Nash (Louth, Labour)
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The view was that things were going to balance out and be okay. I believe the thinking might be a little different now, however, and there might be more anxiety and nervousness.
On corporation tax, Dr. McDonnell asked whether we were the boy who cried wolf. We have been hearing for a long time about our reliance on excess corporation tax receipts to fund day-to-day expenditure and so on. There are obvious risks in this regard that we need to be alive too. It is not today or yesterday that I have started talking about this; I have been talking about it for a long time. In 2021, the Department of Finance warned us that, even in the context of BEPS pillar 1, we were likely to be down by about €2 billion per year. Sometimes it is hard to take Department of Finance outlooks and Estimates seriously but I appreciate that there have been many moving parts over recent years and that nobody could really predict what would happen. If we are to accept, as I do, that there is genuine vulnerability because of the concentration effect, we are going to rely on a handful of US FDI firms not only for our corporation tax, but also for income tax because of the nature and quality of the jobs. It is a genuine vulnerability.
Consider the circumstances if we are to agree that our tax base more generally is vulnerable. Dr. McDonnell has been a member of the Commission on Taxation and Welfare and will note that there has been a marked reluctance on the part of this Administration and its predecessor to dust things down, ask what can be done to rebalance things, and say we should increase current expenditure, target what is needed in society and help sections of the economy that require help, be it on the current side or capital side. There has also been a marked reluctance to raise revenue from alternative sources that would not have an impact on innovation or productivity and that would potentially give PAYE workers a break of some form in the future, even though Irish income tax has probably always been about where we need it to be. Has Dr. McDonnell a view on the top one or two places where we can identify potential revenue-raising measures that would not be harmful to the economy?
Mairéad Farrell (Galway West, Sinn Fein)
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Dr. McDonnell should respond very briefly, in 30-second TikTok form.
Dr. Tom McDonnell:
Thirty-second TikTok again. We examined the whole thing and identified some areas where damage to the economy could be minimised. What we found was that the measures were extremely unpopular politically. Inheritance tax provides a classic example. Increasing inheritance tax would have almost no negative impact on the economy but, obviously, the political implications are very dangerous. Increasing property tax would have a very minimal impact on the economy. Again, this would be politically unpopular. We did think about a site-valuation tax as an alternative to a property tax. It could be a partial replacement of the property tax and, potentially, commercial rates or commercial rates in particular. We talked about getting rid of many tax breaks and tax expenditures because many of them were distortive and regressive. If one cleaned out the system, one could actually cut taxes in other areas or increase public expenditure. It is more about cleaning out the system of all the special sweetheart deals we have for particular groups. If this were done, it could raise billions of euro for the Exchequer and do almost no damage to the economy.
Mairéad Farrell (Galway West, Sinn Fein)
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Go raibh maith agat. When NERI becomes TikTok famous, we will know where it started.
Alice-Mary Higgins (Independent)
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Let me give Dr. McDonnell another moment to describe where his head was at when he passed over. Could the €2.4 billion that we spend on private pension tax reliefs – annually, I believe – be one example of where reform could deliver revenue?
Dr. Tom McDonnell:
Broadly speaking, one of the classic mistakes made in tax systems is to bring in special tax breaks for groups. We would fix the pension tax system by making sure it was not possible to escape it at any part. We would want to incentivise people to delay their spending, but my own view is that the best solution to any future pension crisis is simply to have an adequate pension for everyone.
Alice-Mary Higgins (Independent)
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An adequate universal pension.
Alice-Mary Higgins (Independent)
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I believe 70% of the beneficiaries of the private pension package are in the higher tax bracket and beyond. That is not what we are here to discuss but I just mentioned it because the conversation had gone there.
I thank Dr. McDonnell, as this has been a really interesting analysis. It has been reassuring in some ways and challenging in others.
The digital services levy has been mentioned as a levy that Europe may exercise. Dr. McDonnell talked about short-term and long-term impacts and advocated not taking a low road in making short-term economic decisions, not just in terms of tariffs, but also in terms of other policies, including on employment and the environment, that may actually affect our competitiveness in the longer term. Could he talk a little about that? I ask in the context of the US pitching the idea of a new advisory body for the Digital Markets Act that would result in a particular impact for the companies concerned. This has been thrown into the mix with respect to the EU–US trade deal. The US has been quite aggressive in making companies remove their diversity and equality measures, and it has been pushing back on environmental policies. It has been reaching deeply into the policy space in respect of EU governments, collectively and individually. Is there not a competitive advantage to having policies that recognise the environmental realities or contribute to, rather than take away from, social cohesion? If we chase the deregulatory agenda to appeal to or win points in the tariff war, is there a danger that we will actually find ourselves economically disadvantaged in the medium term?
Dr. Tom McDonnell:
Yes. Let us not forget it was the deregulation policies of the 1990s that caused the great financial crash in 2008. People seem to have forgotten that.
