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  17.07.04 AGENDA This transcript is copyright to Front Page Ltd but may be used provided acknowledgement is given to Agenda and TVOne. I/V: JOHN BRUTON SIMON Mr Bruton why was radical change needed, what sort of state was Ireland in? MR BRUTON Well Ireland in the 1980s had very very high unemployment, about 16 to 18%, we had one of the highest debt levels, government debt levels to GDP in the European Union, and we had had over the previous 100 years the haemorrhage of large scale emigration for example in the 50s almost 400 thousand people emigrated out of Ireland, so against that background there was a sense that something had to be done. Now we had put some of the ingredients for our success in place previously but once we got the debt problem under control there was a sort of an accelerator in the economic growth in Ireland during the 1990s and that was accompanied then by this tax policy which is designed to offer businesses who invest in Ireland a guarantee that their tax rate will not change over a 15 year prospective, and the rate we now apply is 12½% of tax on corporate profits which is very attractive. SIMON Let's talk about that a little further, how crucial is a low corporate tax rate to achieve growth in your mind? MR BRUTON Well it wouldn't achieve very much if you didn't for example have the available workforce that was well trained, if you didn't speak English, if you didn't have access to the biggest market in the world which we do through the European Union, but combined with those things having a low consistent tax rate creates a sort of certainty for a business which is very helpful. SIMON You have bipartisan support for many of these policies, how necessary is that? MR BRUTON Well I think if for example you were to offer a foreign investor the prospective that corporate taxes are not going to be higher than 12% over the next 15 years you must do so on the understanding that there will be several changes of government within that 15 year period. Now we have pursuing a policy right back to the 50s in fact of having low tax in favour of overseas investment in Ireland, 12½% is just the latest manifestation of that, but that while it was initially introduced as a crisis measure in 1956 in response to a balance of payments crisis it gradually became accepted as the way that Ireland would go to attract foreign investment, and the attraction of foreign investment and the tax measures necessary to make it happen never became an issue of public controversy between the Fianna Fail Party and the Fine Gael Party who are the two main parties. SIMON So politically how do you achieve that consensus then? MR BRUTON Well we achieved it in a rather bloody way by having a civil war in the 1920s which has brought about entirely different things which had nothing to do with economics, so Irish politicians never became ideological about economics because they had plenty of other things to argue about, vis a vis relationships with Britain and all that sort of stuff, so we were able to sort of deidiologise politics as far as economics was concerned, and therefore you can have changes of government between the two main formations without that aspect of policy being changed. Now person taxation has been a politically controversial issue, indirect taxation had been politically controversial, but business taxation has not been a politically controversial question. SIMON You've also adopted another controversial area particularly vis a vis New Zealand, a strategy of picking winners along the way, selecting industries to receive tax breaks and so forth, why that approach over a level playing field? MR BRUTON Well actually we haven't really been that selective what we've done is we've offered all manufacturing, all business at different periods a low rate of tax. We have negotiated grant packages with individual industries that wanted to come into create employment and we put them through a viability test. We also went looking in the United States through the offices of our Industry and Development Authority in the United States for the firms in the United States in the 70s 80s and 90s who were running into capacity constraints and who needed to expand and we said well why not have the expansion in Ireland where you can avail of this better environment and have a lot of very well trained young people to be able to work for you at a low tax rate. So by working with the firms that we we're expanding we sort of willy nilly drifted into the sectors which happened to be the expanding sectors of information technology, pharmaceutical and financial services. It wasn't that you know at some stage in 1970 somebody heard and sat down and said aha I know it's going to be information technology pharmaceuticals and financial services that are going to be the sectors of the future, nobody was ever that far seeing, but by working with the firms that needed to expand we found ourselves actually identifying by osmosis the sectors that were to be the great growth. SIMON You've taken somewhat of an interventionist approach, do you believe that that is better in these circumstances in order to achieve radical change? MR BRUTON It's only interventionist in the sense that we are prepared to offer you know some grants not enormous grants and a low tax policy for all businesses that comply with the relevant criteria. It's not interventionist in the sense that we're picking firm A rather than firm B or favouring you know one micro part of a sector rather than another part of the sector, these are all matters that are left to business decision. The government just has a general policy of favouring foreign investment in Ireland and it is fair to say that the Celtic Tiger has grown because foreign investment has brought new technology into a country that had a very adaptable young and available workforce and it was that combination of imported technology through foreign investment and a well