Ireland

   

Economic Policies

#11
Key Findings
Showing steady growth in a highly competitive economy, Ireland receives high rankings (rank 11) in the area of economic policy. Its score on this measure has increased by 2.1 points since 2014.

While apparent growth rates have remained inflated by technicalities, real growth has persisted at vibrant levels, with underlying domestic demand growing by at least 5.5% in 2018. The unemployment rate has fallen to just 5.3 percent.

Post-crisis debt levels have fallen dramatically, from 120% of GDP in 2013 to 64% of GDP in 2018. However, debt remains 91% of modified GNI, a measure that better reflects the underlying domestic economy, and is expected to fall to 87% in 2019, still an excessively high level. Capital spending has increased substantially in recent years, though the deficit remains just 0.1% of GDP.

Low corporate taxes continue to attract international criticism, which has in turn led to greater scrutiny of company filings. The government remains successful in attracting foreign multinational firms. The ongoing housing shortage remains a serious infrastructural concern, and the government is responding with public investments in housing stock.

Economy

#5

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
8
Despite the overstating of Ireland’s economic performance through the activities of the multinational corporations, the underlying domestic economy performed extremely well in 2018. Proxy indicators such as labor market data, tax revenue, modified investment expenditure and consumption expenditure showed that underlying domestic demand had grown by at least 5.5% over the previous year . Total employment pushed over 2,260,000 million as employment rose by 3% (65,000) and unemployment fell to 5.3% of the labor force.
However, against this background of strong economic growth, Ireland faces some serious supply-side blockages, most notably in the area of housing. The 2019 Budget was particularly directed toward increasing public-sector capital expenditure. The government’s gross capital expenditure, which had grown by 7% in 2018, is forecast to increase by 8.4% in 2019.
In November 2018, the Irish Fiscal Advisory Council (IFAC), which was formally established as a statutory body in December 2012 under the Fiscal Responsibility Act (FRA), published its fifteenth Fiscal Assessment Report. The report, under the chairmanship of academic 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 IFAC 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 health care as a major problem area and argued that the Health Service Executive (HSE) has exceeded its allocation by almost €2 billion over the previous four years.

Citations:
Department of Finance, Budget 2019
Economic and Social Research Institute Quarterly Economic Commentary, September 2018 by Kieran McQuinn, Conor O’Toole and Philip Economides.
Irish Fiscal Advisory Council, Fiscal Assessment Report, November, 2018.

Labor Markets

#17

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. In the second quarter of 2018, the number of persons in employment had reached 2,255,000, an increase of 377,000 (20.1%) over the same period in 2012. The number of people in employment increased between 2017 and 2018 by 74,000, an increase of 3.4% since the second quarter of 2017. Full-time employment continued to grow by 73,000 and amounted to 1,798,700 of total employment in the second quarter of 2018.
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 and further to 5.3%, in 2018. Employment rose by 3% (65,000) in 2018 and is expected to grow by around the same amount in 2019. The fall in the unemployment rate in 2018 to 5.3% reflects the strong growth performance of the economy.
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 34,000 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. Less than 15,000 housing units were built in 2017 and – while estimates for 2018 indicate that there has been a considerable increase in building and construction – the number of new houses built will still fall far short of the required 34,000 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 forecasts that the growth in average hourly earnings will be 3% for 2018. 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:
Central Statistics Office, Labour Force Employment Series Quarter 2 2018 (November 2018)

Taxes

#6

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

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 had to be given 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.

In view of the rapid improvement of the country’s fiscal situation, and with an eye on the 2016 general election, it was hardly surprising that the 2016 budget contained no tax increases (apart from a rise in the excise on tobacco products) as well as a significant reduction in the Universal Social Charge (USC), which is levied in addition to income tax. Incomes over €70,000 did not benefit from this change, which further increases the progressiveness of this levy. After the budget reforms are implemented, it is estimated that the top 1% of income earners will pay 21% of all income tax, while the bottom 76% of income earners will pay only 20% of the total. The new local property tax is steeply progressive with respect to property values.

The 2017 budget included few substantial tax reforms. Though the small reduction to the USC and the commitment to lower it further in future budgets indicates the Fine Gael-led government’s concern with the burden of direct taxation on taxpayers.

The indirect tax system is less progressive than the income tax and property-tax systems and weighs relatively heavily on those in the lowest deciles of the income distribution. This is due, to a significant extent, to the heavy excise taxes on alcohol and tobacco products, 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 foreign direct investment (FDI). This policy has been highly successful and is supported across the political spectrum. However, it has attracted an increasing volume of hostile comment 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. The OECD published a detailed report on this topic in October 2015. In an initial response to this report, Budget 2016 introduced a requirement that multinational corporations with Irish parent companies must file country-by-country reports on their income, activities and taxes beginning on 1 January 2016. This information may ultimately be confidentially shared with foreign tax authorities.

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

#16

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
Current budgetary policy led to current expenditure increasing by 5.4% in 2018. The expectation is that it will expand by 4.1% in 2019. Capital expenditure increased by 29% in 2018 and is forecast to grow by a further 25% in 2019 in line with the National Development Plan 2018 – 2027. The very strong growth in capital expenditure has been predominantly targeted at correcting the current housing shortage. There has been sustained progress toward correcting budget imbalances. The general government budget balance as a percentage of GDP fell to -0.1% in 2018 and is forecast to move to 0% 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. When consideration is given to the government’s assets, the net debt position relative to GDP is expected to fall to 55% of GDP in 2019. As a percentage of modified GNI, it had fallen from 97% in 2017 to 91% in 2018 and is expected to fall to 87% in 2019. Given that modified GNI is far more representative of the underlying behavior of the economy, the debt to modified GNI is still excessively high.
The minister for finance indicated in the 2019 budget that €500 million will be allocated to the newly established “rainy day” fund, which will be seeded by a €1.5 billion transfer of funds from the Irish Strategic Investment Fund. This fund is intended to provide money to meet unforeseen contingencies that may arise in the future. Given the potential volatility of corporate tax funds and the increasing dependency of the Exchequer on these funds to finance increased government expenditure, it is believed that a far greater amount of windfall gains from corporate taxation should be allocated to the “rainy day” fund.
Leaving aside the ever-present possibility of adverse external shocks, a risk now facing the Irish economy is 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.

Citations:
Department of Finance, Budget 2019.
Irish Fiscal Advisory Council, Fiscal Assessment Report, November 2018.

Research, Innovation and Infrastructure

#15

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. 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 (ICT) readiness continues to lag behind most other northern and western European countries as well as Israel. Nonetheless, the World Economic Forum’s Competitiveness Report for 2014 ranked Ireland 12th worldwide in terms of “technological readiness,” a rise from 17th place in 2012. This rank was maintained in the 2015 report. The Global Enabling Trade Report for 2016 ranked Ireland 20 out of 136 countries in the Enabling Trade Index 2016.

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 in the forefront in the competition to attract R&D-intensive investment.

Global Financial System

#21

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 zone 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 received only marginal relief on the debt burden it incurred to avert a European-wide banking crisis in 2008. However, in September 2014, euro zone 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 zone 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.

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)
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
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