A Conversation with John Bruton

Conversation, Economy, Frontier Centre

Frontier Centre: Can you describe the dimensions of the economic turn-around in Ireland? How much better off are the Irish people now than they were 15 years ago?

John Bruton: During the 1980’s there were one or two years in which we actually had zero growth. In recent years in the 1990’s we have had 8 or 9% growth. So this is a massive turn-around. The zero growth in the 1980’s was due to the problem with debt that had been accumulated irresponsibly in the 1970’s on which we had to pay an exceptionally high interest rate in the 80’s. In the late 1980’s interest rates fell, government cut its spending and social partnership was introduced between various trade unions and government with pay restraint accompanied by increased productivity. And that, combined with the effect of earlier decisions to invest in education and have an exceptionally low tax rate on business. All those factors combined to give us dramatic growth in the 1990’s.

FC: If we are comparing per capita incomes in Ireland – what has been the effect of this pro-growth policy?

JB: Well, the effect has been, for example, that Ireland has now overtaken Britain in income per head where, maybe 15 years ago the Irish income per head would have been only perhaps 60% of the British. We have also overtaken Canada in income per head.

FC: What measures taken by the government were the most important in creating the Celtic Tiger.

JB: In long term measures probably the most important were: exempting all export companies from taxation from 1956 on, making secondary education tuition-free from 1966 on, and establishing an independent industrial development authority to attract overseas investment whose decisions were not the subject of political patronage. Those are the long-term decisions – the shorter-term decisions were: the curbing of government spending through the 1980’s. When I was Minister of Finance, for example, I had made a rule that for every three civil service vacancies only one of them could be filled which tightened down the numbers substantially. Also, the partnership with the trade unions to agree on a strategy and to have pay restraint contributed greatly, when accompanied by a lot of overseas investment, in making our economy grow very fast. But the overseas investment came to Ireland, in part because we have a guaranteed low tax rate on business, which does not change regardless of whether the government changes.

FC: You talk about predictability in taxation – why is this important?

JB: In 1956 exports were exempted from tax. The government that introduced the exemption was put out of office the following year but the new government didn’t replace that policy – they kept it. And then when they, in turn, were put out of office in 1973 the new government, which I was involved with, didn’t change that policy either. It is now 12-½% on all corporations. This replaced the 10% tax on manufacturing because the EU decreed we couldn’t discriminate between exports and other manufacturing. Where each one of those moves was made by a particular government, it was invariably supported by it successor even though its successor might have been of a different position and color. And the trade union movement supported these policies of low corporate taxation. They saw that if a low profits tax brought more investment into Ireland it would mean more employment for more potential trade union members. Even though some of the overseas companies that came into Ireland didn’t allow trade unions many of the things that they bought came from other Irish companies in which there were trade unions. So the trade union movement gained increased membership, dues and influence from the increased employment that flowed from the low tax policies. So it was a win-win situation for both trade unions and the employers, and for Ireland.

FC: Ireland has traditionally exported large numbers of people to America. In the last seven years thousands of Irish men and women who had left the country in search of jobs have returned and your government is aggressively recruiting more. It must be a source of satisfaction despite its bad effects. How serious is the labour shortage?

JB: The labour shortage is a very recent phenomenon. We have been able to avoid labour shortage despite very rapid growth probably from 1990 right up to 1998. We were able to bring back Irish immigrants from abroad but, since about 1998 – 1999, we are running into labour shortage because the pool of Irish potential immigrants who might return is depleted. Another problem is that house prices have gone up in Ireland, thereby making it harder for people coming in to buy a house.

FC: A key factor in the Irish turnaround has been the high quality of its education system. What elements in that system have enabled it to be so successful?

JB: My belief, and this is not a belief that everybody in Ireland would agree with – is that the most important factor in Ireland’s educational success has been the Leaving Certificate Examination which students take at the end of Second Level at the age of 17. That exam is a very broadly based exam – it is very competitive – it is based mainly on written work so it can’t be sort of subjective, it is an objective exam. It ensures that students work very hard because that exam will determine their job prospects or what course they will get into in college because, while there are courses for anyone who wants to go to college, the good courses are only obtainable by those who have done well in the Leaving Certificate Exam. That exam has, I think, made young people at secondary school work very hard. It also has created an incentive for our teachers to work very hard because, while the examination results are not published on a school by school basis – we don’t have a league table of good schools, people do informally know which teachers and which schools are doing better than others in the Leaving Certificates and informally that pressure does work to push standards upwards.