trained workforce that created this surge in growth, in other words demographic factors as well because we had an awful lot of children in Ireland in the 1980s who were a cost, but when those children grew up in the 1990s to be young graduates in engineering and so forth they suddenly became a huge benefit for the economy, so the demographics worked in our favour as well. SIMON How crucial is that foreign investment and particularly what difference does the type of foreign investment make, is it important that it goes to start up capital as opposed to purchasing existing assets? MR BRUTON Well we have not been willing to offer any grant assistance to people purchasing existing assets, the assistance is only available to greenfield investment, that is in terms of grant assistance, but of course as far as our tax policy is concerned existing assets can be used to avail of the various tax reliefs that are there if the firm wishes to avail of them, but we haven't been encouraging foreign investment in the form of acquisition, it has been an encouragement to foreign investment in the greenfield shape. SIMON Are profits just repatriated out of the country and does that distort the GDP picture? MR BRUTON Very much so yes, if you take the example, Ireland's GDP per head is 120% of the European Union average, but our GNP which excludes repatriated profits is only about 100% of the European Union average, so people looking at the Irish economy from abroad so oh my goodness it's absolutely going phenomenally well, because they're looking at GDP, the more accurate figure to look at is GNP, but even on GNP we've moved from being when we joined the European Union 60% of the European Union average now being up with the average and maybe slightly better, so we've done very well from our foreign investment, it may be a little exaggerated in the GDP figures but it's still a good story. SIMON It seems that at the same time you've had this economic success that you've also had an Irish cultural revolution, do those two things go hand in hand? MR BRUTON I think they do, I think one of the big ingredients in our success has been attracting young people back from abroad, young Irish people and indeed people with talent from other countries to come and work in Ireland, and I think if we didn't have a culturally interesting place to live we wouldn't have got those people back, and now of course our economic success and our demographic pressures in that you know age group, 25 to 40 has also created some problems. We have you know a housing shortage and reasonably high house prices, we have some infrastructure deficiencies as well, but it's good to have those problems because at least we have the economic growth with which we can pay to solve them. SIMON You targeted that demographic bubble specifically didn't you though with new education policy. MR BRUTON Well we were late comer to a strong policy on education, bearing in mind that New Zealand introduced free second level education sometime early in the 20th century, we didn't introduce free second level education until 1966, subsequently in the 70s we did invest then in technological education at third level. Now that combination of the free education in the 60s with technological education in the 70s and 80s did give us that dramatic increase in the training level of our workforce. The older Irish workforce, the people from 55 upwards are relatively under educated, the younger Irish workforce comparative to the competition is very much better educated than the average in Europe and in the world generally. SIMON What does it actually mean to be Irish? I mean you're you've got four million Irish at home almost and then 70 million around the world, what does it mean to be Irish at this stage? MR BRUTON Well I suppose it's an attitude of mind, sort of an openness, an unwillingness to be too rigid about how you solve problems and willingness to try you know the back door as well as the front door to get into a house, willingness to sort of look at things in a different light. Our relaxed attitude to dealing with people, a lack of formality, all of these things are you know Irish characteristics which have made us as well attractive as a place to set up business or to go to live. SIMON What do you think are the main problems now that Ireland faces looking forward? MR BRUTON Well I think our big problems could be summed up by first of all we have these infrastructure problems that I referred to, secondly we are very dependent on the US economy, if there was to be a huge retrenchment in US investment overseas that would hit Ireland disproportionately hard. We are vulnerable as well to the fact that one of our big markets still is Britain and they have a different currency to ours, we are in the Euro they're not and if sterling started to fall in value or relative to the Euro dramatically that would affect our competitiveness. So there are those vulnerabilities, it would be great for us if Britain were to join the Euro that would remove all of the weak points that we have but I'm not optimistic on that score. SIMON You're no doubt aware of course that New Zealand has some strong parallels a former agricultural economy, four million odd people, can New Zealand emulate Iris success, what lessons can we take from your success? MR BRUTON I think you can, I think you should look at having a bipartisan approach to foreign investment and to the taxation regime that you put in place to attract it, I think bipartisanship between the two main parties here would be essential for that to work. I think also you should look very much at financial services, being an English speaking country like Ireland that's a big advantage for financial services, and we've been very successful in that area, you're in a different time zone you could possibly be equally successful, and those are two things I'd particularly recommend that you have a look at. SIMON Do you think we should restore free education, free