Stories
Any new minister wants to put their stamp on their new department. They want to lead it in a particular direction.
The stamping of a department is not a given. Government departments have their own ways of working and going about things. They were there before the minister and they will outlast him or her.
There is a specific skill to influencing these institutions. The system must be respected, understood, and played.
The Minister for Finance Michael McGrath spent a significant time assessing the Department of Finance from the opposition benches before becoming the Minister of Public Expenditure and Reform. And now, one year in the job as Minister for Finance, he has had time in the driver’s seat.
He understands that leading takes time. He is patient: “I’ve already marked dates in January for the 2025 budget. Ideas need to be introduced early for rigorous testing and refinement.”
Taking questions in front of a room full of investors and business people at Cantor Fitzgerald’s gracious townhouse in St Stephen’s Green, he looked ready for the part. “You could have six or seven events a day, you could be speaking, giving public speeches four or five times a day,” McGrath said. “So preparation is key.”
McGrath was warmly introduced by Gerard Casey, the CEO of Cantor Fitzgerald Ireland. For the next hour, McGrath talked openly about his time in the job and his plans for the next year.
He discussed:
The specifics of the sovereign wealth funds
The shrinking Irish stock market
Competition in financial services
The likelihood of auto-enroled pensions next year
Dublin riots
Tom Lyons: I’d like to hear your impressions about what occurred and what the government can do in terms of countering the problem.
Michael McGrath: I was really taken aback by what I witnessed. It’s shattered any sense of complacency about such events occurring in Ireland. It has now happened. It was damaging and received global attention. Now we must ensure it doesn’t happen again.
It is manageable if we respond sustainably and comprehensively. There’s no point in just an initial burst of activity; this response must be sustained. Last Thursday should be seen as a watershed moment in how we address these issues from security and political perspectives. Part of this is tied to the rising far right, related to immigration.
However, I believe there was a significant element of pure opportunism, with some just jumping on the bandwagon, leading to a few chaotic hours. This does not represent the majority of Irish people. People were horrified that we could lose control of part of our capital city for a few hours on Thursday evening. It’s unthinkable and completely unacceptable. We must be resolute in our determination to prevent it from happening again.
Crisis?
Tom Lyons: You’re making decisions at a time of unprecedented crisis. How do you think about the future when you’re trying to put a budget together in the midst of this turmoil?
Michael McGrath: Notwithstanding the international challenges, our economy has shown remarkable resilience. This is most evident in the labour market, where employment has reached a record high, with 2.6 million people working, marking continual growth.
When assessing the Irish economy’s performance based on modified domestic demand, it’s clear that growth is slower compared to last year’s extraordinary rate of almost 10 per cent. We’re feeling the effects of monetary policy and rising interest rates, impacting borrowing costs for households and businesses.
The international turmoil, geopolitical tensions, and high energy costs also weigh heavily on an open economy like Ireland’s. However, despite these challenges, our performance has been outstanding, driven by the innovation, hard work of the Irish people, and the private sector, supported by various public service strands.
Undoubtedly, we face both domestic and international challenges. At the EU finance ministers’ meetings in Brussels, I hear about the deficits and challenges other economies face. Compared to them, Ireland is in a good position. However, we must make the right decisions to maintain competitiveness and prepare for the future. This includes addressing domestic challenges like the need for more homes, planning reform, and speeding up approval processes for public and private infrastructure. We must prioritise investment in education and research.
We’re focusing on innovation and making significant changes in legislation, including new angel investor relief reforms, changes to employment investment and retirement relief, and enhancing the research and development tax credit. These are designed to address potential imbalances in our economy, with a particular focus on the indigenous sector. We aim to make Ireland an attractive place for starting and scaling businesses with an international reach. In my first budget, we made significant progress, and I plan to go much further next year.
Tom Lyons: Minister, you mentioned imbalance. We have been fortunate with corporation tax, its sheer growth over the last number of years has really helped the Irish economy. Now we are seeing a bit of a wobble, a bit of a slowdown. What’s your view on the outlook for corporation tax?
Michael McGrath: We’ve consistently said for a number of years that [corporation tax] is a volatile source of revenue. The Department of Finance and Revenue Commissioners estimate that about half of what we collect is volatile in nature.
In the last three months, we’ve seen some weakness. The receipts for each month were less than in the corresponding month last year. Last year was extraordinary, with nearly 50 per cent growth in corporation tax receipts, bringing us up to about €22.5 billion.
November, a very important month, is ending. Last year, we collected around €13.6 billion overall in revenues in November, including about €5 billion in corporation tax. The trends of the last three months may not repeat in November. Over the last decade, there has been a strong correlation between receipts in June and November, both significant for corporation tax. We will confirm next week if this trend continues.
We must continue to refresh our foreign direct investment offerings. We’ve had extraordinary success, but we meet regularly with the IDA and constantly benchmark ourselves, especially with changes in international corporate taxation.
The relative advantage of our corporate tax rate has narrowed for very large companies. Therefore, we’re focusing on other levers, including the R&D tax credit. We’re ensuring that the net benefit of the credit is maintained for large businesses and significantly increased for all businesses. The future is green, digital, and invested in research and innovation. We need an ecosystem in Ireland where the multinational and indigenous sectors support and enhance each other.
