Exclusive Interview: Minister for Finance, Paschal Donohoe

 

  

Paschal Donohoe is the Fine Gael TD for Dublin Central (first elected 2011) and in June 2020 was re-appointed as the Minister for Finance for Ireland. He was first appointed to that role in June 2017, at which point he also held the position of Minister for Public Expenditure and Reform. This is the first time a Minister had held both of the finance portfolios. He was elected as President of Eurogroup of Finance Ministers in July 2020. He is married with two children and has the misfortune of supporting Tottenham Hotspur.

Early Life & Entry into Politics

"There was a high awareness of current affairs"

 Born in Phibsborough, Dublin in 1974, Donohoe was educated at St. Declan's CBS in Cabra, before receiving a scholarship to Trinity College Dublin. There he studied Politics and Economics and graduated with a first-class honours degree. During his time in Trinity, he served as secretary of the University Philosophical Society, primarily a debating and paper-reading society.

Donohoe's next move was to the UK where a career with the multinational company Procter & Gamble beckoned. He spent six years working in the UK, rising through the ranks to a sales and marketing director. In 2003, he was coaxed into returning to Ireland with his wife, Justine to contest the 2004 local elections where he won a seat on Dublin City Council. This was a somewhat risky move given that he was sacrificing a lucrative job for a career in politics where there was no guarantee of anything.  

Although there was no tradition of politics in his family, Donohoe's foray into the political arena was not entirely surprising given the interest in current affairs cultivated through family and school life. "None of my family participated in politics but there was a high awareness of current affairs mainly through the daily newspapers and the radio. This was further cultivated by my time at St Declan’s secondary school in Cabra where active debate on such matters was encouraged by the teachers," he says.

Fine Gael 

"There was a very visible European dimension to the party which attracted me"

Much of Donohoe's late adolescent years was spent with Fianna Fáíl in power (save for John Bruton's two-and-a-half-year stint as Taoiseach in the mid-nineties). However, Donohoe was firm in his belief that Fine Gael was to be the party for him. "There were 2 reasons why I joined Fine Gael," he says. "Firstly, I grew up in Blanchardstown and the local TD was Austin Currie and the Fine Gael TD in the neighbouring constituency was Jim Mitchell. Both of these TDs has had a significant influence on me. Both were very substantial characters that could have gone on to more financially rewarding careers but decided to pursue politics making substantial contributions during their careers. The second reason was there was a very visible European dimension to the party which attracted me as well," Donohoe adds.

Election to Dáil Eireann

"I remember thinking I was never going to get elected due to the political power and sway that Bertie Ahern had in the constituency"

 

Donohoe's election to public office within a year of returning to Ireland was by no means an indication that he would have everything his own way in the Dublin Central constituency. The presence of one Bertie Ahern, the Taoiseach loomed large in the area. Other constituency stalwarts such as independent TD Tony Gregory and Joe Costello of the Labour Party made the challenge even more difficult. "I initially ran for the council [Dublin City Council] and was elected in 2004. I then ran in the General Election in 2007 and then ran in the 2009 by-election after the death of Tony Gregory. I lost on both occasions and remember thinking I was never going to get elected due to the political power and sway that Bertie Ahern had in the constituency, but things change and I stuck with it and was elected as a TD in the 2011 General Election [Donohoe topped the poll]," Donohoe says. From there, Donohoe hasn't looked backed and comfortably retained his seat in both 2016 and 2020, finishing second only to Mary Lou McDonald in terms of first preference vote share.

Budget 2021 & The Fiscal Response to Covid-19 

"Public indebtedness increased by an estimated 12 percentage points last year, to 108 per cent of GNI* "

Roll forward to the present time and Donohoe finds himself facing a similarly uphill task in his role as Minister for Finance. The impact of a year-long pandemic has taken its toll on the public finances. Hence Budget 2021, which Donohoe unveiled in October as "unprecedented in both size and scale in the history of the Irish State." And while there is no doubt that such a fiscal stimulus was warranted, the rise in the level of public debt compared with this time last year is marked. Indeed, recent European Commission figures highlight that Ireland is forecast to have the highest government debt per head of population in Europe this year. The Commission predicts that Ireland is forecast to have total government debt of €241.6 billion for 2021, up by almost 10 per cent on 2020.  On a per-person basis, this means that the debt burden will be €48,291 this year which means that Irish citizens will carry a debt burden of almost €20,000 more than the EU average. 