FC: Have the teacher unions opposed this exam?

JB: Well this, we call it the Leaving Certificate Exam, is an entrance exam for university and this has been there for so long now that nobody has ever opposed it – it has been in place since the state was founded but it’s real merits are only now becoming obvious and it has become the key to the entrance to university and that is something people want to have.

FC: In a sense it is a type of performance measurement.

JB: It is in fact a performance measurement but it is not portrayed as such. It has the same effect as a performance measurement. The big thing that I would stress about it is that it is universal. It is the same exam for every student in every school whether they have gone to a private school or a non-fee paying school or a school in a poor area or a school in a rich area – the examination is the same for all so while, for instance, in the United States or in Britain, for example, the school you went to could make a difference — in Ireland it is how well you did in the examines that is much more influential than which school you went to.

FC: How can Ireland afford free universities and no property tax?

JB: Since 1997 we have had no tuition fees in universities – students do have to pay their own maintenance costs, of course. And we have no property tax. The way we are able to fund our universities is mainly through purchase tax – our value- added tax is quite high by international standards.

FC: How much?

JB: Well, the highest rate is around 20% on a wide range of items but it doesn’t apply to food, for instance, and a lower rate is applied to clothing. We also have, comparatively speaking, a reasonably high income tax. So they make up the difference.

FC: Is it easier to cut government spending or increase growth in the economy?

JB: In my experience it is extremely difficult to cut government spending. And if you want to reduce your public spending to match income rates, the easiest way to do it is to increase your national income by creating incentives for investment.

FC: You have seen the experience in Canada with regional subsidies – particularly in the Maritimes. Do you agree with the approach to regional development in Canada?

JB: I believe that it is normal for rich provinces in any federation to help poor provinces – I think the federation would mean nothing if that didn’t happen. But the form of the assistance is very important. If the form of assistance is one that encourages people to make an extra effort themselves — that is good. But if the form of the assistance, on the other hand, is something like Unemployment Insurance where the same rate of Unemployment Insurance is paid right across Canada – that can have the effect, in poorer provinces, of making it impossible to set up a business because no employer trying to set up a business in the difficult conditions of the poorer province will be able to pay more than welfare. He is competing with welfare and if welfare is too high he won’t be able to compete for labour with the welfare system. And that seems to be a part of what has happened in the Maritimes. Your Unemployment Insurance has actually ensured unemployment.

FC: Some of the observers of Ireland point to the subsidies from the EU that went to Ireland and credit much of the so-called Celtic Tiger economy to those subsidies. Do you agree with that?

JB: It has been a big help but even at the maximum EU subsidies annually were coming to no more than about 3% of GDP whereas in Newfoundland federal subsidies were coming to 25% of GDP and when we were getting 3 ½ % EU subsidies we were still growing at 9% so it wasn’t the main reason for our growth. However, having said that it has been very helpful in the area of training – particularly technical training. It has been helpful in the development of roads. Probably it has been helpful so far as agriculture is concerned because the EU’s common agricultural policy where it has given a great deal of money to rural areas it has maintained income levels in rural areas quite generously it has slowed down the natural rate of adjustment of Irish agriculture so that, comparatively speaking, thanks to the EU Irish agriculture may be better off than it was since joining the EU but structurally it is much less efficient.

FC: Ireland has committed itself to a common European currency and to further integration into the EU. Critics have warned that oppressive bureaucracies in Brussels can be even more harmful than ones in Dublin. Do you support the move into the EU and why?

JB: The so-called bureaucracy in the European Commission is a very small bureaucracy. I would imagine that London city council has more people employed than the European Commission yet we don’t hear as many complaints about that bureaucracy from the British critics of EU as we do of the European Commission. The European Commission is a small bureaucracy doing a very big job well.

FC: You mentioned yesterday that Ireland had effectively become a part of the American economy.

JB: Ireland is a part of the American economy in so far as so much of our business is American companies – investing in Ireland is a gateway to Europe — yet, politically, we are part of the European economy and but economically-wise we are part of the American economy. So there is a tension in Ireland. At the moment that tension seems to be working to our advantage but there is always the possibility that things could work otherwise.