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Speech by Commissioner Charlie McCreevy to the Association of Higher Civil & Public Servants
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"Challenging times for Ireland and the world economy"

Speech by Commissioner Charlie McCreevy

to the Association of Higher Civil & Public Servants
Revenue Branch Annual Dinner 2009

Mount Wolseley Hotel Spa & Country Club
Friday 27th March 2009

Good evening Ladies and Gentlemen.

Since I became Europe's Internal Market Commissioner you have been kind enough to previously invite me to address this annual event.

On that occasion, I spoke about taxation and the positive role a well crafted taxation system can play in the development of a modern economy, and the importance of a competitive tax environment to the efficient working of the internal market.

This year, that remains as true as ever. But this year too the world with which we have to deal is a very different place. So tonight I want to address the broader economic issues that face us. We are in the midst of a truly global economic crisis – of confidence, of credit, and of demand. The strain that this is putting on the global financial system - and on Ireland - is unprecedented. Frankly the system is in a mess – with problems of asset quality, liquidity, and solvency right across the financial services sector. These problems require urgent resolution.

Concerted international action is imperative. The outcome of that process – and the meeting of the G20 in London next week – may help to restore confidence and some measure of stability.

In Ireland, we depend for our living standards predominantly on external markets with populations of thousands of millions of people. Our prospects and opportunities are closely linked to their prospects. In one sense that’s good news – It means that as a small open economy we have huge opportunities relative to our size to sell into a vast global economy many thousand times bigger than ours. It means we only need to capture and retain competitive advantage in a small number of areas to make a big impact on our domestic economic fortunes. But all of our international markets have been hit. The damage and the cost has been extensive. The storm that has engulfed us - our banks, our businesses, our living standards, and our tax yields - has been horrendous. But how well we survive in this environment depends only in part on our trading partners. It is much more dependent on ourselves and on what we do. I reject the despair and the pessimism, the gloom and doom: This nation is full of people who are entrepreneurial, imaginative, educated, and creative. Of people who have ideas and skills. That’s why the notion that the best days are behind us is ludicrous – unless of course we put them behind us by taking a few wrong turns.

If we decided for example that we weren't going to be more flexible in our work practices, or in our earnings structures. If we decided we weren't going to adapt our education system or upgrade our infrastructure. If we decided we were going back to the 80s and abandon a tax system that rewards self-starters and risk takers, and instead start driving them out with punitive taxes on capital and labour: If we were to take just one of these wrong turns, then of course our best days would be behind us. But it doesn't need to be like that – and it won't be like that unless we will it so.

It doesn’t matter where we work – whether in the public sector or the private sector, in agriculture or engineering, in financial services or tourism, in management or administration: Wherever we are, whatever we are doing – all of us know that there are things we can do better. There are ways to spend less and deliver more. There are opportunities to improve our productivity. There are opportunities to make a quantum jump in our skills base so that we secure existing markets and conquer new ones.

But to do that means being flexible, responsive, innovative, opportunistic, energetic, and fleet-of-foot. It means targeting and attracting investment in the right industries, skills, and infrastructures.

Perhaps the most important task ahead – aside from getting the public finances in order – is to address the skills issue: To protect the high value added businesses that we have and to build further prosperity we need to continue to build on our advanced skills base – in maths, science, engineering and software. That means that if we are short on good maths or science teachers we need to pay more to attract them. And recognise that in the changed environment we can't – and shouldn't - pay more for all teachers. Our more limited resources must be focused on positioning our economy towards the knowledge intensive high technology sectors that require a supply of people of the highest calibre with the relevant skill levels. It means equipping the students of today with the capacity to be the software engineers, the scientists, and the taxpayers of tomorrow. That's what flexibility and responsiveness is about. I agree with the National Competitiveness Council's assessment in this area: They believe that schools have the potential to achieve excellent outcomes on a system-wide basis given the incentives, supports and opportunities to do so; that we need curricula and assessment mechanisms that promote critical thinking, entrepreneurship and innovation. And that professional development for teachers should be frequent, continuing and progressive during a teacher's career and not confined to the introduction of new syllabuses. They point out too that outstanding teachers need to be recognised with merit based pay and promotion. I would just add that in higher education it might be worth considering a more incentivized financial structure for applicants for maths, engineering and technology students compared to others. I hope that all of these issues will be moved forward in the period ahead.