On the Senator’s point on diversity in the workplace, the environment and the low-road and high-road models, a low unemployment rate can be achieved with either a low-road model focused on slashing costs and competitiveness – as in the UK, which has a low-pay problem now and has had no productivity growth in 15 years, by and large – or a high-road model, which is based on the notion of productivity.
That is a model based on innovation, learning and human capital. It is consistent with higher profits for business and higher wages for workers, and because it is focused on productivity, it is consistent with protecting the environment. In fact, it is the only way that economic growth is consistent with protecting the environment. Producing more with the same amount of resources or the same with fewer resources is the only we can preserve the environment longer term.
I want to make a point on one of the issues raised earlier. The more diverse or cosmopolitan your workforce or society is and the more open it is to new ideas, the more accessibility and availability of different ideas that you have not thought of because you are talking to the same people all of the time becomes manifest to you. One of the things in economic history that has been very significant for economic growth is the rise of the cities because people have come into contact with a greater diversity of people. Previously you came into contact with people that were just like you. You see someone doing something in a different way and you then apply it in a new economic context. In a firm, when you have people coming at things from a different perspective, whether it is a gender, an ethnicity, an age or a disability perspective, whatever it might be, that causes you to look at a problem in a different way and put those ideas into the mix. That leads to your company or society being more innovative at large. Having greater diversity in the workforce and having policies that make that possible such as public childcare, flexible hours, flexible working which allows people with disabilities-----
3:20 am
Alice-Mary Higgins (Independent)
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I know Dr. McDonnell is as enthusiastic as I am for this idea but because my time is limited, I have to move on. We are seeing an attempt to shift how our economies are functioning using the tariff threat with a danger of potentially undermining it. I specifically mention the digital services levy which is being talked about by Europe. There is, however, also an attempt to have direct access for digital marketing from the United States, which affects democracy on a very basic level because we have seen what unregulated social media has contributed to the current situation.
Dr. Tom McDonnell:
For sure. Effective tax rates paid by these companies can be very low. The initial idea behind digital services levies were that they would allow the use by companies, often American companies, of tax havens within the European Union to be tackled. Some European countries were implicated and there was a push by France and other countries to find an alternative way to tax them. If it could not be done through corporation tax, they would introduce a digital services tax or levy as an alternative way to catch them. Ireland pushed back against that because these companies tend to be based in Ireland. If they pay a digital services tax, that will reduce their corporate profits, which would mean lower receipts for Ireland. It might also disincentivise them from increasing their footprint in Europe, full stop.
Alice-Mary Higgins (Independent)
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The Digital Markets Act is something different because that is in the regulatory space.
Dr. Tom McDonnell:
Imposing regulation on a company will presumably reduce its profits as well. Companies are looking at that from the perspective of what will maximise their profits, whereas Europe may be looking at it from the perspective of what protects society. Ireland is caught in the middle because it will be the European country that will bear the fiscal costs associated with that, leaving the ethics aside.
Alice-Mary Higgins (Independent)
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Dr. McDonnell mentioned intra-company transfers. A huge amount of what would be affected, maybe even in the pharma area, is intra-company financial transfers rather than productive activity. Does that relate to base erosion and profit shifting?
Alice-Mary Higgins (Independent)
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Those areas may have a revenue impact but they do not necessarily have an employment or productivity impact. Is that correct?
Dr. Tom McDonnell:
That is correct. If you are using transfer pricing and you are selling to yourself, you just decide to sell for a lower rate. This means the amount affected by the tariff is commensurately less. However, let us say you are in Ireland and you have your price set at a high level because you have a low corporation tax rate here and you are selling to country B so that the profits are made in Ireland. If a tariff is imposed, it may end that rationale or it may end it being cheaper to assign the massive profit to Ireland. They are therefore incentivised to change the price and charge a lower price to their sister company in the US, or wherever it might be, because they are worried that the tariff costs will be lower than the savings on the corporation tax side.
Alice-Mary Higgins (Independent)
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It does not touch the productive economy.
Dr. Tom McDonnell:
It would not touch the productive economy necessarily, but it would certainly affect the corporation tax receipts. Would it affect employment longer term to the extent that it reduces the rationale for a having a base in the EU? We are their place in the EU to be part of the Single Market. That could be a potential impact.
Alice-Mary Higgins (Independent)
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To come back to the new economy, we still have instability in terms of tariffs and their priority. Will Mr. McDonnell comment on what Ireland and the EU could do, with reference to the G20 meeting and also in terms of the food and beverage sectors? If I was very cynical, and I rarely am, the huge focus on defence spending will certainly help Germany whose manufacturing capacity utilisation is currently decreasing. We are seeing massive collective resources from Europe going into areas which will certainly help some of the largest economies in Europe weather any storm. Is there a battle within Europe about what it invests in, for exam[;e, food, sustainability and the environment? In terms of Ireland, how can we take measures, be in through the G20 or our own indigenous industries, to build the next market?
