Micheál Martin TD, Leader of Fianna Fáil
Small Firms Association Annual Lunch
Mansion House, Friday 18th November 2016
Thank you for the kind invitation to speak at today’s event. I know that this lunch is a major highlight in the SFA’s year and it is a moment to both reflect on the year gone by and to look to the future.
In a short address like this the usual practice is to address one or two of the issues of the moment, particularly in the context of a recently announced Budget. I would like to take a different approach today because I believe that the last thing we need is to act as if we are facing business as usual. In fact quite the opposite is the reality not just for small and medium sized businesses but for our economy as a whole and our wider society.
To put it very directly, we are already in what is a defining moment for our country. It is probably the most important economic decision point for us in the 60 years since Seán Lemass’ first government began moving us towards an economic model which emphasised investment in people, growth through trade and participation in Europe.
We are faced with a number of major challenges which go to the very core of whether we will have an economy which can support the standards of living and state services which the Irish people quite rightly seek. What makes this situation more urgent is that the biggest threats are coming from outside of our country and our ability to react is limited.
Brexit is by far the most immediate threat, but its implications for us are long-term and profound. The very credible base-line scenario of a permanent loss of €12 billion from our national income implies that the hard-Brexit which appears inevitable will leave no corner of our country untouched. In fact, without a credible response, this means many hundreds of businesses closing and many thousands of jobs lost. It means significantly lower public revenues, lower investment in infrastructure and weaker public services.
And Brexit is not some future hypothetical, it is happening already.
On top of this comes a pessimistic global situation. Many countries are turning their backs on the sort of trade cooperation which smaller economies are particularly reliant upon. The European Union is beset by a lack of ambition just at the time that a new energy is needed to enhance growth. As for the impact of last week’s US Presidential election, it is a very brave person indeed who can predict what American policy will be next year let alone in four years’ time. And that is of course a core part of the problem given how uncertainty is always and everywhere the enemy of sustained economic growth.
Of course we have our own domestic issues, including still fragile public finances and an escalating series of pay demands.
If we take these threats together what we face today may be even bigger than the recession we have recently come through. This is not about a conventional economic shock but a direct challenge to our core economic system. We must be radical in our response or suffer the long-term damage.
A crucial part of this response must be to broaden our economic base, and central to this is to give a new emphasis to indigenous companies.
For many years Ireland has been incredibly successful in becoming a world-leading centre for international companies. Through strategic investments in education, training, research and infrastructure we have maintained and grown this success over the long-term. These companies make a great contribution to our country and we have to continue to work with them well into the future. I see no reason why our success in this sphere cannot continue and it should be a national priority.
However the reality is that indigenous Irish owned business, and especially smaller enterprise, has too often been the Cinderella sector of our economy. It has been addressed through targeted initiatives rather than promoted through a genuine national strategic priority.
As a society we have certainly not valued our small firms as we should even though half of all people at work in the private sector are employed by these firms. An announcement by one firm of 200 jobs for a town will win banner headlines and a civic reception – but 200 jobs created by a total of 20 firms will go unnoticed. This is in spite of the fact that a more diverse commercial base can provide greater long-term security and growth.
In the context of Brexit this sector is threatened more than any other. Over 40% of exports to the UK are from indigenous enterprises. And they are the ones already hurting.
It is a very striking fact that enterprise policy today is nearly identical to the policy in place a decade ago. In spite of a dramatic national recession and the deepest international recession in 70 years, we have the same strategic priorities and the same core policy approaches. Yes, there have been some improvements and some disimprovements, but the basic Irish economic strategy is the same.
This is not sustainable.
It is possible to go on for some time about the problems and challenges of today, but I believe in focusing on what can be done. First and foremost I have no doubt whatsoever that with the right strategic policies we can get through these challenges. The core strengths of our people remain and can be built upon. In the past we overcame the seemingly insurmountable problems of a lack of natural resources, a history of poverty and being a peripheral economy.
I believe that we can and we must develop a more balanced economy, with a world-leading multi-national sector and a world-leading indigenous sector.
The continued success of the German economy and its ability to generate a secure, long-term and high-value enterprise sector is something we should do more to understand. Germany is obviously too large a country to serve as our model, however many of its regional economies are very relevant for us.
The biggest difference with us is the emphasis which their government has put on supporting smaller and medium-sized enterprise. Heavy industry and major employers are crucial to their economy, but without the Mittelstand there is no German success story.
60% of German employment is in the SME sector. Firms with a turnover of under €2 million per annum are core to manufacturing exports. Of the 1500 German companies who are world-leaders in their markets, an incredible 1,350 are SMEs. Of these 70% are based in small cities or rural areas – helping to avoid the type of over-centration we have experienced.
The explanations for this success are quite diverse and have a direct relevance for us.
Family ownership and a long-term approach are actively supported. It is easy to transfer firms and the ‘build to sell’ mindset which can lead to bigger firms dominating is avoided. Everything is done to encourage re-investment and rewarding an approach which upskills workers and gives them security.
Firms target niche markets, avoiding commodity driven sectors and adopting world-class processes. This way they offer added-value which can survive many threats to competitiveness.