More immediately we cannot overlook the fact that the eyes of the world's capital markets are upon us: Neither those with whom we trade nor those from whom we borrow owes us a living. The yawning gap between what we earn and what we spend that has now opened up is not remotely sustainable. The capital markets have been telling us that in clear and unmistakable terms: The price signals have been unambiguous, and painful: The yield on Irish government bonds has risen steeply. The price of insuring our debt against default has risen steeply too. That is why there are actions that must be taken in coming weeks – purposefully and determinedly – to reassure investors that we are serious about getting our public finances back in good order as quickly as practically possible. Public and private borrowing has reached proportions that require actions that will be more painful than most people have yet come to grips with. But the reality is that in a world short of capital, if we don't narrow the gap between what we spend and what we raise in revenue – and narrow it meaningfully- the price of raising debt will get higher and the task of raising debt will get harder. In the long term, capital markets are not driven by sentiment. They are driven by fundamentals. Investors and prospective investors in Ireland are looking for action on a phased but credible basis - starting in coming weeks. There are many ways to slice the cake. I am not holding the knife. But what is clear is that spending must be cut back deeply and taxes must be increased prudently – not to levels that will encourage those who contribute most to the exchequer to "up sticks" - as they did in the 1980s - and flee the net - leaving us with less tax, instead of more. Of course there will be pressures on the Minister for Finance from some quarters to act imprudently on taxation. But to fail to learn the lessons of history on the exceptionally high elasticity of the tax yield from mobile assets such as capital and labour - would be a big mistake. We must stay focused on the incentives that attract capital for investment. We must stay focused on the incentives that attract skills for innovation. We must never succumb to the failed, excessive tax raising recipes of the past – recipes for putting our economy on a long term diet – starved of investment, starved of well paid jobs, starved of risk taking and wealth creation. It was the abandonment of the socialist policies of the 80s that gave everyone in this country the opportunity to remain here on this small island and make a decent living over the past 15 years. Let's stick with those policies that will offer hope to our children and grandchildren that they too will have the opportunities and incentives that we had here at home. That means protecting and encouraging the basic tax structure that encouraged risk taking and promoted the economic activity that produced the tax revenues to finance our public services and that paid our committed and hard working public servants. I don't underestimate the challenge or the difficulty for the Minister for Finance in getting the balance right.

But as we move forward we need to create more targets for public service management to reduce costs - not by cutting pay – but by finding ways to rationalise processes and to harness technology so that we can do more tasks with fewer resources. And I would like to see us move to a system that where challenging targets are set and are met, and where performance is monitored and sustainable savings are realised and lasting, then those in the public sector who have managed and contributed to that process should be bonused on the sustainable and sustained benefits that it delivers.

In conclusion, Ladies and Gentlemen, while the outlook for the global economy – and our economy - remains difficult and the next few years will be painful, there are good grounds for hope - provided we remain focused on the things that attract investment and create economic activity that is the only source of the tax revenues that we have. There is nothing sacrosanct about the Irish economic model. But from time to time it needs to be reviewed, renewed and updated.

In a fast moving world we can never afford to rest on our laurels. And we won't. We are a nation that can get up off its back and restore the economic success that currently evades us.

Of course the task of restoring confidence has been made more difficult by the recent British media campaign against this country. There is nothing very new about this. These campaigns used to be designed to titillate readers of their tabloid press. But their wider press has now joined the fray. We all know that at some vulnerable moments in our history, our immediate neighbours tried to take us on. But they should remember this: They never managed to take us out. Let's make sure that they never will.

Thank you very much indeed.




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