Mairéad Farrell (Galway West, Sinn Fein)
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Go raibh maith agat, a Sheanadóir. There is a good chance we will have a second round.
Alice-Mary Higgins (Independent)
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I apologise. If there is no time for those questions to be answered now, maybe Dr. McDonnell can answer them at the end of the second round because I have to step out.
Mairéad Farrell (Galway West, Sinn Fein)
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There may be a chance in the second round. This has gone over a bit longer than anticipated. Two other members have been waiting a long time. Senator Higgins can maybe come in on that when I am asking my questions.
Colm Burke (Cork North-Central, Fine Gael)
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I thank Mr. McDonnell for a comprehensive presentation. Coming from Cork, I am concerned about the pharmaceutical industry, which is a major player in the entire country, but in particular in the Cork region. The issue that arises in the US is its focus on why it is importing rather than manufacturing so many pharmaceuticals. From conversations I have had with representatives from some of the pharmaceutical companies, my understanding is that while it is fine to build a plant, you also need to have the personnel who can run it. That will take some time to work out in the US. Trump is asking why America is importing rather than manufacturing its pharmaceuticals. Could the next US President not adopt that message? Are we engaging in wishful thinking in believing this will all change again in three or four years' time? I am concerned that there is a bit of wishful thinking on our part on this. What is Dr. McDonnell's view?
Dr. Tom McDonnell:
That is a very important question. It also deals with the points about investment and abeyance made earlier by Deputy Timmins. In many cases, these companies may be waiting to see what the next potential administration will take as a stance. Will it be similar to President Trump's perspective on tariffs? If it is, we could be looking at up to 11 years of this, if not longer. It would effectively be permanent from an investment perspective. If it was a different candidate looking to win, we could be looking at a more benign outcome. I would not necessarily say we are being too optimistic and we are certainly not being cavalier about it, but it does take a long time to build a pharmaceutical plant. You have to build up a large group of highly skilled workers to do this. These are often very specific products.
They are there because production costs are lowest or because there are other tax or skill advantages. It is a cost to them to open another plant in the United States. It is easier just to transport it back.
The point about pharmaceuticals and the security problem is well made. It is one of the four arguments used by the Trump Administration to justify tariffs. However, it is notable that it was very slow to do anything on pharmaceuticals. There are steel jobs in the USA and plants and factories can be ramped up but, when it comes to pharmaceuticals, Trump was particularly concerned because the USA cannot do this itself in the short term and the costs would simply be passed on to US consumers. That is my expectation as to what would happen. I genuinely feel that job losses in the food and drink sectors are more likely than they are in the pharmaceutical sector in the short term. However, that is not to say that the next plant will not be built in the USA rather than in Cork. That would obviously be of significant concern to the local area. Leaving all that aside, I do not anticipate significant job losses in pharmaceuticals over 2025.
3:30 am
Colm Burke (Cork North-Central, Fine Gael)
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On goods we are importing into Europe from America in the areas of pharmaceuticals, computerisation and medical devices, is there now a need for Europe to analyse what we are importing from the United States and to see how we can grow those particular businesses?
Dr. Tom McDonnell:
Absolutely. The big area where Europe is very frustrated - this was one of the points about the vertical industrial strategy versus the horizontal industrial strategy - is our failure to develop digital services companies. The USA has won in that area thus far and China is winning on green technology.
Colm Burke (Cork North-Central, Fine Gael)
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On research and development, the universities sector in the US plays a big part in that. We have not done that to the same extent.
Dr. Tom McDonnell:
I have never been able to get a proper answer to one of the points we have always made as an institute. I do not understand why it is but Ireland spends much less on research and development per capita, including in the public sector, than comparable countries in northern and western Europe. It is a false economy in the longer term. Even at a European level-----
Colm Burke (Cork North-Central, Fine Gael)
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On one of the issues in the research area, I will give the example of the new children's hospital being built in Canada, which is costing $3.6 billion. The Government is only paying out two thirds of that money. The hospital has to raise the other $1.2 billion itself. Everyone has bought into it. The pharmaceutical, medical devices and IT companies have all contributed to the $1.2 billion to build that hospital. In Ireland, we seem to have created artificial boundaries making sure the pharmaceutical industry does not have that connection with the health service. Is it not the case that we now need to look at that whole area rather than having this idea that everyone who wants to put money in for research is looking for a gain somewhere along the line?
Dr. Tom McDonnell:
I must confess that I was not aware of those particular barriers. It is certainly something I can look into. I am not sure what the rationale for those barriers would be. The Deputy is thinking particularly of the ability of pharmaceutical companies to engage in research connected-----
Colm Burke (Cork North-Central, Fine Gael)
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I will give an example. When I was Minister of State, I was advised that I could not go to a particular event being run by a pharmaceutical company. That is the disconnect. I am just wondering whether that is the right approach now when we need everyone to be working together. I gave that example from Canada, where a brand-new children's hospital was built, costing $3.6 billion, with everyone buying in while we seem to compartmentalise here, which may not be in the long-term best interests of the country.