Wealth funds
Tom Lyons: There were two big ideas in the budget. The Future Ireland Fund which you suggested will rise to €100 billion. And the other was the Climate Fund. What are you going to do with those funds, and what are the logistics around launching those funds?
Michael McGrath: Let’s start with the small one first, the Infrastructure, Climate and Nature Fund. We’ve earmarked €14 billion for this. The principal reason for setting up this fund is to move away from the past approach to public capital investment: the boom-bust approach. This was when we spent a lot in our National Development Plan during economic growth, and then abruptly cut back during a downturn, which is counterproductive.
You should invest through the cycle to get better value for money and a better return on incremental funding. This fund ensures that if we face another downturn or shock, which is inevitable in the coming years, we’ll maintain a high level of investment in public housing, transport, renewable energy, healthcare, education, and other areas.
The primary purpose of the fund is to sustain these sectors. Within this, over €3 billion is earmarked for climate, nature, and biodiversity. If we’re lagging in our climate targets, we can use this fund for major capital projects.
The larger fund [Future Ireland Fund] is about future-proofing public finances due to significant structural changes in our population. We have a young population that will age quickly, affecting the ratio of working-age to pension-age people, along with pension, healthcare, and nursing home costs. We’re also facing climate and digital costs. The plan is to set aside a large share of windfall tax receipts — 0.8 per cent of GDP annually until the 2030s. Managed by the NTMA, it will deliver an annual return to mitigate tax increases that would otherwise be necessary. This isn’t a rainy day fund as we will need this money in the next 10 to 20 years.
Tom Lyons: When I started in journalism, Paddy Power, CRH Jefferson Smurfit, which became Smurfit Kappa were all on the Irish stock market. We’ve seen a lot of the big well-established names leaving the Irish stock market. Do you have a concern about the decline of access to the public capital markets in Dublin? Is there anything you’re thinking about as minister that maybe we could do to help?
Michael McGrath: The concerns [over Euronext] are valid, particularly given the vibrant equity market based in London and the broader global trends. Europe is indeed facing significant challenges, especially in comparison to the United States, which has more developed and deeper capital markets. This is a collective challenge for Europe, and as it affects Ireland, we’re addressing it at the European level through the Capital Markets Union. The action plan involves various reforms.
Looking ahead, there are specific steps we can take within the Irish context. Currently, we are conducting a comprehensive review with the whole sector, focusing on retail investment. Our goal is to channel more domestic investment into equity markets. We have already engaged with Euronext and received a report from them.
This report made several recommendations, but they weren’t developed enough for inclusion in the budget, primarily because one measure on statute had a significant community cost of around €350 million, which exceeded our budgetary limits. However, we are open to exploring the other recommendations and working with Euronext to implement them.
Banking changes
Tom Lyons: Over the last period we’ve had major banks leaving and financial services businesses like Goodbody and Davy absorbed into big banks. Are you concerned about a lack of competition in financial services?
Michael McGrath: Before the financial crisis, Ireland had over a dozen retail banks. Now, there are only three. The departure of Ulster Bank and KBC was a significant setback, and it led to the strengthening of Permanent TSB, which is a positive development for the Irish banking system.
To directly answer your question, yes, I would like to see more competition in retail banking. We’re witnessing the rise of fintechs and more non-bank lenders entering the Irish market. However, the current stage of the interest rate cycle makes it challenging for these new entrants to compete in funding.
The Irish market for retail banking is quite small, which reduces the likelihood of attracting major international players to provide retail banking services on the high street. But, I do believe there’s potential to attract employers offering a diverse range of products and services to customers, both personally and corporately. We’ve seen some progress in this area.
Tom Lyons: The other big issue coming down the tracks is pension auto-enrolment. That’s being deferred to the second half of 2024. Do you think the state has the capacity to deal with it in that time frame?
Michael McGrath: My colleague, Minister [Heather] Humphreys, who is leading this project, and I have been working closely together. This initiative requires significant government effort to make it successful and accurate. It aims to address the long-standing issue of insufficient pension coverage in the private employment sector. Ensuring this is done correctly is crucial.
For me, the most important aspects are establishing the right structures, operations, and regulatory framework. It’s vital that people have complete trust and confidence in the system. The Minister is aiming for implementation in the second half of next year. This is contingent upon the successful passage of legislation and completion of necessary scrutiny work. The Minister is involved in this process, which is beginning its journey through the legislative stages. Concurrently, there will be a procurement process for the operations and administration on a large scale.
Tom Lyons: The Standard Fund Threshold for pensions is €2 million. It is causing hiring issues in An Garda Síochána. Will you consider raising this cap?
Michael McGrath: I’ve committed to reviewing it and I’m going to bring in some external help to do that. I want to have that work completed by the summer of next year. It hasn’t changed for the past nine or 10 years at this stage and obviously as wages and incomes have increased, the relative cap has changed. So yes, I am committed to examining it.
Taxing times
Tom Lyons: Over the last two years, since Covid, the state has gotten much bigger. Now, even IBEC is calling for a bigger state. Will taxes need to go up to pay for it?
