David McWilliams: Ireland’s choice is Ryanair-style growth or dull accountancy

It’s been a long time coming. At last an Irish sovereign wealth fund is on the horizon. This column has long argued that we should set aside the extra taxes garnered from the multinationals, revenue which far exceeds the country’s day-to-day requirements.

It’s good to see action but, in typical Irish State fashion, the reason it has acted now reveals a lack of imagination when it comes to the commercial possibilities promised by this extra cash. It is also worth remembering that as recently as 2022 the Department of Finance was talking about a fall in corporate tax revenue in the years ahead

Before we look at what ought to be done with the sovereign wealth fund, let’s recap on how we got here and how much money we are talking about.

[ David McWilliams: Ireland is awash with money. Sitting on it would be a monumental waste ]

Ireland is awash with money partly because a chunk of our economy trades at high velocity with the rest of the world, generating enormous profits, based on the extreme productivity of about 10 per cent of the workforce. These employees account for considerable extra corporation tax revenue. Is it a “windfall” as commonly described? Not really. It is more the product of a unique economic structure which most countries crave. Who doesn’t want extra revenue?

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Might the amounts fluctuate? Well, yes, the tax take might ebb and flow but, as this column has argued over the years, the chances of it flowing are at least as good as the chances of it ebbing.

[ David McWilliams: Here’s what we could do with extra corporation tax ]

My own sense is that the world is now moving into a global period of what is termed “friend-shoring”, which is offshoring to friendly nations. With the US on a collision course with China and Chinese allies, American corporate policy has shifted markedly. As well as bringing American jobs back home, an added dimension of the new global reality involves American companies being encouraged to invest in countries that are friendly to America.

This means pivoting away from China as part of the US global supply chain in favour of countries already embedded in the US supply chains who are considered friends. These places will benefit most. And who might they be? You’ve guessed it, countries such as Ireland. This is why Joe Biden’s visit matters because the US state department matters.

My hunch is that excessive tax revenue is as likely to increase as decrease, implying that the term “windfall” is not an accurate description as it implies something that is a “one off”.

The Department of Finance has reacted to the revenue with its usual “prudence first” – and more accurately “prudence only” – approach to money. Prudence is an affliction that affects many economists who seem to believe that saving money is the way to prosperity. In fact the opposite is the case. Investing, backing yourself, taking risks, introducing new products, innovating and creating fresh demand where demand never existed is the way to prosperity.

Innovation drives economic growth and economic growth enables countries to achieve social objectives. Without growth countries stagnate financially and politics atrophies. If you want to see what happens without growth, look no further than the UK since 2008 and all the problems it has stored up for itself behind the jewelled carriages.

Economies need to grow and growth comes from innovation, which is animated by this magical substance called money. Consider Ryanair, which this week put in the biggest ever order for planes in aviation history. That’s how you grow – by using revenues to create new products, sparking new demand where no demand previously existed. Had Ryanair adopted a prudence-only approach to revenue down the years, squirrelling profits away for a rainy day – or, worse, giving them all to shareholders to hoard – would it be the biggest airline in the world? No way!

Money is the energy that ignites. Without it, nothing can be achieved, and this is why the default position of “prudence-only” is the victory of dull accountancy over vibrant economics.

Paying down debt with new money is a ludicrous idea in a monetary union where interest rates are determined centrally. Ireland, with a rising population, is in a monetary union with the euro zone, which has a falling population. As the young typically spend more than the old we will, for the foreseeable future, be getting an interest rate subsidy – lower rates than would otherwise be the case – within the euro zone.

In such an environment, paying back old debt with new money is the triumph of easy slogans over hard thinking. The growth rate will look after the debt ratio.

How do we get growth, particularly in the part of the economy that is not aligned to America and the globe? One thing is clear: countries do not grow by setting aside money for pensions. We are all getting old but rewarding people for ageing, which is what a pension paid by someone else is, will not deliver growth. It will deliver yet more savings because older people save, taking yet more money – the energy of commerce – out of the system.

Prosperity comes from new companies creating better products, disrupting what went before, coaxing new customers to buy or switch. This is the relentless process of economic activity that will also deliver the income and taxes to pay the pensions of older workers.

Ideas, not bridges, roads or infrastructure, generate growth. Ideas move the economy and, oddly enough, at their core ideas are free. We build infrastructure to make life easier and more pleasant but not to generate prosperity.

Prosperity comes from commerce and the urge to venture commercially comes from within ourselves. As a result, the society that welcomes entrepreneurs and bequeaths dignity on their efforts, rather than scorn, is the society that wins.

All big businesses start as little businesses, and a start-up culture with proper financing is the foundation of a prosperous society. This is where the sovereign fund comes in.

Why not use the money to create a start-up fund for young people rather than a pension fund for old people? The young are the very section of society suffering from high rents, low incomes, low savings, precarious work and a sense that the fruits of the growth have gone to the older generation. Imagine ring-fencing some of the sovereign fund to provide collateral that banks could accept for start-up projects, which would de-risk the young person’s start-up project.

We could pledge each citizen’s stake in the fund as collateral for loans extended by the banks to finance start-ups. This way the financiers’ risks are minimised and the young entrepreneurs’ chances are maximised. This would change the entire orientation of the country, moving Ireland from a top-down to a start-up nation.

Now that would be money well spent.