Dr. Tom McDonnell:
There are always concerns with lobbying of any type. There are questions as to whether it will affect the behaviour of people in the hospital as regards prescribing certain types of drugs or whatever it might be. However, I must again confess that this is not my area of expertise so there is not really much that I can add. I certainly think there would be value in having that type of input, provided it was in very specific research-related areas, for example. I do not particularly see an issue with that.
Colm Burke (Cork North-Central, Fine Gael)
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There is now a need for us to make sure that we can grow a lot of areas in which we are reliant on imports. We need to focus on those.
Dr. Tom McDonnell:
That is right. Again, we do not spend enough on research in this country. One of the very obvious things we could be doing is that we should be exploiting the historical mistake the US Administration is making in attacking its own universities. We should be attempting to attract those superstar researchers to Ireland, which is what France and other European countries are doing. We should be giving them funding for PhD students, laboratories or whatever it might be. We should be basing their cutting-edge knowledge and skills in Ireland so that their high-potential start-ups will be founded in Cork, Limerick and Galway rather than in the United States. That would be a very useful policy to pursue and a way of kick-starting our own innovation system, which has been too reliant on US multinationals in some respects and which we have not been able to develop properly. We have been very successful in some aspects of education but there is now an opportunity as regards that kind of high-level innovation system model. From a fiscal perspective, it would not be that expensive.
Colm Burke (Cork North-Central, Fine Gael)
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I will raise one final issue. The defence budget in the US is going to continue to rise, which means there will be more pressure on us to manage the deficit there while at the same time growing the economy. I presume that focus will continue because of the rise in the defence budget.
Dr. Tom McDonnell:
The first thing to say about defence budgets is that they represent almost the opposite of a growth strategy because you are buying things that you hope never to use. The goal of defence spending is not to use what you buy so it does not add to the productivity of the economy. It is true that some European countries would benefit from increased defence spending on the European Continent but Ireland is not particularly well placed to do so. If we increase our defence spending, that is money taken away from education or health or raised through higher taxes. That is going to mean lower economic growth in Ireland in the future. You might choose to do so for security reasons but economic growth would be the absolutely last reason a country like Ireland would increase spending on defence. It might make sense for some countries that can export such products but that is not really relevant in the case of Ireland. If we increase our defence spending, we should accept lower economic growth as one of the consequences.
Joe O'Reilly (Fine Gael)
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I thank Dr. McDonnell. It has been fascinating to listen to his contributions and responses to specific questions this evening. It has been extraordinarily interesting. A very exciting issue arose in his response to Deputy Burke when he talked about attracting high-calibre researchers from America. That is a fascinating concept. The results of that could be great. To take a minor diversion before I go back to my few questions, I have had a lot of extended family from America home recently and I am meeting a lot of American visitors here who are all saying they are contemplating relocating for a whole lot of reasons so there might well be great potential in that, based on anecdotal evidence. It is an interesting one but the entire evening has been interesting.
If I understand Dr. McDonnell correctly, the thrust of what he is saying on tariffs is that they will not dislocate existing investment in Ireland in any significant fashion and that they are not likely to move anything out of Ireland. That is the general conventional wisdom but they also may slow down what would otherwise potentially come in. Will he expand a bit on where he sees potential for replacement by indigenous economic activity? It is a bit scary when Dr. McDonnell speaks about drink and food being at risk because food production, processing and adding value to the product and exporting that new and improved product are very important to the region I come from.
Could Dr. McDonnell comment first please on where he sees us developing an alternative, including through green energy and AI? Could he give us some specifics, like the example about the academics?
3:40 am
Dr. Tom Mc Donnell:
It is a very good and complicated question. On headhunting academics, it is a case of striking while the iron is hot. This is the opportunity to bring them over. In many ways, one of the things about technological change, disruption and innovation is that we often do not know in advance what is going to happen. We do not know what the new technologies are going to be, how they are going to play out or what is going to be successful. If we knew that, things would be very easy.
Specific types of product are currently at risk, such as whiskey and butter. That implies there would potentially be very specific job losses. That is why I emphasised the point about-----
Joe O'Reilly (Fine Gael)
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That is very scary for my region.
Dr. Tom McDonnell:
It is. That is why I was saying general rather than targeted, which could enrage the Trump Administration and bring the tariffs to such a level that it might make the problem worse. In my view, the strategy should be to just go for a general rate that does not focus on bourbon or whatever it might be, which would cause a pushback for us.
