Ireland

   
 

Key Challenges

Multinationals have
driven growth
The key challenge facing the Irish economy relates to the role of multinational corporations (MNCs) in driving the current phase of economic growth. Ireland’s economic performance over the last 25 years may be classified under four phases. Phase one, between 1994 – 2001, was a golden period of economic growth and rising employment predominantly driven by the exporting activities of high-tech MNCs. Phase two, between 2002 – 2007, produced a change of direction with most of the growth emanating from the domestic property/construction sector financed by an out of control banking system. Phase three, between 2008 – 2012, was a period of economic implosion and heavy retrenchment arising from the banking and construction excesses of phase two. Phase three was marked by severe cutbacks in fiscal expenditure, increases in taxation and sizable reductions in bank lending, allied with a significant reliance on the Troika (IMF, ECB and European Commission). Phase four, starting in 2013 and continuing over the last six years, has marked a new period of economic growth similar to phase one in that it is largely driven by MNCs. Once again, economic growth has been predominantly export driven with 83% of exports emanating from the MNC sector.
Highly concentrated export sector
A report by the Irish Exporters Association demonstrated the dependency of the Irish economy on the exports of MNCs. The report showed that 73% of total exports from Ireland emanated from MNC exports in just three sectors. The first exporting sector was that of pharmaceuticals, which provided 35% of total exports through the activities of Abbot Laboratories, Alexion, Allergan, Boston Scientific, Gilead, Johnson and Johnson, Mallinckrodt, Medtronic, McKesson, Merck, Perrigo, Pfizer and Takeda. The second highest exporting sector with 29% of exports consisted of just four companies – Google, Apple, Microsoft and Facebook. The tech sector provided 19% of exports through the activities of Adobe, Dell, Intel, Oracle, VMware and Western Digital.
 
Currently, one-quarter of the Irish business labor force is directly employed by MNCs, while MNCs have a significant indirect influence on the employment market through labor employed in the services sector, notably in areas such as accounting, law, and building and construction.
Corporate tax revenues reaching record levels
At the fiscal level, 77% of corporate tax receipts, and 40% of income tax and Universal Social Change payments come from MNCs. It was believed that 2018 represented an exceptional year in the generation of corporate taxes in Ireland as a result of a “one-off” payment made by a single company in November of that year. However, the latest tax returns for 2019 indicate that corporate tax revenues will reach a new record of over €11 billion, an increase of over 100% on corporate tax revenues for 2014 of less than €5 billion. Furthermore, around 50% of these tax revenues are believed come from just 10 MNCs, notably Apple, Dell, Google, Microsoft and Oracle.
International tax-law changes a serious risk
As a small open economy, while it is re-assuring at one level to find that a large proportion of Ireland’s economic growth is export driven, there are important caveats that need to be noted on this front, which may become an Achilles heel for the economy in the years ahead. The main concern on this front is the possibility of international changes in the taxation of MNCs, which would make Ireland a less attractive habitat for MNCs. At a global level, there is increasing pressure from the OECD to push the taxable profits of MNCs to market jurisdictions so that MNCs pay more of their taxes in the countries of sale origin and less in the countries in which they are tax resident. Such a move may reduce the attractiveness of low corporate tax bases, such as Ireland, as well as reducing the amount collected in corporate tax from these MNCs.
Official statistics are excessively optimistic
A second major concern is the way in which MNC activities influence Ireland’s main macroeconomic indicators, including GDP, investment expenditure, and exports and imports. As a result of the deep involvement of MNCs in the Irish economy, the official statistics on Ireland’s economic performance present (a) an over optimistic picture of developments in the real economy and (b) show increasing volatility with respect to key sectors such as exports and investment expenditure. The recorded figures for GDP growth provide an over-exaggerated picture of the economy because they include the contributions of MNCs. When profit repatriation by MNCs is excluded from the national accounts, the resulting GNP estimates provide a more accurate statement of the real economy. A report by Brad Setser for the U.S. Council on Foreign Relations, Ireland’s Cry for Statistical Help, indicated that the GDP data compiled for Ireland had become so extreme “that it almost reads like a plea for a new system of national accounts.”
 
