The Irish Times
Real growth may not be a supersonic 7% but we are still doing really well
An economist or a statistician might be some help in trying to work out what is happening in Ireland’s economic figures, but, really, a philosopher might be more useful.
When a big multinational moves the right to its intellectual property to Ireland, does this represent a “real” rise in economic activity?
Or what about when manufacturing undertaken in the Netherlands or the sale of goods in the UK is arranged from an Irish subsidiary of an American multinational?
There is no “right” answer to a lot of these questions. The presence of big multinationals in a small economy has long been a complication in trying to work out what is really happening, but tax-driven changes and the increasingly global nature of business are now making it all the more tricky.
There are statistical rules covering all this stuff. When all the numbers are counted, they show the Irish economy growing at an extraordinary rate of 7 per cent.
And even if you make a stab at removing the multinational froth from the data , there is no doubt that growth here is well ahead of the average.
For example, the volume of consumer spending, for so long in the doldrums, is up 3.6 per cent year-on-year. Perhaps this isn’t a bad “guesstimate” for a kind of underlying rate of growth in our economy – and given the buoyancy in parts of the business sector you could even add a bit.
The difficulties with trying to strip out the multinational factor are significant. For example, as UCC economist Seamus Coffey pointed out in a blog on the national accounts figures, tens of billions slosh in and out of the economic figures relating to manufacturing carried out overseas on behalf of Irish subsidiaries. Under the rules this is counted as “Irish” exports although most of the money is then shuffled on to other parts of the multinational empire.
There is one other factor now coming into play. And here again Ireland’s luck is holding – for the moment anyway.
International moves, led by the OECD, are putting pressure on big multinationals to be less aggressive in the ways they arrange their affairs to avoid paying tax. There are pluses and minuses for Ireland in this.
On the negative side, there looks likely to be pressure on companies to pay more tax where goods are actually sold, rather than from a lower tax location where the whole thing is managed from. As an economy with a small market and a lot of multinational headquarters for Europe, we could lose a bit here.
However, the surging corporate tax revenues suggest we are more than making up for this elsewhere.
Part of the rise in corporate tax revenues above target is due to businesses doing well, making more profit and paying more tax. But there is also something else going on.
Big US companies, sniffing the international mood and seeing new rules being introduced, are starting to abandon tax havens. Up to now many would have had subsidiaries in havens like Bermuda, which had legal ownership for what are called their intellectual property rights – the rights to market products and services around the world arising from patents and copyrights and resulting from massive investment. The rest of the multinational empire pays big royalties to these subsidiaries, effectively a fee to be allowed to sell the products and services.
As this money has ended up in tax havens – or in the case of Apple ended up “nowhere” in a stateless company – little or no tax has been paid on it .
Now, however, there is pressure to abandon tax havens. And given that many of the big multinationals have operations here already, at least some are moving the ownership of their intellectual property rights to their Irish subsidiaries.
The immediate tax benefit to us may be limited –as the companies get a big tax write-off to account for the investment involved in bringing these rights to Ireland - but it does seem to be adding to national revenues.
Also, over time, it does further embed the companies in Ireland and means that at least a bit more of their tax bill should end up here.
It seems that this is one factor which has helped to push up the corporate tax take so sharply above target this year.
This all affects the economic statistics in a host of ways. The purchase of intellectual property by Irish subsidiaries, for example, is a factor boosting the national investment figures – up a massive 36 per cent in the third quarter year-or-year. Here is the centre of the multinational froth which has boosted our growth figures rate to 7 per cent.
One of the dangers of statistical boosts like this is that they tend to bite you back at some stage as whatever it is that caused it comes to an end.
And never mind trying to judge – with the help of our philosopher friend – what this means about the actual level of activity and growth rate of our economy.
However, there is reality in the growth figures too. Consumers are spending more. Job numbers are up close to 3 per cent year-on-year. Businesses are producing more, even if there are some signs of a slowing in growth rates here. Many parts of the services sector are flying, as are many of the foreign-owned firms here.
Multinational money shuffling means the real growth rate is overstated. It is not a supersonic 7 per cent.
But in a world of low growth and no inflation, an economy with underlying growth of , say, 4 per cent, is still doing really well.
International moves, led by the OECD, are putting pressure on big multinationals to be less aggressive in the ways they arrange their affairs to avoid paying tax. There are pluses and minuses for Ireland in this