There are a lot of economic opportunities for rural Ireland in the future if we can design our policies in such a way that does not put barriers there. For example, if we can arrive at a place where we are more comfortable with working from home, then that means workers do not have to physically be in Dublin, Galway, Limerick or Cork all the time. They can be in the midlands or the north west, Mayo or wherever it might be. There are soft areas where we can mop up and ensure that more of the jobs in existing sectors are based outside of the city areas. That is one thing that would be very important for rural Ireland not to miss as an opportunity. That can be done by the public sector as well. Public sectors jobs no longer have to be in Dublin. The work could be done anywhere in the country. There are existing options for sure.
In terms of new economic opportunities, and developing out the innovation system, every region should have a champion campus. For example, what if some of the former ITs were able, with Government support, to attract some of those academics, which would over time massively improve the rankings of those places and they would generate high-potential spinoff industries or new technologies from those areas? There is no reason that cannot happen just because it has not happened in the past. Resources have not been put into those areas. In many ways I am talking about jobs or sectors that may not even exist yet. If we give the resources educationally and make sure people have a reason to stay in those areas and do not go to Dublin or London, if we keep people there, it will happen over time. Economic development is a long story, one of decades rather than years. Rather than pointing to a specific area, we should, of course, get into artificial intelligence. Unfortunately, it will kill more jobs than it is going to create, although a lot of those jobs will be in cities rather than in rural areas. That is not a fully satisfactory answer to the Senator's question but it is the type of strategy I would pursue. It is something we intend to look at more in the future.
Joe O'Reilly (Fine Gael)
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That will be fascinating. Does Dr. McDonnell agree that to deal with the housing issue, we must have a major infrastructural investment in water, energy and other areas to create the conditions where we can develop housing? I presume he agrees with that.
Joe O'Reilly (Fine Gael)
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Dr. McDonnell said, however, that one of the limitations to infrastructural development is the lack of capacity and personnel to do it. He said we should make it easier to enter construction. How could we do that? Second, does he think we could attract people in the construction sector back from abroad? I also have another question I am very anxious for Dr. McDonnell to answer.
Dr. Tom McDonnell:
It is a great question. We have far fewer construction workers now than we had in the past. As the Senator is aware, one of the things that happened was that construction came to be perceived as an extremely volatile and risky profession. It is not, but because of the great financial crash and because such an avalanche of jobs were lost and there was such devastation, people were told for a decade not to go into construction and we ended up with a shortfall of construction workers. Because we are close to full employment, the incentive for people to switch careers to something totally different like construction, with very specific skills, is challenging. First, how do we convince existing workers to become construction workers, because the pool of unemployed workers is quite low? Second, how do we convince people in their teens and early 20s to choose construction?
The third possibility is how we get people to come from other countries, whether returning Irish or others. We will probably have to give them incentives to come. We must find a place for them to live, which is a case of the chicken and the egg. We have to make it attractive for people to go into construction, whether it is pay, terms and conditions or pension benefits down the line.
Joe O'Reilly (Fine Gael)
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Should that be an immediate strategy?
Dr. Tom McDonnell:
We need an immediate strategy for inducing workers into construction. A lot of that will be about terms and conditions. There might be some pushback from the construction industry. Over the long term, one big strategy, which would require a fundamental rethink about how we do construction, is whether the State over the medium to long term can itself be a player, even if it is just subcontracting. Could the State be a big construction employer, in the sense of over the long term providing the jobs through local authorities for management and maintenance? That would make construction be perceived as a less volatile profession, which it is. It would induce more people to go into it if it was effectively a respectable public service job. It would not be a short-term solution, but over the medium to long term, with that in place, it would ensure we would not have one of these situations again. It would also put a kind of ballast within the housing market, which would give it a bit of balance over the longer term.
Joe O'Reilly (Fine Gael)
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I have a son who puts that point to me every time I meet him for lunch. It is a very interesting one.
Because it is the contemporary debate, could I bring Dr. McDonnell back to the question of the short-term measures such as energy credits? If I understand him correctly, he thinks the correct strategy is to target money at those most in need to cushion their passage through the increases in grocery prices, etc., and to suspend the temporary short-term measures? Is my understanding correct? I do not want to talk him into party politics.
Joe O'Reilly (Fine Gael)
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Does Dr. McDonnell think we should drop the plasters?
Joe O'Reilly (Fine Gael)
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Another factor is the kind of jobs Deputy Nash spoke about with temporary contracts.
Dr. Tom McDonnell:
Yes, absolutely. It is a protective measure. There is an imbalance between people's incomes and the cost of living, but there is not an imbalance for everybody in that regard. What I would like to see is how we can use our resources to protect the most vulnerable in society. We know there is broad support for a second-tier child benefit, which would potentially halve child poverty on the island of Ireland. I refer to those types of measures. We can fix the welfare system, including through tapered payments for poorer working households, but the problem is the administration. We have waited too long perhaps to do it this year but we should look at whether we could put it in place for budget 2027, for example, and therefore bring up those levels to a sufficient adequacy whereby people are able to thrive within Irish society during the cost-of-living crisis.
