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There's a risk that Ireland could fall behind

Kitty Miv, Editor
01 December, 2016

Kitty's Country Rankings are below, with a description of how they are compiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

Judging by the United Kingdom Government's Autumn Statement, which has come to serve as a secondary Budget (for the last time, alas), you would be forgiven for thinking that there must have been a general election at some point in the recent past that everyone missed. Had there been, I'm fairly sure we would have been looking at a very different Autumn Statement than the one just delivered by Chancellor of the Exchequer Philip Hammond, if it had it been announced by former Chancellor George Osborne. 

The approach to fiscal policy under the Tory Government of Cameron and Osborne (who both ran the Tory-led coalition which preceded it) and the Tory Government of May and Hammond is quite stark. Almost like two different political parties, in fact. Osborne was all about righting Labour's wrongs with his focus on deficit reduction, spending cuts, and showy corporate tax cuts – although he wasn't shy about pinching a Labour policy or two to shore up the Government's support! Hammond on the other hand has just abandoned deficit reduction and increased spending (and, crucially, borrowing), and is all about prudent tax policy – pretty much usurping the center ground once occupied by Labour in the process.

Hammond claimed that this was a (mini-)budget for the people. For the so-called "JAMs" – those "just about managing" to make ends meet. Unless I'm missing something, I fail to see a single new tax measure in there that would help anyone that much. Indeed, it's amazing how many plaudits Hammond seems to have received for doing hardly anything of note. Osborne, a serial puller of rabbits from hats, must be perplexed, perhaps even envious of his Right Honourable Friend – he was never shown the love in quite the same way. But perhaps the Chancellor has given taxpayers what they want for once, which in this case is nothing. And the sigh of relief from business taxpayers in the UK is almost palpable. The post-budget response from business has been more a collective "phew" rather than the usual "oh no, what have they gone and done now..." This gives businesses more time to think about how they will cope with Brexit. And, best of all, Hammond has restrained himself and future Chancellors by scrapping the Autumn Statement altogether.

Brexit is not only a major preoccupation of the UK, however. Ireland is also spooked by the prospect of the UK's withdrawal from the EU, which is understandable given the strong trading links between these two neighbors.  This had led to calls for the Government to urgently review the tax system and make any necessary changes to ensure that it is "match fit" for a potentially turbulent future, to coin Hammond's favorite new phrase. For example, Ireland's Small Firms Association said the Government needs "to become obsessive" about the country's tax competitiveness in relation to the UK.

But perhaps there is a case for some Hammond-esque caution to be exercised in Ireland too. Otherwise it might fall into the trap of thinking it needs to constantly update its tax system or fall behind. Such a course of action might actually be counterproductive. There's a risk that Ireland could fall behind because it is constantly updating its tax system.

When it comes to the taxation of businesses, the latest Paying Taxes Index from PwC shows that actually, Ireland is already ahead of most of the competition anyway. Therefore, change in this area could well do more harm than good. As President Reagan used to say, if you find yourself in a crisis, "don't just do something. Stand there!"

It could be said that most things tried by successive Greek governments and the international community to save the Greek economy have either not worked, or made things worse. Take for example attempts to reduce tax evasion and avoidance, a crucial plank of Greece's recovery plan. According to a recent analysis by business advisory firm EY, it could be still as high as nine percent of gross domestic product, or roughly EUR16bn per year. For those of us living in the world's large economies and used to much bigger macroeconomic numbers, if the amount of tax evaded in the United States was the equivalent of nine percent of GDP annually, that figure would be a staggering USD1.6 trillion, give or take a few billion. However, the Internal Revenue Service recently put the US "tax gap" at USD385bn, which, although a huge sum on its own, puts the scale of the Greek problem with tax evasion into context.

So what's going wrong? According to EY, an inefficient, complex tax system is one contributory factor behind the high levels of tax evasion. This, theoretically, can be fixed. However, the political will seems to be lacking. Another reason is the rising tax burden. However, this policy won't be reversed unless Greece's bailout creditors allow it.

Such a course would take a radical, almost unthinkable, reversal in the approach taken to the Greek crisis by the "troika," and the international community. But we are living in a period of radical political change, so the possibility that a fresh approach to the Greek crisis may materialize is not out of the question. President-elect Trump is expected to question the IMF's role in bailing out Greece as the soon-to-be leader of by far the largest contributor to the Fund. What's more, we are likely to see a change of leadership in France next year, and possibly Germany too.

Doing nothing is clearly not an option when it comes to Greece. But perhaps it's time for a change of plan, and that might be closer than we think. After all, isn't the definition of insanity repeating the same action time after time and expecting a different result?

To the other side of the world now, and in Australia we see the Government determined to push through its unpopular "backpacker tax." This is despite warnings about the negative impact it may have on the country's important tourism industry, not to mention agriculture, with farmers warning that they will struggle to fill vacancies caused by a fall in transient foreign workers.

You do have to wonder why, after all these years of Australia being a major stop-off on the backpacker trail, the Government is doing this now, and is digging its heels in, too. Well, the answer to that probably has something to do with the Government's plan to close the budget deficit, currently three percent of GDP, almost completely by 2020. However, as has been demonstrated by the UK, the best-laid plans of treasury ministers can easily go awry, especially if the economic assumptions upon which fiscal plans are laid turn out to be overly optimistic. And, according to a recent report by Deloitte, Australia risks undershooting its tax targets for this very reason.

To be fair to the current administration, the fiscal problems it is attempting to fix aren't of its own making. However, it would be well advised not to dig a deeper hole for itself.


Kitty's Encomiums and Execrations

Methodology: each week (this is the 147th) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums

Ireland match fit

Kitty's Execrations

Greece insanity

Australia digging



About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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