In the area of product development, R&D is actively supported with a range of funding and facilities available to all firms. 53% of the R&D spend is actually in the medium-tech market, protecting their competitive-edge.
And then they have an approach to banking which could hardly be more different to ours. The relationship between a German SME and its bank has been described as ‘close, confidential and long-term’. Help with cash-flow needs and investment capital is much, much easier to obtain. Of course this relationship can be too close, but the economic and social benefit of banks being committed to long-term success has been immense.
This German success story didn’t happen by chance. It happened because of an ongoing commitment by state and national governments to work closely with SMEs. Nearly 60 years ago a national institute for SME research was established. The experiences and needs of SMEs are constantly monitored and it is a sector which gets both the acknowledgment and the priority it deserves here.
Given the barriers which Irish SMEs have overcome, particularly in relation to a distorted banking system, I have no doubt whatsoever that with the right supports they can overcome the threats they face today and be a driver of future prosperity.
The first thing we need is a comprehensive and accountable national strategy. We have to move beyond the warm words and give a clear commitment to helping SMEs. This means not just the policies of one Department, but through all of government and the state sector as a whole. If we want to secure economic success then SMEs can’t be an afterthought, they have to be permanently on the agenda.
Part of the accountability of the strategy should be quarterly reports on key issues like credit availability, employment and exports in the sector.
The scale of the immediate threat from Brexit for SMEs requires its own urgent response. The guiding principle has to be that Irish businesses must be helped to compete and to diversify. Brexit is not our fault and we are clear in making our commitment to working within the European Union – and the Union needs to step up and recognise the unique impact which Brexit is having and will have in Ireland.
In the negotiations we must seek a combination of support programmes and exemptions from normal state-aid rules. These matters are contained within all accession treaties because they recognise that a transition period is always needed. The UK leaving the European Union significantly changes the impact of our membership. We can’t be expected to stand by while firms and communities are undermined because existing rules don’t allow us to help them to respond.
In the interim, we need to take steps to help. In the next budget the Earned Income Tax Credit should be at the same level as the PAYE credit. We should also introduce a new PRSI Relief system that reflects the increase in the headcount of a business, encouraging further expansion, innovation and employment. And we must review development levies to facilitate expansion.
On a national level we have to tackle the dysfunctional banking system as it impacts on Irish businesses. In recent years our banks have been recapitalised at great cost to the Irish people and have benefitted from unprecedented support from the European Central Bank. For five years lending targets have been missed time and again – and the basic service level for businesses has got much worse.
For families and communities the rapid contraction of the banking network is hurting – for some businesses it is creating a crisis. If a long-term, close and confidential arrangement is key to helping businesses succeed then we’re getting the exact opposite.
There are limited tools available to force banks to support SMEs – and they will always be able to plead risk which cannot realistically be independently verified. What we can do is to keep up the pressure, reward good practice such as maintaining local banking and potentially encourage and capitalise SME-focused banking. Specifically, we believe in reforming the role of the SBCI by fully licensing it as a state enterprise bank, similar to the former ICC.
We must also do more to help SMEs use research to innovate. This is an area where there have been damaging steps backward in recent years. SMEs cannot be expected to have large research departments. They need permanent access to contract research facilities in their field. Tax changes help, but direct aid and a more dynamic opening of research facilities is needed.
We can’t pass a law to make us all German when it comes to passing businesses down through many generations – what we can do is to remove as many barriers as possible to this. Long-term ownership of businesses is an unequivocal benefit for wider society and it should be actively encouraged in tax law.
What I haven’t mentioned so far is the threat posed by the increasingly loud demands for new pay deals. This can’t be ignored because the scale of what is now being demanded has serious implications.
For a lengthy period our economy was in a grave condition and our public finances were unsustainable. Through the hard work and sacrifices of the Irish people this was turned around, but the idea that we no longer have any need for restraint is simply wrong.
This year we are again borrowing to pay for public services. In the recent Budget the entire fiscal space was allocated, including a last-minute €300 million which no one was told about.
There is in place a mechanism which is delivering increases in pay – and there are investments in public services which are improving conditions for many. Demands to break this approach and accelerate pay would require more borrowing, less investment and a chasing of tails which we all know could end up with the need for another round of forced-cuts.
Even more importantly, it is the crushing impact of rising costs which are impacting on everyone. Reduced funding for investment in tackling these rising costs may cost workers far more than they might gain after a lengthy dispute.
In recent weeks some of the most effective speakers on the threats posed to our economy by Brexit and the wider global situation have been union leaders. They’ve been forthright in sounding the alarm and calling for action.
We need to step back before the pay situation gets out of hand. Surely after what we have just been through, an angry, relativities-driven escalation of industrial disputes is the last thing we need?
This is a defining moment for Ireland. In the months and years ahead we will take fundamental decisions about the future of our economy. We must negotiate a new relationship with our oldest market and develop new ways of sustaining high-employment and high living standards.
An absolutely essential part of this must be to have greater balance within the economy – and this requires a new, sustained and strategic commitment to supporting our SMEs.