Joe O'Reilly (Fine Gael)
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I thank Dr. McDonnell. That was fascinating in the context of the debate.
3:50 am
Conor Murphy (Sinn Fein)
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I thank Dr. McDonnell for the presentation. Apologies for missing a substantial chunk in the middle of the questions and answers. I will ask a couple of questions and apologies if they have already been asked and answered.
Referring back to the last paragraph of the contribution where it talks about the future, there has been much discussion about what immediate action to take in relation to tariffs, how Europe might respond and where that might take us. We have been through a whole series of economic shocks, arguably going back to 2007 and 2008 and right through Brexit, the pandemic, the Ukraine war and now the prospect of a volatile American Administration. Increasingly, the vulnerability of the Irish economy to all of that has been talked about and exposed, perhaps no more so than in this latest economic shock. That is where all the American vulnerability is exposed. Clearly, that has been very beneficial for the Irish economy and for growth but, as Dr. McDonnell said, the model is going to have to evolve if it is going to endure future shocks, arguably not in the next generation because these things come along like buses, much more quickly than expected. We need to evolve fairly quickly. There is an acceptance that the economy is too narrow in terms of sector, region and and the international aspect, and we have become very heavily reliant on that. There is a need for diversification and, as Dr. McDonnell offered, in terms of different trade routes in the global south and other parts of the world but also diversification of the areas in which we work.
Dr. McDonnell could write another full paper on the next chapter of all this. There is actually more of an urgency to this because this trade stuff with Trump could go any way. Who knows who will come behind him and what the approach will be? We always think this is the worst we have ever dealt with, until the next one comes along. This type of uncertainty is not going away any time soon. Therefore, the need to insulate the economy as well as we can becomes even more imperative. Does Dr. McDonnell have any thoughts on how that can be done in the short to medium term?
Dr. Tom McDonnell:
I do. My colleagues in the North and I have developed a paper focusing on what a new economic model South and North could look like, obviously with similar policies in both. Good policies are good policies generally. As for analysing what these coming megatrends are going to look like, deglobalisation of course is the one we are talking about here. There are also the ageing demographics, artificial intelligence, digitalisation, deglobalisation, decarbonisation - all of these things - but also land wars and Covid-19. How do we insulate our economy? How do we ensure that we are antifragile in the sense that, no matter what happens, we can potentially thrive and flourish regardless because we will have built our economy in such a way that it is resilient to these type of shocks?
We have attempted to build a model based upon four pillars: productivity, more and better jobs, economic security and economic resilience. Within each of those threads, which are complementary, there is a policy suite to get to that place. For example, research and development, R&D, is a classic one that we have not really done in the Republic or in the North. How can we deal with the underspends on education? Is this a false economy longer term? There are the points about infrastructure and golden rules. How can we reform social insurance in order that people have time to find a new job rather than taking the first job but also preventing a crash, if there is a recession, so that people have income protection that allows the economy to get through that? There is also utilisation of national training funds to provide on-the-job training. All these measures are good for companies as well.
On the productivity side, it is about emphasising that. That is what the high-road model looks like. Workers often ask whether productivity means just working harder. Rather, it is about giving workers better tools, whether that is equipment, skills or knowledge, to do the job better or to do different types of jobs. That is what productivity really is, rather than the low-road model, or the London model if you will, which was about bringing costs as low as possible and gaining competitiveness that way. The diversity of the economy comes from that. It ends up with a diverse economy. On minimum wages, funnily enough, a minimum wage forces companies to up their game so it actually does kill very unproductive jobs. However, over a longer term, and this is what the Nordics often did, it pushes companies to be more productive, albeit over decades. There is a lot in this. It is about changing how we think about economic development. For what it is worth, it would be applicable in any European country, frankly.
In dealing with this volatility, it is clear we have a very concentrated economy in the South. The statistics show that just two sectors, pharmaceuticals and digital services, represent an enormous percentage of the economy. If anything were to happen to either of those, it would look like Ireland has had a massive recession. It would not necessarily have the employment impact but it would look devastating. We have not successfully developed a strong domestic enterprise base. Understanding why we have not been able to do that relates to the productivity piece. This is not a trade unions or workers versus business issue. It is actually something that benefits both sides longer term. We have been attempting to break out those policies and those documents are now going up on our website. We would be very happy to talk about them in greater specifics in whatever forum. We certainly intend to do that. We have been working on this for the past two years, but we are getting there now.
Conor Murphy (Sinn Fein)
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It reminds me of the four pillars I brought into the Department for the Economy in the North, of which productivity was one.