tertiary education? MR BRUTON I'm in two minds about that I think - we have free tertiary education in Ireland which was introduced when I was Taoiseach actually, it has meant that everybody can go to college but is it made too easy for people to go to college, and the funding of university is too dependent on government as a result of our having free tertiary education, these are questions that some people would ask. It wouldn't be the first reform I'd be urging on you, I think there are others, although I do recognise that if you have very high fees and people have very high student loans and you don't have very good paying jobs for graduates that may encourage people to have to work overseas to pay off their loans and that may represent a brain drain as far as New Zealand is concerned, so that's something you need to look at. SIMON You said it wouldn't be the first reform what would be the first reform you'd made? MR BRUTON Well I'm being impudent now of course in suggesting anything to a country that has been such a success as New Zealand has, this is a very successful country, successful a lot sooner let it be said than Ireland was successful, but looking at Ireland and trying to find something that would be particularly useful to New Zealand I would say go for foreign investment, don't think that you can produce all the technology on your own at home in a country of only four million people, recognise that one of the ways of upgrading your economy is to buy in readymade technology in the form of foreign investment and put in place a policy that will be attractive for foreign investment on the greenfield basis in New Zealand, that would be my advice. SIMON Former Irish Prime Minister John Bruton thank you very very much for your time today.
AGENDA SIMON Twenty years ago on July 17th New Zealand faced economic crisis, outgoing Prime Minister Sir Robert Muldoon had refused to devalue the dollar against Treasury and Reserve Bank advice. Faced with party rebellion Sir Robert relented. Incoming Labour Finance Minister Roger Douglas devalued by 20% and removed Sir Robert's interest rate controls, he thus paved the way for what we now call Rogernomics, the deregulation of the economy with emphasis on fiscal and monetary reforms and Sir Roger is with me now. Do you agree with John Bruton that we need to do more to chase foreign investment, how important is it for growth here? SIR ROGER Well I think foreign investment is important but we have a very liberal foreign investment policy. I think what he was taking about a lot more was creating the climate where individual overseas companies wish to come here and invest. SIMON Why then have we failed to match Ireland's success, why haven't we achieved the Kiwi thing? SIR ROGER Oh I think if you look at the last 10, 15 years we have had considerable foreign investment. I think he made the point that Ireland is fortunate in being part of a global network of over 200 million people, they're four million, they're very attractive, they've made it attractive, they've created that type of climate where investment is likely to go to Ireland, they've got a good labour force which did have some spare capacity, probably running down, but secondly they created a tax rate which would encourage people to go to Ireland as compared to go to France or Italy or elsewhere and I think the important point he made to us this morning was you create the right climate and the investment will follow. SIMON How do you create that environment what are the key ingredients to get the foreign investors here is it simply tax? SIR ROGER Oh I think low tax, he laid them out really, low tax, a highly educated workforce, you're not going to get people here to invest unless the workforce is educated and able to do the job. We do pretty well there but there's actually a lot more we could do in that area. SIMON How much of a disadvantage are we at not having 300 million people on our doorstep in a European market and also the US connection? SIR ROGER That's a huge disadvantage, I mean they are fortunate in that they sat within that community of two or three hundred million and they have been a net recipient of money from the European community, I mean they pay less into the budget than they get out. Those things are probably going to change, but I don't think it's going to stop Ireland moving ahead, they've created a different climate, I mean I went there in the late 80s, I was actually looking at capital gains tax, they'd done a lot of work on that, and you know Ireland today 15 years later is a much different place than it was in 1988 when I went to look at that. SIMON At the end of the day is the foreign investment really dependent simply on an appealing tax regime I mean is that the single key ingredient, is that the silver bullet? SIR ROGER Oh not it's not the only ingredient, it's helpful, because what people are looking at is can they make a return, and for people who come into New Zealand, we're only a small country, is it justified coming here just to make for the New Zealand market, many times the answer is no. So they want to come here they've gotta be able to manufacture or produce the goods they are successfully and be in a position to export. SIMON They have a low corporate tax and quite a simple two tier personal tax system, should we be emulating that, what is your recipe now for tax success? SIR ROGER Look I've always been in favour of low tax, I mean I think everyone knows that, I mean we did announce a 23 cent flat rate of tax for both corporate and individuals at the end of 1987. I proposed earlier that year that we actually went to 16 and two thirds and we could have in 1987 gone to a 16 and two thirds corporate and personal income tax, it would have meant that we'd have to have had 16 and two thirds GST as well, but I think had we done that New Zealand would have done substantially better than it possibly has over the last 15 years but then that's not to say we haven't don't quite well. I