Ireland

   

Economic Policies

#17
Key Findings
As a strong example of robust crisis recovery, Ireland falls into the upper-middle ranks internationally (rank 17) in the area of economic policy. Its score on this measure has increased by 2.1 points since 2014.

After several years of exaggerated growth figures inflated by technicalities, real growth has persisted at vibrant levels. Much of this activity stems from the consumption and domestic investment sectors, as opposed to previous years’ reliance on exports and foreign investment.

Post-crisis debt levels have fallen dramatically, from 120% of GDP in 2013 to 61% of GDP in 2017. Deficits are under 1%, with a surplus forecast for 2018. Unemployment rates have fallen to moderate levels, although youth unemployment remains high. Jobs have shifted away from low-skill construction work toward higher-skill services and manufacturing.

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.

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
Ireland’s economic performance over the last four years has been more than impressive if judged by GDP growth. The already high GDP growth rate of 8.3% in 2014 was dwarfed in 2015 by a growth rate of 25.6%. This growth rate was dubbed as a “leprechaun statistic” by Paul Krugman and Ireland became a target of criticism in international media. Yet, because of the new accounting conventions introduced by changes to the European System of Accounts in 2010, these statistical effects cannot be removed from the official national income accounts. The main driver of the growth rates in 2014 and 2015 was multinational corporations transferring intangible assets (i.e., intellectual property rights) to Ireland, a process that created an on-shoring effect, enabling multinational corporations to allocate the profits of external activities to their Irish operations. In particular, a small number of multinational corporations engaged in contract manufacturing, whereby multinational corporations arranged with foreign manufacturers to produce commodities derived from intellectual property that had been transferred to Ireland. Under this system, the Irish-based multinational corporation pays the foreign manufacturer a fee, but the profit accrues to the owner of the intellectual property in Ireland and is attributed to Ireland’s GDP. A further driver of these high growth rates was the rise in aircraft leasing operations financed in the Irish Financial Services Center (IFSC).

The Economic and Social Research Institute noted that Gross Value Added (GVA) in the industrial sector more than doubled in 2015 with nominal GVA increasing from €41 billion in 2014 to €92 billion in 2015. Although most production took place outside of Ireland; because the intellectual property rights were registered in Ireland, production gains were attributed to Ireland (ESRI Quarterly Bulletin, Autumn 2016: 17).

Adjusting for the overexaggerated performance in 2014 and 2015, the Irish economy continued to register impressive growth of 5.1% in 2016 and 5% in 2017. A great share of this growth originated from the consumption and domestic investment sectors, a stark contrast to the previous two years when the export sector and foreign investment had largely fueled growth. Consumption expenditure had taken a major hit during the financial crisis and the lagged effects of the wealth destruction and loss of employment during that period, along with extensive financial de-leveraging, meant there was little scope for increases in consumption expenditure until relatively recently. With the sustained growth of employment and some moderate growth in incomes, domestic consumption expenditure has once again become a driver increasing the growth rate. Domestic investment, particularly in the construction sector, is once again also driving growth and will become more important in the coming years. The credibility of the strong underlying performance of the real economy in both 2016 and 2017 is borne out by sizable increases in tax revenue and considerable growth in employment. As a result of the improved fiscal position, the General Government Balance as a percentage of GDP has fallen from -3.7% in 2014 to -0.3% in 2017. Over the same period, employment has increased by 158,000 and the unemployment rate has fallen from 11.3% to 6.2%.

Citations:
Budget 2018 and related background documents are available here:
http://www.budget.gov.ie/Budgets/2018
Economic and Social Research Institute Quarterly Economic Commentary, Winter 2017 by Kieran McQuinn, Conor O’Toole, Philip Economides. Teresa Monterro.

Labor Markets

#23

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
7
Ireland’s rapid economic growth since 2014 has been reflected by significant improvements in the labor market. 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 15% in 2012, the unemployment rate fell to 6.2% in 2017 and is forecasted to fall further, to 5.4%, in 2018. Employment has pushed over the two million mark to 2,072,000 and the unemployment level has correspondingly fallen to 136,000. Long-term unemployment constituted 43% of total unemployment in October 2017 compared to 45% a year earlier. With respect to long-term unemployment, there has been some improvement as it fell by a rate of 19% in 2017 faster than short-term unemployment (rate of 11%). Some active labor market strategies, such as making unemployment support payments increasingly contingent on evidence of active job search, have contributed to these favorable developments.

The expected fall in the unemployment rate in 2018 to 5.4% 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 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. Less than 15,000 housing units were built in 2016 and while the forecast for 2017 suggests an improvement to 19,000 housing units it is still considerably below the target figure 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 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:
“The Impact of Training Programme Type and Duration on the Employment Chances of the Unemployed in Ireland” by Seamus McGuinness, Philip J. O’Connell, Elish Kelly, Economic and Social Review, Vol. 45, No. 3 (Autumn 2014).

Taxes

#8

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 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 UK.

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

#14

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
There has been sustained progress toward correcting budget imbalances. The general government budget balance as a percentage of GDP fell to -0.3% in 2017 and is forecasted to move into a surplus of 0.2% in 2018. The most recent data show that the national debt-to-GDP ratio, which peaked at 120% in 2013, fell to 66% of GDP in 2016. When consideration is given to the government’s assets, the net debt position relative to GDP was 61% in 2017 with the expectation that it will fall to 60% in 2018. The Minister of Finance announced in the 2018 Budget that the government intends to establish a “rainy day” fund to provide money to meet unforeseen contingencies that may arise in the future.

By dint of considerable sacrifices involving increases in taxation and cutbacks in public-sector expenditure, the Irish debt numerator has been brought under control. The sizable growth in the economy has greatly increased the GDP denominator thereby enabling Ireland to move close to the euro zone’s 60% debt limit requirement. Ireland’s fiscal situation is now sustainable. Experience over the past five years has confounded the view that Ireland could not return to sustainable economic growth while undertaking a regime of fiscal austerity. The country’s adjustment could be regarded as an example of successful “expansionary austerity.”

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:
For projections of Ireland’s national debt see:
http://www.ntma.ie/business-areas/funding-and-debt-management/debt-profile/debt-projections/

Research and Innovation

#18

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 that will partially replace this facility. This will provide 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

#31

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 Markets
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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