Ireland

   

Economic Policies

#12
Key Findings
With its highly competitive economy showing steady growth, Ireland receives high rankings (rank 12) in the area of economic policy. Its score on this measure has increased by 2.2 points since 2014.

While apparent growth rates have remained inflated by technicalities, the underlying domestic economy performed extremely well in 2019, with proxy indicators such as labor market data, tax revenue, modified investment expenditure and consumption expenditure all positive. The unemployment rate has fallen to just 5.1%.

The government posted a small budget surplus in 2019, after a balance the previous year. Current budget forecasts were predicated on a hard Brexit. Post-crisis debt levels have fallen dramatically, from 120% of GDP in 2013 to 64% of GDP in 2018. However, debt remains around 87% of modified GNI, a measure that better reflects the underlying domestic economy, still an excessively high level.

Low corporate taxes continue to attract international criticism while attracting foreign multinational firms. An OECD proposal to allow countries to tax companies even if they lack a physical presence there could disrupt Ireland’s model. The ongoing housing shortage remains a serious infrastructural concern, and the government is responding with public investments in housing stocks.

Economy

#2

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 2019. Proxy indicators such as labor market data, tax revenue, modified investment expenditure and consumption expenditure were all positive. Total employment increased to 2.3 million and unemployment fell to 5.1% 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 2018, 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 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 healthcare 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.

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. IFAC stressed that health over-runs continue despite large planned increases. In the health budget for 2019 an increase of €1.7 billion was planned pushing total health expenditure up to €17 billion. Budget 2020 indicates that, notwithstanding this increase, there was a further over-run of €0.4 billion in 2019 – this unplanned increase repeats the pattern of over-runs in recent 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, 2019.

Labor Markets

#15

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:
Central Statistics Office, Labour Force Employment Series Quarter 2 2019, Preliminary estimates of the Earnings and Labour Costs Quarterly Release (November 2019)

Taxes

#4

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 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, which was steeply progressive with respect to property values.

The 2020 budget produced one significant taxation change with a further move toward increasing the carbon tax. The carbon tax was first introduced in Ireland in 2010 with an initial imposition of €10 per tonne of carbon dioxide. The rate was increased to €20 per tonne with effect from 1 May 2014. In the 2020 budget, the rate has been increased to €26 per tonne. 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 tonne 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 tonne.

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 budget), 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.

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

#18

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. When consideration is given to the government’s assets, the net debt position relative to GDP is expected to fall to 59% 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.

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 2020.
Irish Fiscal Advisory Council, Fiscal Assessment Report, November 2019.

Research, Innovation and Infrastructure

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

Citations:
World Economic Forum Global Competitiveness Report 2019

Global Financial System

#30

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
5
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.

Ireland is on all “tax haven” lists. Transfer pricing is key for Ireland’s economic success, although some people would call this unfriendly tax competition.

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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