Conor Murphy (Sinn Fein)
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Speaking to that, such issues as supply chains and the carbon footprint of supply chains mean that closer to home is much better for creating a sustainable economy. However, there are opportunities for North-South and perhaps even a greater diversity in the economy on the northern side of the border, even though it struggles, albeit more in terms of public finances than its economic activity. The opportunity is there for all-island approaches. Trade has gone up sixfold since the Good Friday Agreement. Some of the sectors that have developed up there, such as advanced manufacturing, creative arts, creative industries and fintech, offer significant opportunities for collaboration and, in turn, for creating greater diversity in the southern economy.
Dr. Tom McDonnell:
That is right. To the point I was making earlier about cities, economies of scale are another important factor. The more back-and-forth that can be created between the two economies creates a greater economy, greater scope for innovation and can only be a positive thing. There are obvious sectors such as electricity where having a single island economy completely makes sense. What we are talking about in the South is the same broad policy suite that makes sense for Northern Ireland as well. The Senator knows the issues there in terms of human capital and brain drain to London in particular being a significant issue that creates a negative feedback loop. If there is not labour supply, then the labour demand will not be there. However, there is not the labour demand in enough areas as it is. It is about using the third level sector to kickstart that. The North should absolutely should absolutely be attempting to induce these American academics over to Queen's and Derry universities and the rest. We should strike while the iron is hot because it will not be hot for long.
Mairéad Farrell (Galway West, Sinn Fein)
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I thank Dr. McDonnell for what he has discussed so far. The budgetary oversight committee has dealt with tariffs somewhat. Entities such as IFAC, the ESRI and the Parliamentary Budget Office have come before that committee and we have had conflicting reports, which is totally understandable given the nature of this particular beast. Some feel that with the way things stand, most goods exports to the US, particularly big revenue generators, will not be impacted. Others paint a more pessimistic picture. What does Dr. McDonnell believe the impact will be? In his view, is he more on the pessimistic or optimistic side on that? If the pharmaceutical sector is not included-----
Mairéad Farrell (Galway West, Sinn Fein)
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Yes.
4:00 am
Mairéad Farrell (Galway West, Sinn Fein)
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Does Dr. McDonnell mean that jobs will be lost or does he mean that no new jobs will be created?
Dr. Tom McDonnell:
Jobs will be lost in those sectors, but this will be outweighed by the overall level of job creation in the economy as a whole. There will be fewer of those types of jobs. The workers who do them jobs might not necessarily have the skills that are required for the new jobs. One of the reasons we are seeing employment growth is because our population is increasing. That, in itself, accounts for some of new job creation. It is important to bear that in mind, particularly when people say that everything will be fine and that we will still have employment growth.
Mairéad Farrell (Galway West, Sinn Fein)
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Government policy in terms of retraining will be essential. If we are looking at how to negate some of the impacts of tariffs, potentially then one of the big sectors will be that relating to further education.
Mairéad Farrell (Galway West, Sinn Fein)
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And it will need to be made accessible.
Mairéad Farrell (Galway West, Sinn Fein)
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That goes to Deputy Nash's point in terms of what has been done in Germany.
Dr. Tom McDonnell:
Absolutely. If people have a certain percentage of their income for the next six months - it could be close to 100%, as is the case in some countries - that means people do not panic on day one. They are not terrified. They can take the time to find the best job for them. They might even have time to go back into education. They can also maintain their standard of living. It also protects other jobs in a local area, such as those in coffee shops and places like that, because people are not going to withdraw. If a person loses 50% or 80% of their income, they are going stop spending on non-essential items. If a person is able to hold onto most of their income, it prevents the cascade or the earthquake from expanding to other sectors of the economy. Job losses will be regionally specific to where these plants are. They will not happen across the economy. Adult education is something we need to focus on. It is also something that we do not do very well in this country.
Mairéad Farrell (Galway West, Sinn Fein)
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There is that. It is important to see it as retraining. I do not like the concept of upskilling.
Mairéad Farrell (Galway West, Sinn Fein)
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It is retraining. People are well skilled no matter what area of work they are in. We could look at that retraining aspect in terms of Government policy. Another thing that I am interested in procurement policy and how the State uses the money it spends. For example, one of the big issues that comes up regularly - it came up again today - is investment in infrastructure. We need to look at how we can use State spending wisely to create to jobs and at how this can have a knock-on impact within local economies. I come from the west. The western seaboard that does not have the infrastructure it needs. In addition, it does not have as many jobs as are needed.
Mairéad Farrell (Galway West, Sinn Fein)
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Again, if there is a social clause aspect to that in order to ensure that there are also apprentices coming on stream in places such as, for example, Donegal, where there is then a guarantee because you know the State is spending a specific amount there and the initiative is going to take five years to ten years to reach fruition.
