Fran O'Sullivan: Time to look again at Irish revolution

With Ireland's export receipts from Viagra sales rocketing at twice that of New Zealand's dairy sales, it's time to ask yet again why this country does not have a serious look at the "Irish Model".

Irish media mogul Sir Anthony O'Reilly did just that last Friday at a luncheon on the eve of the final Lions test. Not that O'Reilly mentioned the V word. This was a rugby event after all.

But his fundamental message that New Zealand should use taxation ("or rather the lack of it") to create future employment cut through the pre-match bonhomie.

Ireland has been transformed from a basketcase to one of Europe's pre-eminent economies in less than a generation on the back of an aggressive foreign direct-investment programme.

O'Reilly notes the Irish courted major American multinationals and seduced them to establish operations in the high-tech (software), financing and pharmaceutical sector with a 10 per cent tax rate.

These days all companies - both domestic and foreign-owned - pay a mere 12.5 per cent.

This is the lowest tax rate in Europe - and remains well below the company tax rates of Asian stars such as Hong Kong and Singapore.

The Irish economy is in fine fettle and on target to be second only to the United States - in GDP income per capita terms - by 2020.

O'Reilly's contention is that New Zealand could also achieve a much-needed transformation if it mirrored Ireland and focused on high technology and financial services, which he believes are "largely location-indifferent".

The former Lions wing is passionate about this country and its "singular" people.

But being renowned for legends such as Peter Snell, Murray Halberg and Sir Peter Blake will not ensure future prosperity.

"New Zealand has to figure out how to use its current limited tax flexibility to start making an exciting new future for your country ... Inward-bound investment will create unprecedented prosperity in this country as it has in Ireland and remedy greatly the location to the rest of Asia."

Unfortunately the boldness the All Blacks displayed at Eden Park last Saturday is not replicated - these days - in the economic arena. Finance Minister Michael Cullen's paltry tax snips are a case in point.

Our recent appalling export performance is another. New Zealand has been studying the Irish story for an awfully long time.

Fully seven years ago Treasury economist Sarah Box published The Irish Economy: Lessons for New Zealand?

But it received scant play as we were still in the midst of the "hands-off" economic regime sparked by Rogernomics and Ruthanasia.

Box noted obvious similarities: size, population and agriculture. But even then Ireland was outstripping New Zealand as it transformed itself through an aggressive FDI programme into a modern hi-tech economy. In just 10 years, Ireland's GDP per capita rose from 65 per cent to 108 per cent of New Zealand's while we still argued the merits of privatisation.

The lesson for New Zealand - which did not sport the same geographical advantages as Ireland - was to be "twice as smart as other countries to achieve the same gains" said Box.

Her message fell on deaf ears.

Fast-forward to 2001 and a bunch of passionate New Zealanders who were determined to arrest a long-term economic slide.

The Irish Model - along with the economic lessons from other small countries such as Norway - moved centre stage at the Catching the Knowledge Wave conference.

Sean Dorgan - chief executive of Ireland's Industrial Development Agency - was a keynote speaker and spent considerable private time promoting an accord between Government, business and labour to move New Zealand forward.

The conference was co-chaired by Prime Minister Helen Clark and former University of Auckland vice-chancellor John Hood. There were recommendations by the armful. But four years on it is fair to say the effects have been incremental rather than transformative. Policies have been introduced to attract talent and promote research and development.

But the Government appears ideologically opposed to really going after foreign investment through a targeted tax break.

Irish-born economist Colin Lynch - whose eight-page monograph "Can we learn from Ireland's experience - An Irishman's perspective" was recently published on the Business Roundtable's website - contends that a low corporate tax rate for foreign investors is just one factor in the Irish success story.

He points to grants Ireland got from the European Union structural funds, the hugely tribal Irish diaspora, its well-educated workforce and access to the European market as pivotal factors behind its growth.

O'Reilly concurs that such factors are relevant. But he also makes the point that investors "want to keep the profits they make".

"Of course, no one is going to say publicly it is tax - there is no point in attracting attention in that way.

"You say it is due to the skills of the workforce - improving infrastructure - great education system - they speak English - but actually basically it is tax ."

Adopting the Irish tax model - or ideally going one better - is not just a matter of taking an axe to company tax rates.

The Irish Government projects it will rake in some $72.3 billion tax revenue in 2005/06 - of which $11.46 billion (15 per cent) will come from corporation tax. New Zealand's tax take for the same year is projected at $48 billion - $7.8 billion (16 per cent) from company tax.

Despite the differing tax rates - Ireland's 12.5 per cent to New Zealand's 33 per cent - the two exchequers each expect to get some 15-17 per cent of tax revenues from companies - which proves the dynamic income-producing effects of tax cuts.

But Ireland also boosts its coffers with other taxes which might prove politically difficult here. For instance, its consumption tax (VAT) of up to 21 per cent is projected to net some $22.25 billion this year. New Zealand's GST - at 12.5 per cent - is expected to bring in $10.5 billion. Ireland also has capital gains taxes and stamp duties.

But politicians such as National's finance spokesman John Key, NZ First Leader Winston Peters and Progressive leader Jim Anderton are among some who are considering tax measures to boost New Zealand's overall export performance.

Key in particular believes we could target potential earners - such as the offshore finance industry - and back them with preferential tax rates to help to transform the economy.

Bringing the issue into even sharper focus is the fact that New Zealand is starting to look extremely uncompetitive as Asian countries like Singapore drop their rates to attract investment.

KPMG's recent survey of global corporate rates shows they are now averaging below 30 per cent.

Ireland was the runaway star of the 1990s among the industrial countries, posting 7 per cent annual GDP growth.

Deutsche Bank believes the Celtic Tiger still has plenty of bite. With a population growth rate nearly twice that of New Zealand it will be much bigger than us by 2020. It's not too late to arrest the trend.

* Disclosure: Sir Anthony O'Reilly is the single largest shareholder in Independent News & Media PLC of Dublin, which has a major stake in the Herald's owner, APN News & Media.