Ireland

   

Economic Policies

#8
Key Findings
With its highly competitive economy showing robust growth despite the pandemic’s effects, Ireland receives high rankings (rank 8) in the area of economic policy. Its score on this measure has increased by 2.3 points since 2014.

The Irish economy, which depends strongly on multinational corporations, was affected less than many others by the COVID-19 pandemic. Despite several quarters of significant decline in 2020, GDP growth surged to 13.5% in 2021 (with GNI, a more accurate measure here, also rising by 11.5%). The unemployment rate fell to 7.4% that same year.

Pandemic spending pushed government debt to 106.2% of GNI. The ongoing housing shortage remains a serious infrastructural concern, and the government is responding with public investments in housing stocks. Brexit-related issues remain a source of uncertainty.

The country has long relied on low corporate tax rates to attract FDI. The OECD agreement to allow countries to tax companies operating in their jurisdiction even without a physical presence threatens this model somewhat. The presence of large high-tech and pharmaceutical companies has created substantial opportunities for innovative local firms.

Economy

#1

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
9
Prior to the arrival of the pandemic, the Irish economy seemed to go from strength to strength. Proxy indicators (e.g., labor market data, tax revenue, investment expenditure and consumption expenditure) were all positive. In 2021, GDP grew by 13.5%. This was driven by an increase of more than 16% in exports of goods and services. Gross national product increased by 11.5%. General government expenditure is forecast to reach €105 billion in 2022, with a forecast budget deficit of €8.3 billion, down from €13.3 billion in 2021. Personal spending increased to €105.2 billion, an increase from €99.5 billion in 2020, but lower than the €111.1 billion recorded in 2019. Total employment increased to 2.5 million (the first time it reached this mark in Ireland), with 229,000 more people in work compared to 2020, and the COVID-19-adjusted rate of unemployment fell to 7.4% of the labor force.

However, against this background of strong economic growth, Ireland faces some serious supply-side constraints, most notably in the area of housing.

In November 2021, the Irish Fiscal Advisory Council (IFAC), which was formally established as a statutory body in December 2012 under the Fiscal Responsibility Act, published its fifteenth Fiscal Assessment Report. The report, under the chairmanship of academic Dr Seamus Coffey, was highly critical of government budgetary policy. It asserted that there had been no improvement in the budget balance, excluding interest costs, since 2015 and maintained that non-interest spending by the government has expanded at the same pace as government revenues. Arguing that a great deal of the improvement in government revenues has been cyclical or temporary, the IFAC report suggested that the overall structural position has deteriorated. Resulting from this, the report contended that opportunities to strengthen the budget balance during the upswing in the economic cycle have been missed. It identified unbudgeted increases, most notably in the area of healthcare, as a major problem area and argued that the Health Service Executive had consistently and significantly exceeded its allocation by almost over the previous four years.

In its initial comments on the 2020 budget, IFAC stressed that the economy faces unusual uncertainty on two fronts, namely (1) overheating, because the economy is close to its potential, and (2) Brexit-related issues.

Citations:
Department of Finance, Budget 2019, 9 October 2018, https://www.gov.ie/en/collection/df7d1-budget-2019/#
McQuinn, Kieran, O’Toole, Conor and Economides, Philip, Economic and Social Research Institute Quarterly Economic Commentary, September 2018, https://www.esri.ie/publications/quarterly-economic-commentary-autumn-2018
Irish Fiscal Advisory Council, Fiscal Assessment Report, December, 2021, https://www.fiscalcouncil.ie/fiscal-assessment-report-december-2021/
Irish Fiscal Advisory Council, Fiscal Assessment Report, November, 2019, https://www.fiscalcouncil.ie/fiscal-assessment-report-november-2019/
Roantree, Barra, Doorley, Karina., Kakoulidou, Theano, and O’ Malley, Seamus. Budget 2022, ESRI Special Article, Economic and Social Research Institute, https://www.esri.ie/system/files/publications/QEC2021WIN_SA_Roantree.pdf

Labor Markets

#11

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
8
Ireland’s rapid economic growth over the last six years has been reflected by significant improvements in the labor market. Total employment amounted to 2,305,000 in 2019.
The composition of the labor force has shifted significantly away from relatively low-skill construction work toward higher-skill service and advanced manufacturing jobs. From a peak of 16% in 2012, the unemployment rate fell to 6.2% in 2017, to 5.3%, in 2018. In October 2019, the seasonally adjusted unemployment rate had fallen to 4.8%.