Illustrative of this process, the statistics for changes in investment expenditure have become increasingly volatile as may be noted from the ESRI indicator on gross domestic fixed capital formation (50.8% in 2016, -6.8% in 2017, -21.1% in 2018, 45.1% in 2019 and 4.6% in 2020).
 
The ESRI indicator reported that investment expenditure changed abruptly from 51% in 2016 to -7% in 2017 and -21% in 2018, followed by an estimated upward surge of 45% in 2019.
Difficult to track underlying economy’s health
These are topsy-turvy Alice in Wonderland figures rather than serious macroeconomic indicators. The key phenomenon here has been the on-shoring of intellectual property rights in Ireland by MNCs. The transfer of intellectual property rights along with changes in aircraft leasing expenditures – 50% of all aviation leasing contracts pass through Ireland – have played havoc with the compilation of statistics on investment expenditure. Once adjustments are made for this exceptional item, it is clear that domestic investment expenditure increased rather than fell in 2018. The expected growth of 45% in investment expenditure in 2019 is similarly biased because of the treatment of intellectual property rights and aircraft leasing.
GDP figures are inflated
The knock-on effects of these problems for economic policy are considerable. Ireland’s forecasted GDP (€349 billion) in 2019 is significantly over-inflated by the activities of MNCs with GDP over €78 billion greater than GNP. Similarly, export statistics were over-inflated by the activities of MNCs.
Tax-receipt boom leading to high public spending
One major implication of the activities of MNCs has been the way in which corporation tax increases have fed into the financing of increased public sector expenditure – a phenomenon increasingly noted by the Irish Fiscal Advisory Council in its annual reports. Economists at the central bank have estimated that, since 2014, 40% of increased taxation has come from buoyant corporate tax revenues. Such a windfall gain in taxation is highly reminiscent of similar windfall gains from property-related taxes during the second phase of the Celtic Tiger boom between 2003 and 2007, which facilitated excessive public sector expenditure leading to the fiscal crisis between 2008 and 2013. Over the first nine months of 2019, corporation tax receipts reached a record €6.9 billion (income tax receipts for the same period amounted to €17.6 billion), suggesting that total tax revenue from this source will be well over €11 billion for the year.
“Rainy day” fund becoming more urgent
At some stage in the future, it is possible that there may be a considerable fall in corporate tax revenue resulting from changes in the taxation of corporates by the United States and/or the European Union. While the Irish government has established a “rainy day” fund to meet unforeseen contingencies, there is a strong argument for significantly increasing this fund because of the potential danger of a considerable reduction in corporate taxation in future years. In the 2019 budget, while a €1.5 billion contribution from the Ireland Strategic Investment Fund was made to seed the newly established “rainy day” fund this merely represented a shifting of money between government accounts. Only €500 million was earmarked for the “rainy day” fund from the 2019 budget – less than 1% of net current expenditure by the government. In the 2020 budget, based on the assumption of an adverse Brexit scenario, the minister of finance decided to cancel the annual €500 million to the “rainy day” fund.
Worst-case Brexit seemingly avoided
At the time of writing, there was still considerable uncertainty with respect to Brexit. Ireland is the only EU member state to share a land border with the United Kingdom. The tentative October agreement reached between the government of the new British prime minister, Boris Johnson, and the European Union shifted the border, from a customs perspective, away from land border sites to the Irish Sea. From an Irish political perspective, this agreement represents a considerable improvement on a hard Brexit scenario. The United Kingdom accounts for a significant share of Ireland’s external trade. The bare trade statistics (14% of Irish exports go to the United Kingdom) appear to suggest that Ireland’s dependence on the United Kingdom has 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 United Kingdom. The United Kingdom 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 United Kingdom.