think though the whole point he makes about education is enormously important and I think if you look at New Zealand now the areas that require attention are education, health, they're the welfare areas and I think also we should be looking at the issue of retirement as well. SIMON Should we bring back free tertiary education? SIR ROGER No I don't think that's necessary. I think what we should be doing, and I think it really starts at the very young age we should be ensuring that every child gets a very successful early start to education and you know you have to say that this 40% of young children out there who aren't getting adequately at the preschool level and they start school at a disadvantage and you cannot have a knowledge economy when you have one child in three leaving school basically unable to read in an adequate manner, that's just a recipe for disaster. SIMON Surveys of foreign businesses suggest that policy concerns may have driven the 90s slow down in foreign investments, can we ever achieve in our climate in our political environment, the consensus needed to give those investors the certainty they require. SIR ROGER I think look, I think consensus in the policy area really comes after you've introduced the policy. If the policy is successful you do actually have a consensus. SIMON So are we politically mature enough to achieve that? SIR ROGER I think we are, I think if you look at the 80s, well I mean what we did between 84 and say 88, 89, all those changes then were controversial, none of them are controversial today, no one is saying put subsidies back to the farmers, no one is saying let's reimpose import licenses, nobody is saying put tariffs up, nobody is saying put taxes up, no one is saying go back to a bloated public service that employs 88 thousand people instead of the 40 thousand it does today. These things were successful. Where we weren't successful frankly and haven't been in the 90s is the reform of social policy, education, health and welfare itself. SIMON How has MMP changed the nature of coalition building? SIR ROGER Oh I think it's probably made it much more difficult. Fortunately is wasn't there when that was in, mind you you always had those issues, well I mean you had them within the party, you had the debate within the caucus, now it's much more visual, probably a lot more fun for reporters these days, a lot of it went closed doors. SIMON Do you think you got it right back in the 80s? With hindsight what would you have changed? SIR ROGER Oh I wouldn't have changed anything we did, but certainly we didn't finish the job and I've always said that, that there's unfinished business, I wrote a book about it, and that unfinished business is that whole area of education and health and welfare. SIMON Your fourth Labour government had a 20th anniversary reunion this week that everyone's been covering, and you also caught up again with David Lange, do you either of you have any regrets? SIR ROGER Oh not really, well I mean I think both of us take pride in the fact that we made some significant changes and that New Zealand's better for it. I think both of us would have liked to have done more in those social policy areas, on the other hand we had a different approach and I think the former Irish Prime Minister had it, you know in New Zealand sometimes we get locked into the means of doing things rather than the end goal that we're really looking for and that is very very true in our social policy area. You know we're so locked into the means in terms of providing education, it has to be through a state system, and if I can tell a story. Look, I represented Otara, the poorest area in New Zealand and if I went along in the 1980s to buy a hamburger at McDonald's it cost me a dollar fifty, the service was good and the quality was good, it was exactly the same price, the same service and the same quality as if I went to buy a hamburger in Remuera. Now if I looked at the educational establishment Remuera's quality was much better than those in Otara. When I looked at health there was no one from Remuera on the waiting list dying but a lot of my constituents were. The difference? Price and competition and until we get price and competition into the education and health system we will not solve the problem. Look I don't care who you are you cannot do it in an administrative way because administrators do not have the information that prices give you, and they don't have the incentive necessarily to get it right, they're good people. SIMON You've just returned from meeting Israel Finance Minister and former PM Benjamin Netanyahu. How does Israel see us what relevance do we have to Israel? SIR ROGER Well he's trying to do some reform in Israel in the economy, he's trying to lower taxes and he's certainly trying to reform welfare and I think he's running into some of the same sort of problems that reformers do right round the world and I think he really wanted someone to go and tell the story of what happened in their country and probably he really wanted to look rather milder than some people in Israel see him as. You know they're making a real effort, they've been heavily into welfare and I think it's hurt them. SIMON Any word on the spies? Netanyahu, what did he have to say? SIR ROGER He never said anything, but I was actually invited over there by one of their think tanks and that think tank was heavily into foreign policy and the person who met me at the airport and was the head of that think tank he did ask me about it, but obviously I didn't know anymore than anyone else, it was really what I read in the newspaper, but they were conscious of it, that was clearly it was sensitive for them. SIMON Sir Roger Douglas thank you very much for you time this morning on a day that marks the 20th anniversary of a landmark in New Zealand politics. Copyright to Front Page Ltd but may be used PROVIDED attribution is made to TVOne and Agenda |
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