The greatly improved labor market statistics for Ireland have several important consequences. In the first place, continued economic growth will necessitate a growth in immigration to ensure that the economy does not face capacity constraints. To facilitate this growth in immigration there is a need to improve the infrastructure, particularly with respect to housing. It has been estimated that at least 35,000 housing units need to be added annually. However, the lagged effects of the financial crisis have had significant negative consequences for the construction sector. Because of the collapse in the property market between 2008 and 2014, the knock-on effects to the construction sector caused skilled construction workers to emigrate and building entrepreneurs to go into liquidation. De-leveraging by the banks, which had been massively over-committed to the property market, meant that the flow of finance available for construction and mortgages was greatly reduced. In 2017, 15,000 housing units were built, with a further 18,000 built in 2019 and 22,000 expected to be built in 2020. While showing an upward trend, the number of new houses built will still fall far short of the annual target of 35,000 units.

A second important consequence of the strong growth in the labor market will be the impact on future earnings. Hitherto because of the strong deflationary effects on earnings created by the financial crisis of 2008 to 2014, the growth in nominal wages has been subdued. The growth in average hourly earnings was 2.2% in 2015, 2.5% in 2016 and 2.8% in 2017. The ESRI forecasted that the growth in average hourly earnings was 3% for 2018, increasing to 3.5% in the second quarter of 2019. However, it will be difficult to contain the growth in earnings on such a subdued scale if the economy continues to register a 5% growth rate.

Citations:
Burke-Kennedy, E., ‘Wage growth in Irish economy recorded at 2% last year’, The Irish Times, 1 March 2022, https://www.irishtimes.com/business/economy/wage-growth-in-irish-economy-recorded-at-2-last-year-1.4815161
Central Statistics Office, Labour Force Employment Series Quarter 2 2019, Preliminary estimates of the Earnings and Labour Costs Quarterly Release (November 2019)
Morgan, G., ‘House prices soaring by €100 a daysproperty heats up to boom time level’, Irish Independent, 28 March 2022, https://www.independent.ie/business/personal-finance/property-mortgages/house-prices-soaring-by-100-a-day-as-property-heats-up-to-boom-time-levels-41493411.html

Taxes

#2

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
7
The goal of fiscal consolidation has been a high priority in formulating tax policy over recent years. The burden of direct taxation was increased after the country’s financial collapse and a new local property tax was introduced in 2012, which was steeply progressive with respect to property values. A carbon tax was first introduced in Ireland in 2010 with an initial imposition of €10 per ton of carbon dioxide. The rate was increased to €20 per ton with effect from 1 May 2014. In the 2020 budget, the rate has been increased to €26 per ton. This measure will raise €90 million in 2020 and the money raised will be ring fenced to fund climate action measures. There is cross-party parliamentary support to increase the price of carbon from €20 to €80 a ton by 2030. The recent budgetary change, while small, at least indicates that there is an increasing commitment to meet the objective of a carbon tax of €80 per ton.

The indirect tax system is less progressive than the income tax and property-tax systems, and weighs relatively heavily on those in the lowest income distribution deciles. This is due, to a significant extent, to the heavy excise taxes on alcohol and tobacco products (once again increased in the 2020, 2021 and 2022 budgets), expenditure on which looms relatively large in poorer households’ budgets, as well as to the larger proportion of income saved by those on higher incomes.

Ireland has long relied on a low corporate tax rate as an instrument to attract FDI. This policy has been highly successful and is supported across the political spectrum. However, it has increasingly attracted hostile comments from critics in foreign jurisdictions who assert that some features of the way Ireland taxes corporations constitute “unfair” competition and encourages profit-shifting by multinational corporations (MNC). In October 2019, the OECD proposed that countries should be allowed to tax companies in their jurisdictions, even if the companies have no physical presence there. Such a change in tax legislation could have significant implications for the activities of MNCs that are based in Ireland for taxation purposes. The OECD has also been consulting on the establishment of a global minimum tax rate, stating that:

“A minimum tax rate on all income reduces the incentive for taxpayers to engage in profit-shifting and establishes a floor for tax competition among jurisdictions.”