Dr. Tom McDonnell:
I completely agree. That model of the State subsidising apprenticeships into construction might allow young construction workers to have higher incomes than their peers at an early age, which pushes people into construction. The two big sectors that are going to be protected from artificial intelligence are construction and care. We know, because of all of the dynamics in economy, that we need to grow and will grow those two sectors. I would be comfortable with having those types of social clauses included and with finding a way to deal with the housing crisis and the infrastructure crisis. We need to get people in and make it attractive, even if it is just temporary to do so. That would be just as relevant in the west, where the Cathaoirleach is right, the infrastructure deficits are so much more extreme than they are in the greater Dublin area. It is beyond belief.
Mairéad Farrell (Galway West, Sinn Fein)
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It comes down to the fact that concepts such as those relating to retraining, apprenticeship models and so on are changing our psyche. That is important. At the moment, jobs that involve certain titles, etc., are sometimes prioritised.
In the context of reshoring and tariffs, we are looking at a four-year term and at how many decisions will really be made by large companies during that period. The issue is what will happen in the longer term. Officials from the ESRI were before the Committee on Budgetary Oversight yesterday. One of the points they made is that investment in big pharmaceutical plants is a 15- to 20-year project. How much of an impact will tariffs have on reshoring over the four-year period?
Dr. Tom McDonnell:
The Cathaoirleach is correct in that those are long-term investments. They are not done on a whim. The individual companies involved are going to have to make decisions as to whether they think tariffs - if and when they come in - will be permanent. Much of that comes down to politics in the US. There will be profound levels of lobbying by the pharma industry, including supporting people leading up to the elections for the next Congress. They may be hoping that this will be all over in 2027. If they believe there is a good chance of that, they will ask why on earth should they reshore when they decided to base their operations in Ireland for logical financial reasons. They will all make different decisions. There may be some reshoring, but it would be speculative on my part to-----
Mairéad Farrell (Galway West, Sinn Fein)
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It is all speculative. We do not know what will happen between today and tomorrow, let alone between today and 1 August. If the US continues to pursue the policy of the tariffs beyond this Administration and into the long term, it will have an impact on FDI and corporation tax here. What kind of policies could we pursue at that point? I presume our focus would have to be on building our own infrastructure and-----
Mairéad Farrell (Galway West, Sinn Fein)
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-----industrial policies.
Dr. Tom McDonnell:
Absolutely. If they believe that this is effectively a permanent thing, they will reshore at that point. They do not know at the moment. Europe, Ireland and politicians need to convince them that this is not forever. If it forever and if it takes five years to ten years to build one out, they will do that. They only care about what will maximise their profits in the long term. They would not be in Ireland if they cared about in America. If they do not care about America, they certainly do not care about Ireland. They are here to make profits. That is the reality. That would be a shock of a different order. That would be the genuine game changer for the Irish model, which is why we need to be thinking about five, ten and 20 years' time and how do we build up the domestic enterprise base.
It is about having a stronger innovation system. It is about dealing with infrastructure problems. It is about controlling matters and making no-regrets moves. What are those moves? Infrastructure is never a move that we regret. The authorities in Spain are still glad they have all of the infrastructure that they built in the 2000s. Spending on research and development, adult education, public childcare are no-regret moves that we should be doing anyway. In many ways, we can say that we cannot control what happens in American politics. We can still gain things through the corporation tax system, but no matter what happens, we ought to be doing all of these things anyway. Education, research and development, infrastructure and childcare are all areas in which we should be doing things doing anyway.
Mairéad Farrell (Galway West, Sinn Fein)
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Because it would benefit us later.
Mairéad Farrell (Galway West, Sinn Fein)
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Does Dr. McDonnell comment on Senator Higgin's final question?
Dr. Tom McDonnell:
The Senator's question was mostly about defence spending. I did address that. While most areas of public spending are very good for economic growth, for example, education and health, defence is the one area that is unequivocally a bad thing for the economy. Leaving aside any ethical issues or the fact we are willing to break all of our rules for defence when we were not willing to do it for the environment, which is the genuine existential long-term threat, the more we spend on defence, the weaker our economy will be in the longer term.
Mairéad Farrell (Galway West, Sinn Fein)
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We have a few minutes left if anyone wants to come back in. Speak now or forever hold your peace.
4:10 am
Shay Brennan (Dublin Rathdown, Fianna Fail)
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I thank Dr. McDonnell for his valuable input. I am intrigued by the new model. We strayed into discussing the evolution and reform of the economy. Is there something Dr. McDonnell could share with the committee on that matter?
Mairéad Farrell (Galway West, Sinn Fein)
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Documentation would be great.
Mairéad Farrell (Galway West, Sinn Fein)
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That is brilliant.
Shay Brennan (Dublin Rathdown, Fianna Fail)
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I thank Dr. McDonnell.
Mairéad Farrell (Galway West, Sinn Fein)
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Although the past 30 seconds have been fabulous, the extra documentation will assist.
I thank Dr. McDonnell so much for his extremely comprehensive replies. This session has been beneficial for us all. Go raibh míle maith agat. We appreciate your time. That concludes our business for today.