Housing cycles have undermined sector;
strong demand for
new housing
One of the most difficult cyclical phenomena to manage is that of housing and construction. Ireland’s housing and construction boom between 2002 and 2008 created a highly unstable banking and financial environment along with a fiscal system excessively dependent on taxes from this sector. The ensuing collapse led to an oversupply of housing marked by newly constructed ghost villages. Building and construction activity fell dramatically and many key workers in this sector emigrated. The return to economic growth from 2013 onwards has meant that the building and construction sector was ill-equipped to meet the increasing demand for new housing. Additional to this, several banks that had been adversely affected following the previous period of expansion were reluctant to lend to builders and developers. This meant that in 2013, only 4,575 new dwellings were completed, followed by 5,518 in 2014, 7,219 in 2015, 9,915 in 2016 and 14,446 in 2017. The situation improved somewhat in 2019 with 22,000 dwellings expected to be completed. Despite this, the number of housing completions has been inadequate given the demand for housing resulting from the improved economic situation. Some forecasters believe that Ireland needs to build an average of 35,000 new units per year, with half of these required outside the Dublin area (see Initiative Ireland Housing 2031). The Housing Agency estimated that the total number of households that qualify for social housing amounted to nearly 72,000 in 2018.
Housing declared a national emergency
The inadequate flow of new housing relative to shifts in demand has had severe repercussions on the rental market. Over the period 2010 to 2019, rental prices doubled in Ireland. There are now signs that the rapid inflation in the rental market may have peaked. Inflation in the private rental market, as measured by a Daft.ie report in November 2019, fell from 12% in mid-2018 to 5.2% in the third quarter of 2019. Dublin appears to be driving this moderation as over the same period the inflation rate in private rental prices fell from 13.4% to 3.9%. On 4 October 2018, the Irish parliament passed a motion declaring housing and homelessness a national emergency.
Hung parliament
following election
The most recent political challenge is the hung parliament following the 2020 general election. Fine Gael, which has ruled as a minority government since May 2016, lost 12 seats, only winning a total of 35 seats. Sinn Féin gained the majority of the popular vote, but only won 37 seats. Fianna Fáil came second after a loss of eight seats, winning a total of 37 seats. The stalemate led to the resignation of Lea Varadkar as taoiseach in February 2020. The rise of Sinn Féin is a historic break from the rule of the two center-right parties. As there are 160 seats in parliament, even a coalition between Fianna Fáil and Fine Gael will need additional support to gain a majority. On the other hand, Sinn Féin could not command a majority even if it were to collaborate with other center-left and left parties within the Dáil Éireann.
Citations:
Lorenz Emter, Peter McQuade and Caroline Mehigan ‘MNEs in Ireland: A Firm Level Analysis, Central Bank of Ireland Quarterly Bulletin, July 2019.
‘Top 250 Exporters in Ireland and Northern Ireland 2015,’ The Irish Exporters Association, 2015.
Brad Setser ‘Ireland’s Cry for Statistical Help’ U.S. Council for Foreign Relations, 2019.
For political events see: Michael Gallagher and Michael Marsh (2016, eds), How Ireland Voted 2016: The Election that Nobody Won. London: Palgrave Macmillan.
Summary of Social Housing Assessments, Housing Agency 2018
Irish Fiscal Advisory Council, Fiscal Assessment Report, November 2019
Initiative Ireland Housing 2031, February 2018
 

Party Polarization

End to inter-party
budget deals
The 2016 general election produced a minority Fine Gael government, which is very much dependent on a confidence-and-supply arrangement with the other major party, Fianna Fáil. Under the arrangement, Fianna Fáil has not opposed the passing of the government’s annual budgets. The confidence-and-supply arrangement was produced on the basis of an agreed range of policy principles. By the end of 2019, this confidence-and-supply arrangement had facilitated the passing of four annual budgets. It looks as if this arrangement will end following the general election of 2020. (Score: 7)
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