Given that Ireland’s 12.5% corporate tax rate is one of the lowest in the OECD, the implications of such a change in the taxation of MNCs could be considerable. It remains to be seen, however, whether the OECD agreement will be implemented.

The openness of the economy, and relative ease of cross-border shopping and smuggling dictate that the main indirect taxation rates be aligned closely with those in the United Kingdom.

Citations:
Tim Callan, Maxime Bercholz, Karina Doorley, Claire Keane, Mark Regan, Michael Savage and John R. Walsh ‘Distributional Impace of Tax and Welfare Policies: Budget 2018. ESRI Quarterly Commentary, Winter 2017.
Budget 2016 contains an annex that discusses the progressiveness of the Irish tax and welfare system in some detail: http://www.budget.gov.ie/Budgets/2016/Documents/Budget%20Book%202016%20-%20full%20document.pdf

The conclusion is reached that “it is evident that, compared to other countries, the Irish tax and welfare system contributes substantially to the redistribution of income and a reduction in market income inequality. The income tax system is more progressive relative to comparator countries with the tax burden from income tax and USC falling in large part on households with the highest incomes.”

See also Donal De Buitléir http://www.publicpolicy.ie/wp-content/uploads/Budget-2013-Progressivity-of-Irish-Income-Tax-System1.pdf and Michael Collins http://www.nerinstitute.net/research/total-tax-estimates-for-ireland/
For a review of how the burden of the adjustment during the period of ‘austerity’ was distributed by income class see John FitzGerald https://www.esri.ie/UserFiles/publications/RN20140204.pdf

The OECD report on Base Erosion and Profit-Shifting is available here http://www.oecd.org/tax/beps-reports.htm

Budgets

#12

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
8
The 2020 budget was developed in the shadow of Brexit. The central assumption was that there would be a no deal Brexit. Given such an assumption the Department of Finance forecasted that GDP would only grow by 0.7% in 2020 and that real GNP would fall by -0.1%. This is in sharp contrast to the European Commission’s forecast of 3.5% GDP growth for 2020, which was based on the assumption of a soft Brexit. The minister of finance provided a package of €1.2 billion, excluding EU funding, to respond to Brexit. He also anticipated increasing external borrowing in the event of a no deal or a disorderly Brexit, and indicated that he would draw on money in the “rainy day” fund to mitigate any harsh Brexit measures. Furthermore, he decided not to transfer the expected €500 million from the 2020 budget into the “rainy day” fund.

There has been sustained progress toward correcting budget imbalances. The general government budget balance as a percentage of GDP fell to 0% in 2018 and moved to a small surplus of 0.2% in 2019. The most recent data show that the national debt-to-GDP ratio, which peaked at 120% in 2013, fell to 64% of GDP in 2018 and 56% in 2021. As a percentage of modified GNI, it had fallen from 97% in 2017 to 91% in 2018. As a result of the fiscal turmoil caused by the pandemic and the necessity of increasing the budget deficit, the debt to GNI climbed again in 2021 to reach €236.7 billion or 106.2% of GNI. Given that modified GNI is far more representative of the underlying behavior of the economy, the ratio of debt to modified GNI is still excessively high.

Leaving aside the ever-present possibility of adverse external shocks, there is a clear risk now facing the Irish economy that the government, following record tax returns, will encounter increasing demands from public sector trade unions to increase public sector expenditure and, in particular, public sector remuneration, given the impact rising inflation is having across Irish society.

Citations:
Department of Finance, Budget 2022.
Department of Finance, Budget 2021.
Department of Finance, Budget 2020.
Department of Finance, Budget 2019.
Irish Fiscal Advisory Council, Fiscal Assessment Report, December 2021.
Irish Fiscal Advisory Council, Fiscal Assessment Report, November 2019.

Research, Innovation and Infrastructure

#22

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
7
While government policy is supportive of research and innovation by indigenous firms, the most striking success of Irish industrial policy has been in attracting foreign-owned firms in high-tech sectors to Ireland. This trend continued during the economic crisis and throughout the pandemic. Indeed, the inflow of FDI in the IT and pharmaceutical sectors contributed significantly to the economy’s strong recovery. The location of these firms in Ireland has created opportunities for innovative small Irish firms to develop technological inputs to supply them.