Michael McGrath: The state has become more significant, partly due to Covid-19. The argument hinges on dynamics related to our growing population. This growth has naturally increased the demand for our public services. We’ve had to make substantial investments in healthcare, housing, and a range of other public services. I anticipate this trend will continue, albeit at a slower pace, in the coming years. This situation necessitates a broad and sustainable tax base, where income tax, VAT, and corporation tax remain strong. However, we also need to consider the recommendations made by the Commissioner of Taxation. Their key suggestion is that we must gradually broaden our tax base and increase revenue.
To mitigate the need for immediate tax changes, we’re setting up the Future Ireland Fund. This initiative aims to maintain our competitiveness and reward enterprise. It will help us manage how wealth generated in our country is distributed. This is an important takeaway from this discussion.
In our national parliament, there’s much debate about spending, but little on generating revenue. We’re very focused on this aspect. The Future Ireland Fund will be instrumental in managing inevitable tax increases, especially in areas like pensions policy. We’ve decided to keep the pension age at 66, but this comes with associated costs that will increase over time. The Minister has already laid out a roadmap for gradual PRSI increases in the coming years.
Tom Lyons: What’s your view of a potential government with Sinn Féin?
Michael McGrath: I’m very concerned about their tax policies and their approach to major problems. They propose to tax the rich and big businesses more, but this overlooks a fundamental reality. If you consistently increase taxes on individuals earning over, say, €100,000, it affects everyone. This is because decision-makers and jobs are influenced by these tax policies. In my interactions with the FDI community and large businesses in Ireland, I’ve found that our personal tax system significantly influences their decisions.
So, if we send a message that success and business growth will be met with excessive taxation, it will ripple through the economy. The idea that this won’t affect people earning €40,000, €50,000 or €60,000 is a misconception. It does impact them. In the next election, we have a responsibility to address this issue and explain that while taxing the rich might seem like an easy solution, it ultimately affects us all. It makes us less competitive and less attractive for investment, leading to fewer jobs. We have a job of work to do politically to communicate this and to persuade people to understand the broader implications.
”I was really taken aback by what I witnessed. It’s shattered any sense of complacency about such events occurring in Ireland. It has now happened.”
Tom Lyons: What’s your view of Sinn Féin’s housing policy?
Michael McGrath: We see this every year when discussing the private market or the private rented sector. The issue is that there’s a lack of regard for it. Therefore, all the schemes we’ve introduced to support first-time buyers and enforce private supply are met with opposition, despite the belief that the state can manage everything.
We need at least €15 billion annually to build over 30,000 homes each year. The state has provided €5 billion. This goal is ambitious, the most we have ever aimed for. There is scope to increase this, but it’s limited; the state can’t do everything. Hence, we must involve private capital to build the necessary homes and ensure that housing construction remains a viable proposition.
That’s why we’re reforming the planning system, which is an urgent priority for the government. Measures like suspending development contributions and water connection charges, and providing funding are part of this reform. However, the idea that we can increase supply by 20,000 units simply by declaring it and expecting immediate results is nonsensical. It may sound attractive, especially to those under pressure and struggling to find a home, but it’s not that simple.
Tom Lyons: Corporation taxes are low, but other capital taxes, such as those on dividends and CGT, are high. Do you think reducing capital taxes would spur investment?
Michael McGrath: In this area, I chose not to follow the Commission on Tax and Welfare’s recommendation regarding capital taxes. They view these taxes as a way to broaden the tax base or increase revenue. However, changes in capital taxes don’t yield straightforward dividends due to behavioural effects. Such changes influence decision-making and have impacts, especially since our rates are high by international standards. These rates have been stable for years, providing certainty.
Currently, as part of a focused review in parliament, we’re examining a range of products, including their tax treatment. This review will inform the next budget, which I’ll be looking into. We’re considering various areas like life insurance, investment products, and ETFs, among others, for their tax implications. Regarding entrepreneurs and active investment, this budget demonstrates our willingness to adjust taxes in a targeted and effective manner, aiming to boost economic activity.
Tom Lyons: You had a long apprenticeship as shadow finance spokesperson and then Minister for Public Expenditure. How does it feel to be Minister for Finance?
Michael McGrath: Well, I’ve worked closely with the Minister as both a successor and predecessor. He’s in public expenditure and has occupied the office I now hold for a number of years. I support him and his work, and he supports me. This relationship is crucial for the proper functioning of the government.
My experience includes two and a half years in public expenditure, an underrated department where many critical decisions are made. It’s involved in day-to-day decisions, expenditure, and major initiatives like the national development plan. Leading this department provided me with invaluable experience.
I recently celebrated my first anniversary in the Department of Finance. We work closely with the revenue commissioners, and I’ve learned a lot this past year. The role is demanding, with up to six events and public speeches each day. Preparation is key, especially for the budget process. I’ve already marked dates in January for the 2025 budget. Ideas need to be introduced early for rigorous testing and refinement. The finance bill is a massive undertaking, almost 300 pages long. It’s a complex process, but important to start planning well in advance. I’m already working on many ideas for the next year to include in the 2025 budget.
