Low-tax FDI model running out of steam, says Honohan

The State should respond to the threats of Brexit and Donald Trump’s presidency by emphasising matters other than tax advantages when seeking foreign investment, former Central Bank governor Patrick Honohan has said.

Mr Trump has said he plans to reduce the US corporation tax rate from 35 per cent to 15 per cent, close to the State’s 12.5 per cent rate.

“It’s not that either Brexit or an isolationist and Eurosceptic US administration is likely to trigger an Irish economic collapse like 2008/2009,” Dr Honohan said.

“Instead, the threat is clearly to what have been some of the strongest suits for the Irish economy over the last half century. Exploiting the potential of globalisation has been the key to Ireland’s huge increase in prosperity over the past decades.”

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Dr Honohan was speaking at the UCD Michael Smurfit Graduate Business School where he launched Austerity and Recovery in Ireland, a book on Ireland's experience with austerity in the aftermath of the financial crisis.

Momentum

He said that in order to keep “the forward momentum”, the fixed factors in the State’s policy stance must remain: its openness to the international flow of goods, services and people.

“Achieving this will be tough with Britain determined to increase control of its borders and US corporate tax policy apparently moving in the direction which could undermine what always seemed a fragile reliance on tools of tax competition, the aggressive use of which has eaten into Ireland’s standing in international circles,” he said. “These will be among the policy challenges of the coming decade.”

To combat those challenges, Dr Honohan said: “We must emphasise the other things: the education, the infrastructure, social cohesion, political stability. These are the longer lasting things.”

He said the State over-emphasised its tax advantage, which has “given us a huge flow of particular types of foreign direct investment”.

“We have other strong suits. The IDA has always emphasised that, but the tax has always been the biggie.

Just trying to get an advantage on the percentage of the tax is going to run out of steam, and it looks like it is running out of steam.”

Dr Honohan was also critical of a “short-termism” in relation to planning. “Decisions are taken with a view to what’s going to happen this year and next year, and very often, either there are 20 year plans nobody is paying any attention to, or there are no plans,” he said.

“This is something we can address. It’s not something we’ve naturally done very comprehensively.”