Ireland’s overall information and communication technology readiness continues to lag behind most other northern and western European countries, as well as Israel. Nonetheless, the World Economic Forum’s Global Competitiveness Report for 2019 ranked Ireland 24 out of 141 countries in terms of global competitiveness (up from 28 in 2014). Ireland was ranked sixth in terms of its labor market competitiveness and 10th in terms of business dynamics.

The so-called double Irish tax facility, which provided significant tax incentives for multinational corporations to attribute intellectual property income (wherever its origin) to their Irish subsidiaries, was abolished in the 2015 budget in order to avert EU penalties over illegal state aid to industry. In the 2016 budget, the minister for finance announced some details of a new “knowledge box” scheme to partially replace this facility. This provides for a 6.25% corporate tax rate on profits arising from “certain patents and copyrighted software which are the result of qualifying R&D carried out in Ireland.” The Irish government intends to remain a world leader in attracting R&D-intensive investment, irrespective of whether or not the OECD agreement on corporate tax is implemented.

Citations:
World Economic Forum Global Competitiveness Report 2019

Global Financial System

#19

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
6
Ireland’s situation as a member of the euro area and of the European banking system needs to be taken into account. This has involved substantial surrender of national sovereignty and autonomy in financial policy to the European Central Bank (ECB). Ireland’s minister for finance, Paschal Donohoe, chairs the 19 nation Eurogroup within the European Union.

Ireland received only marginal relief on the debt burden it incurred to avert a European-wide banking crisis after 2008. However, in September 2014, euro area finance ministers agreed to allow Ireland to refinance its debt based on its dramatically improved credit rating. This enabled it to use funds raised on the international bond market at interest rates near 2% to retire IMF debt carrying interest rates of close to 5%.

From evidence presented at the public hearings of the Oireachtas Banking Inquiry in 2015 and published in the Committee of Inquiry into the Banking Crisis’s Banking Inquiry Report 2016, it is clear that the ECB pressured Irish authorities not to “bail in” the bondholders of Irish banks that had failed. The motivation for this was to avert impairment of the balance sheets of German and French banks, which were significant investors in these Irish banks. It is contended in the report that the ECB exceeded its authority in pressuring one country to bear the cost of shielding banks in other euro area countries from the consequences of their imprudent investment decisions. Jean Claude Trichet, the then president of the ECB, refused to give direct evidence to the Inquiry on the grounds that the ECB is accountable to the European Parliament and not to national parliaments. He did, however, take questions from members of the Inquiry and defended his 2008 actions at a public lecture he delivered in Dublin in April 2015.

Ireland features on some so-called tax haven lists globally and has been criticized for its lax approach by leading economists, such as Thomas Piketty, Paul Krugman and Joseph Stiglitz. Criticism has mainly centered on the operation of the now defunct “double Irish” model of corporate tax and the way intellectual property assets are classified (O’ Boyle and Allen, 2021). Transfer pricing by MNCs remains important for Ireland’s economic success, although some would call this a regime of unfriendly tax competition. Ireland opposed the wording in the proposed OECD agreement in 2021, which set out a corporate tax rate of “at least 15%” and argued successfully for a change to a set rate of 15% (Donohoe, 2021)

Citations:
Committee of Inquiry into the Banking Crisis (Banking Inquiry Report), January 2016.
Donal Donovan and Antoin E. Murphy The Fall of the Celtic Tiger Ireland and the Euro Debt Crisis (Oxford University Press, 2013; paperback 2014)
Donohoe, P., ‘Statement by Minister Donohoe on decision for Ireland to enter OECD International Tax Agreement, 7 October 2021, https://www.gov.ie/en/speech/615f7-statement-by-minister-donohoe-on-decision-for-ireland-join-oecd-international-tax-agreement/
A posthumous biography of or tribute to the man who was Minister for Finance in 2008 sheds light on the interaction between Ireland the European institutions during the banking crisis:
Brian Lenihan in Calm and Crisis edited by Brian Murphy, Mary O’Rourke and Noel Whelan, Irish Academic Press 2014
O’ Boyle, B. and Allen, K., Tax Haven Ireland, Pluto Press, November 2021.
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