However, given that the State has been borrowing at less than 1% (and sometimes negative rates) in recent years and that the NTMA’s recent bond auctions have been oversubscribed, Ireland seems to be nowhere near the point where markets could be spooked by our comparatively high indebtedness. Indeed, in January the NTMA, launched its 2021 funding campaign by raising €5.5bn via a new 10-year benchmark bond which bore a negative yield of close to 0.25%. 

However, a rise in interest rates which has been touted by many analysts as long overdue could spell danger for Ireland.  Donohoe acknowledges such a threat, but remains upbeat that Ireland is in a strong position to absorb the increased debt burden. He explains: "The Covid-19 pandemic represents a once-in-a-generation shock to the Irish economy. As a result of this unprecedented public health emergency, the fiscal landscape in Ireland – as elsewhere – is dramatically different to that of just a year ago. The necessary budgetary supports put in place to limit the economic fall-out from the pandemic have resulted in a sharp increase in public indebtedness in Ireland. As a share of modified Gross National Income (GNI*), public indebtedness increased by an estimated 12 percentage points last year, to 108 per cent. The continuation of these supports mean further debt accumulation is expected this year," he says.

Government Debt & Interest Rates

"There are several structural features of Irish public debt that remain favourable."

 

In a world where Modern Monetary Theory (MMT) is becoming increasingly in vogue (particularly among Democrats in the US), the question arises as to whether managing debt is as relevant as it once was. At its simplest, MMT purports that governments which possess monetary policy independence (not Ireland) can spend at will, as they can always create more money to pay off debts in their own currency. Fiscal hawks are naturally opposed to such largesse. Donohoe has shown fiscal rectitude in the past, with two successive budget surpluses in 2018 and 2019. Whatever one's attitudes are in relation to the optimal level of debt, it is the underlying profile of Irish public debt, however, which is at the root of the Minister's optimism.  "My Department has recently published its fourth annual assessment of public debt in Ireland. The aim of this report is to provide a comprehensive analysis of public debt developments in Ireland. A key take away from this report is that, the public finances in Ireland are well positioned to absorb the increase in public debt associated with the pandemic. This is the case for a number of reasons," he says.

"Firstly, prudent management of the public finances in recent years ensured a relatively healthy starting fiscal position pre-pandemic.  Indeed, we entered this challenging period on the back of two successive annual budget surpluses and a significant downward trajectory for the debt-income ratio over the last number of years. This created the necessary fiscal room-for-manoeuvre. 

Secondly, while the absolute level of indebtedness is high and rising, favourable financing conditions mean that the burden of debt is moving in the opposite direction. Lower interest rates mean that interest costs (total interest expenditure) are actually falling.

 

Finally, there are also several structural features of Irish public debt that remain favourable. In particular, Irish debt has a relatively long maturity profile. Given that the bulk of Irish debt is at fixed rates, the probability of an interest rate shock having a near-term impact on debt sustainability is low. 

 

That said, we cannot continually add to the debt burden and we must gradually eliminate the deficit so that we are not adding further to public debt and we reduce the vulnerability of the economy and public finances.  It will, therefore, be crucial to set out a credible medium-term strategy to reduce and, ultimately, eliminate the deficit. Economic growth can play a large role in this, with underlying growth dynamics remaining relatively strong. 

 

My Department recently published the Stability Programme Update (SPU) which sets out a set of medium-term forecasts that will help to guide us in the years ahead," he adds. Indeed, there is room for mild optimism for the medium-term. The SPU which Donohoe refers to, predicts GDP will expand by 4.5% this year and 5% next year. Meanwhile, Modified Domestic Demand (MDD), a more useful indicator of domestic economic conditions, is projected to grow by 2.5% per cent this year and 7.5% per cent next year. However, the SPU highlights that economic recovery over the second half of this year and into next year is firmly predicated on the success of the vaccination programme and the assumption of a further easing of public health restrictions. And as has been seen previously, such assumptions could be rendered nugatory if a new variant were to emerge.

Election as President of the Eurogroup of Finance Ministers (July 2020)

"Our main goal is achieving consensus on economic policy"

Last July, Donohoe reached arguably the apotheosis of his career following his election as President of the Eurogroup for a two-and-a-half year term. Donohoe will clearly have his hands full given the backdrop of the unprecedented €1.8 trillion EU fiscal stimulus package agreed in December 2020, but is evidently relishing the challenge ahead. Much of his work will consist of reconciling divergent Member State views on areas of economic policy.

"Eurogroup is an informal body of Euro Area Finance Ministers," he says. "Our main goal is achieving consensus on economic policy through a focus on political and strategic discussions. This is somewhat different to ECOFIN’s [The Economic and Financial Affairs Council] more legislative role and the latter is also explicitly an EU27 body. Eurogroup is a political body, with political processes and political objectives.

