Spending cuts and tax increases are only worthwhile if they lead to things getting better in the coming years

AMID ALL of the noise and emotion surrounding the arrival of the International Monetary Fund and Ireland’s need for assistance, it has become increasingly difficult to keep focused on the measures and steps which will help, rather than hinder, our ability to climb out of the hole we are in.

There is a (perhaps ironic) convergence of interests around whatever table the discussions are taking place. We need to borrow money more cheaply than is available to us in the market. Whoever lends us the money will want to be repaid. Both sides will want to be sure that whatever measures are next taken, whether contained in our own four-year plan or elsewhere, will improve our ability to repay the emergency loans as well as other borrowings.

The alternative scenario – worsening our ability to repay our debts – is not attractive to either side. We will not be able to borrow to pay our teachers and nurses, and the European Union is at risk of fracturing in disarray.

This makes a broad assessment of our four-year plan critically important. It is very clear that there will be a wide range of expenditure cuts and tax increases, and these will be painful. They are only worthwhile, however, if they credibly lead to things getting better rather than worse in the coming years. This is the basis on which the plan, whatever it contains, should be judged.

The 12.5 per cent corporate tax rate has been a focal point for much of the speculation. Frankly, the analysis is simple. The Organisation for Economic Co-operation and Development estimates that a 1 per cent increase in corporate tax rates leads to a decrease in inward investment of 3.7 per cent and therefore a corresponding reduction not just in corporate tax but in all of the related economic impacts such as employment and other taxes.

Our experience as a firm leads us to conclude that for Ireland the position could be far worse. As an island economy on the periphery of Europe a sustainable 12.5 per cent rate is an essential cornerstone of our economic sustainability.

A low corporate tax rate is not the only element required for a sustainable Irish economy. Business makes decisions on the basis of a multitude of factors.

Tax is critical, but it is not the only critical factor and these factors are themselves interdependent. The skills required to undertake the business must be available. The costs of doing business must be competitive. Regulation where it is required should be fit for purpose and effective. Access to capital for small business is an issue; perhaps the principles underpinning the original Business Expansion Scheme should be revisited. Labour market flexibility and cost is key – if we are not competitive we will not get people back to work.

Our social welfare system should support people in returning to work where possible and avoid an “unemployment trap”. Operating costs throughout the economy and in all sectors, public and private, must be competitive, and barriers to achieving this removed.

An increase in our corporate tax rate would make our position worse, not better, and is rightly treated a “red-line item”, to quote the Minister for Finance.

There is a broad acceptance that we have no choice but to cut spending and increase taxes. The real challenge is to do so in a manner which provides a platform for recovery. It will be possible to debate the pros and cons of individual elements of the four-year plan when it emerges.

Ultimately, however, it should be judged on whether it facilitates a sustainable recovery, helps us rebuild and sustain employment for people, and puts our public finances on a sustainable footing.

Colm Kelly is head of tax and legal services at PricewaterhouseCoopers