With the budget set for May 2, Finance Minister James Flaherty has now settled on his major tax and spending initiatives. Let’s hope he had his eye on Ireland as he made his way through the conflicting pressures. He certainly would have been aware of Ireland’s economic record. At the World Bank and International Monetary Fund meetings in Washington over the weekend, Mr. Flaherty had the formal responsibility of delivering economic statements on behalf of Canada, several Caribbean nations, and Ireland.
A few contrasts were obvious. The Canadian economy “remains solid,” said Mr. Flaherty, with growth this year up 2.9%. Ireland, he said, “continues to prosper” with real GDP growth of 4.7%. Canadian federal debt is down to 39% of GDP. Ireland’s debt is down to 28% of GDP.
The gap between Canada and Ireland could not have been more glaring. A little more exposition would have provided more indications of the economic forces at work and the role of low taxes and less government in delivering greater prosperity in Ireland while growth rates slowed in Canada.
Fortunately for Mr. Flaherty he didn’t have to deliver more news on Irish economic output. According to the latest IMF numbers, Ireland’s GDP per capita is now up over US$40,000, compared with $34,273 for Canada. As recently as 2000, Canada was still ahead.
More comparisons would have been even more revealing. Canadian corporate tax rates hover above 20%. The Irish corporate tax rate is 12.5%. In recent years, total government spending in Ireland has fallen to as low as 31% of GDP, while Canada remains at 40%.
The miracle story of the Celtic Tiger is now beyond legend. Therein lies the message Mr. Flaherty and the Harper government should be delivering as the Conservatives make their first economic policy moves.
The Irish Question is this: What economic policies created the conditions that propelled Ireland, recently a backwater economy in which the Irish were half as productive as Canadians, into the fourth-most-productive nation on Earth, behind only Luxembourg, Norway and the United States. Canada is seventh, according to the latest IMF report.
Four key elements play a role:
Size of government: In the mid-1980s, total government share of the Irish economy had soared to 55%. Dramatic moves were made to cut taxes and lower the government’s share of the economy.
Tax cuts: The 12.5% tax rate on corporate income became a major attraction for global corporations, especially American firms looking for a base of entry into Europe. Personal income tax rates were also stabilized, although the rate remains high at upper-income levels.
Free trade and markets: As part of Europe, Ireland benefits from open access to the continental economy. Ireland also opened its borders to immigration, a powerful force that drives growth and productivity. Employment grew by 4% in 2005. Mr. Flaherty noted much of the increase was accounted for by inward migration. Note to Canadians: Immigration does not destroy jobs.
No more central bank: It is rarely acknowledged that Ireland benefits from no longer having its own currency. No central bank plays around with Irish interest rates and monetary policy, trying to manipulate growth and currency values. Irish inflation, essentially pegged to euro-inflation, has been low and remains stable. The only recent problem has been rising oil prices, which have driven prices higher across Europe.
All the above have liberated the Irish economy. While Canada’s long-run growth potential has been sliding in recent decades — to the point where the Finance Minister considers 2.9% growth “solid” — Ireland’s growth potential is now thought to be about 5%.
These are the answers to the Irish Question. A recent OECD report on Ireland cited risks to the economy, but pressed the government to continue with economic reforms that would increase internal competition, bolster infrastructure development and maintain Ireland’s attractiveness to immigration. One risk is the rise of public sector wages.
But, overall, Ireland remains a model that contains economic lessons Canadians seldom hear. Economist James Gwartney, co-author with others of Economics: Private and Public Choice, has argued for years that the absolute size of government is a major factor that determines an economy’s productivity and growth rates. Research shows “a strong and persistent negative relationship between government expenditures and growth of GDP.”
In cases where governments have significantly reduced the size of government, the result has been Irish-style growth rates. That’s the message Mr. Flaherty will hopefully take to Canadians on May 2. Lower taxes and less government mean faster economic growth.
© National Post 2006