As President, I engage actively with the EU institutions. This includes the ECB, the Commission, the ESM [European Stability Mechanism] and the Council. We also have regular ‘inter-institutional actor meetings’, or in more colloquial terms – a ‘4 Presidents call’ - that involves the Presidents of the Council [Charles Michel], Commission [Ursula von der Leyen], ECB [Christine Lagarde] and myself. All of these feed into how we operate.

Another key part of my role is to represent Eurogroup at the European Council, where I recently presented to our leaders on the international role of the euro. I also attend G7 meetings - again representing the Euro Area. These are currently chaired by the UK with a particular focus at the moment on the common challenges created by COVID-19 and the global economic response to it.

We are also fortunate in that we can expand Eurogroup into a more inclusive format, depending on the topic at hand. This can involve opening up discussions to include non-Euro Area countries but also in inviting external speakers to participate on selected topics. This has included representatives from the WHO and European Centre for Disease Control to get their take on COVID-19 but also briefings from other experts depending on the topic," Donohoe adds.

Eurogroup Work Programme

It is evident from the above that Donohoe's role is an influential one, which can only mean good news for Ireland. Indeed, Taoiseach Micheál Martin acknowledged that his election was "a great win for Ireland." Tanaiste Leo Varadkar also recognised that this was "very good for Ireland because it means that we will be in the room when important decisions are made about the Euro and the future of the Euro."

For all the meetings and representation that go with Donohoe's new role, he explains that the actual substance of "the work of Eurogroup is underpinned by a very detailed work plan." He breaks down the "five broad objectives" of this plan as follows:

"(i) Economic and fiscal policies to support recovery and long-term growth;

(ii) Use of banking union as a source of stability and growth;

(iii) Capital markets union (in terms of the Euro Area aspects);

(iv) The euro as a digital currency; and

(v) The international role of the euro."

Economic Recovery

"There won't be a cliff-edge withdrawal of Covid supports"

Needless to say, there will come a time when the support schemes offered during the pandemic come to an end. A hefty bill also awaits the Irish taxpayer when the pandemic finally passes. As of yet, there is no indication of when this will be. On Thursday, the Dáil voted to extend the Employment Wage Subsidy Scheme and the Temporary Wage Subsidy Scheme. The supports thus far have been substantial, amounting to €5.8 billion in total between the two. Donohoe and his colleague Michael McGrath (Minister for Public Expenditure) have repeatedly emphasised that there will be no cliff-edge in terms of withdrawing supports at sudden notice. The abundantly clear message is that supports will continue for as long as is necessary to ensure a strong recovery.

However, there has been criticism from some quarters that some Covid supports should be better targeted. Central Bank Governor, Gabriel Makhlouf for instance has said that “some enterprises entered the COVID-19 shock with unsustainable business models and during a typical downturn the closure of such companies can be seen as part of the overall process of economic restructuring and dynamism.” While the fiscal stimulus has been unprecedented, government spending on pandemic-related issues has, for the most part, not been profligate. For example, the Minster confirmed that the Stay and Spend Scheme would terminate at the end of this month as scheduled given that the "broad interests of taxpayer need to be taken into account and that these may not be best served by extending the scheme over the summer months in circumstances where we will all be staying at home and hopefully holidaying Ireland. This is particularly the case when other very significant support measures will remain in place. Taking these factors into account, it may be more appropriate to take stock again in a number of month’s time and assess if the position needs to be reconsidered at that point.”

Keynesian Economics

"Ireland does have to provide counter-cyclical support for the economy, but it needs to be sustainable."

The Keynesian school of economic thought has been at the core of the fiscal response to Covid, both internationally and in Ireland. At a basic level, Keynesian economics advocates for expansionary fiscal policy and increased borrowing in times of a downturn. Such an approach will boost aggregate demand, which Keynes believed was the driving force of any economy. These counter-cyclical policies are something which Donohoe appears to be a firm believer in: "Ireland does have to provide counter-cyclical support for the economy, but it needs to be sustainable," he says. "A balance has to be struck because to sustain the national debt and manage the deficit, economic growth is required. Economic growth requires employment growth and that is why we have in place such strong support for income and for jobs." 

"The strong supports in place are in recognition of the strain on businesses and the need to lay foundations to allow employers to reopen when they can do so.  We've made really clear that there won't be a cliff-edge to that support, that we will be looking to adjust that support as health circumstances improve but not in a way that could undermine our ability to recover. We will lay out the detail of that, towards the end of June when we'll have to make the next decision in relation to the Wage Subsidy Scheme and the Pandemic Unemployment Payment," Donohoe adds.

