Key Challenges

Brexit, U.S. tax reforms
are challenges
Against the background of impressive macroeconomic performance, the Republic of Ireland continues to face the Scylla of Britain’s withdrawal from the EU and the Charybdis of potential reforms to the corporate tax code in both the United States and EU.
New land border would undermine peace process. Trade would suffer under hard Brexit
Ireland is the only EU country to share a land border with the UK. The dangers posed by a hard Brexit are twofold. At the political level, a hard Brexit would lead to the re-imposition of a land border that had de facto disappeared under the EU in recent decades. The reintroduction of this land border could significantly undermine a peace process still in progress. Economically, the implications of a hard Brexit are equally serious as the UK accounts for a significant share of Ireland’s external trade. The bare trade statistics (14% of Irish exports go to the UK) appear to suggest that Ireland’s dependence on the UK has been greatly reduced in recent years. However, this decline is largely the result of strong growth in high tech and pharmaceutical exports from Ireland to countries other than the UK. The UK still accounts for over 40% of Ireland’s agricultural exports, with more than 50% of beef and pork, and 84% of poultry exports destined for the UK.
U.S. tax changes could reduce investment flow
The eventual scale of this economic challenge will depend on how multinational corporations currently based in Ireland respond to the reduction in the U.S. corporate tax rate. Though multinational corporations (MNCs) employ only 200,000 out of a total workforce of 2 million in Ireland, their activities have a significant influence on the overall performance of the economy. These MNCs have sizable interlinkages with the services sector, particularly with law and accounting firms. The construction industry has also benefited from the increased demand for new factories, offices and housing. Ireland’s low 12.5% corporate tax rate has been a key factor in attracting MNCs to Ireland. However, the recent reduction in the U.S. corporate tax rate from 35% to 21% appears to reduce the incentive for multinational companies to base in Ireland. It may therefore reduce the flow of new U.S. multinational investment into Ireland, though there are many other factors such as geographic proximity to other EU countries, the multiplicity of double taxation arrangements between Ireland and other countries, the availability of a young English speaking labor force, and Ireland’s membership in the euro zone that will continue to encourage MNCs to come to Ireland.
EU demanding greater
tax transparency
At the EU level, Ireland must react to increasing pressure for greater transparency regarding the tax agreements between MNCs and its national tax authorities. On 30 August 2016, the EU’s Competition Commission found that Apple had unfairly benefited from selective treatment by Ireland’s tax revenue commissioners in 1991 and 2007. This case has been appealed by both Apple and the Irish government. If both Apple and the Irish government lose their appeals, the Irish government will face the embarrassment of having to accept $13 billion of unpaid taxes from Apple. Should this scenario arise and the Irish government accepts these unpaid taxes, it will face a flurry of actions from other EU countries who will contend that the revenues from these taxes should be transferred to them.
Minority government
faces difficult tasks
These diverse challenges must now be addressed by a minority government. On 6 May 2016, Taoiseach Enda Kenny formed the first minority government since 1997. This Fine Gael-led minority government replaced the Fine Gael-Labour Party coalition government that had taken office in March 2011. Public debate around the 2011 general election had focused on the four crises that had enveloped the economy between 2008 and 2011, namely the property market crash, banking collapse, fiscal downturn, and financial crisis. In the 2011 general election, a dissatisfied electorate had voted against Fianna Fáil and its coalition partners, and in favor of Fine Gael and the Labour Party. Together Fine Gael and the Labour Party won 113 out of 166 (68%) parliamentary seats, the largest majority of any Irish government.
High level of party fragmentation
During the 2016 general election, the Fine Gael-Labour Party coalition, having campaigned under the slogan “let’s keep the recovery going,” lost a combined 57 seats. Fine Gael lost 27 seats, while the Labour Party lost 30 seats. Fianna Fáil, the bête noire of the electorate in the 2011 general election, regained 25 seats and Sinn Féin, an Irish republican party, increased its number of seats to 23. The election also marked the further rise in the number of independents (23 seats) and marginal parties, including the Anti-Austerity Alliance–People Before Profit (6 seats), the Social Democrats (3 seats), and the Greens (2 seats). The 2016 general election was characterized by a high level of party system fragmentation with historically low levels of support for the three largest parties. The combined proportion of votes won by Fine Gael, Fianna Fáil and the Labour Party dropped to 56% from a long-term average of 84%. The current minority government operates on a knife edge; there is the possibility that another general election will be called over the coming year.
For political events see: Michael Gallagher and Michael Marsh (2016, eds), How Ireland Voted 2016: The Election that Nobody Won. London: Palgrave Macmillan
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