OECD Tax Reforms/International Tax Landscape

"A multilateral approach via the OECD/G20 process is the best way in which to ensure that the international tax framework meets the needs of the globalised economy."

Covid-19 aside, a grave threat to Ireland’s future prosperity is the issue of OECD global tax reforms. With corporation tax accounting for about 6% of our national income last year, changes by way of a new digital tax and the imposition of a global minimum rate of corporation tax threatens to seriously undermine the attractiveness of our hitherto hugely successful inward investment model.

These changes have been a long time in the making, however, any progress on a deal was stymied when the Trump administration withdrew from talks last year. The Biden administration has, however, re-entered negotiations with vigour and global tax reform appears to be high on their agenda. In addition, the US is planning major changes to its own corporation tax system as it seeks to find ways of funding its colossal $1.9 trillion stimulus package as well as a proposed major infrastructure programme and Green New Deal.

Treasury Secretary Janet Yellen has proposed a minimum rate of 21% on the foreign profits earned by US firms. The previous minimum rate of 10.5% introduced by Donald Trump actually turned out to be beneficial for the Exchequer as firms shifted profits to Ireland due to the fact that our 12.5% rate was deemed acceptable compared with other zero rate jurisdictions. The proposed 21% rate, however, serves to seriously undermine Ireland's 12.5% rate. Indeed, last month's Stability Programme Update forecast a €2 billion drop in tax revenue by 2025 as a result of the OECD and Biden tax reforms.

Donohoe is under no illusions as to the task ahead but reaffirms that Ireland is very much a supporter of the OECD process, acknowledging that it is "the best way in which to ensure that the international tax framework meets the needs of the globalised economy." He believes that  "2021 will be a critical year for International Tax as we seek agreement at the OECD on addressing the tax challenges of digitalisation. It is important to acknowledge just how far we have come over recent years in terms of updating and enhancing the international tax framework to provide for transparency, administrative cooperation and to limit opportunities for those who engage in aggressive tax planning. It is clear that the BEPS project including the 2017 US tax reforms are having an impact."

"Ireland has played its part by engaging constructively with the international discussions, and by taking the necessary steps to reform and modernise our tax system to take due account of the international developments. In this respect, we have just published an Update to our 2018 Corporation Tax Roadmap which sets out the significant measures we have already taken as well as commitments for the period ahead," he adds.

 "A multilateral approach via the OECD/G20 process is the best way in which to ensure that the international tax framework meets the needs of the globalised economy. Without a global solution, we will see unilateral and regional measures continue to proliferate, with consequent negative impacts on trade at a time the world needs stability and a return to economic growth. Ireland has seen the benefits of global tax co-operation.  We continue to believe that working together globally is the only way to ensure a stable international tax system into the future," says Donohoe.

Income Tax

"The Government’s commitment to a pro-enterprise policy framework, by providing a stable and sustainable regulatory and tax environment."

A major element of the Fine Gael election manifesto last year included tax concessions to middle-income earners. Needless to say, tax cuts are off the table for the moment, but in general Ireland's income tax regime is regarded as being overly punishing on middle-income earners. For instance, a single worker will start paying the higher rate of income tax (40%) on any income above €35,300, which is 10% below the average industrial wage. In the UK, a worker will pay income tax at the standard rate of 20% on any income up to £50,271 (€57,650) at which point an identical 40% rate kicks in.

Donohoe acknowledges that there is certainly a conversation to be had in relation to the principles of fair taxation and welfare policy: "At national level, the government will bring forward a National Economic Plan and a Medium Term Plan to align public spending with revenue, as provided for in the Programme for Government. This Programme also provides for the establishment of a Commission on Taxation and Welfare, which will review and make recommendations on how our taxation and welfare system should develop over the next 10 to 15 years. On Monday [19th April], I announced the establishment of the Commssion which will be chaired by Professor Niamh Moloney", he says.

He adds: "The Commission’s work will have regard to the principles of taxation and welfare policy outlined within the Programme for Government, including the Government’s commitment to a pro-enterprise policy framework, by providing a stable and sustainable regulatory and tax environment.

It will also take account of issues such as, the impact of the Covid 19 emergency, ageing demographics, digital disruption and automation and the long term strategic commitments of Government regarding health, housing, and climate.

Members will be appointed to the Commission in the coming weeks to bring the necessary expertise to fulfil the objectives of the Commission’s work from relevant areas including taxation, welfare, economics, legal and broader civil society. The Commission is due to report to me as Minister for Finance by 1 July 2022,"  Donohoe affirms.

END