Ireland depends on multinationals and is not as rich as it pretends to be

If Irish household incomes really are twice as high as those in Britain, someone really should tell the Irish

‘The Irish economy is richer thanks to a low rate of corporation tax’

The news that Ireland is mulling the creation of a sovereign wealth fund to take advantage of bumper tax revenues has prompted some good takes – and some terrible ones.

The flawed analysis has mostly come from pro-eu campaigners keen to argue that the Irish economy is booming at the expense of “Brexit Britain”. These are often the same people who leapt on a recent article in the New Statesman, which peddled the dodgy statistic that per capita incomes in Ireland – as measured by GDP – are now twice those of the UK.

You can tell something is fishy here just by looking at a few other countries which are still in the EU. Ireland’s per capita GDP is indeed more than double that of Brexit Britain, after overtaking the UK way back in 2001. But it is now also at least twice that of Germany (overtaken in 2000), France (1999) and Italy (1997)!

This is the result of what prominent US economist Paul Krugman has called “leprechaun economics”. Or, if you prefer, “shamrock economics”, with the emphasis on “sham”.

In reality, the Irish GDP data are so heavily distorted by the activities of multinationals that no one pays them much attention – even the Irish themselves. No serious commentator would pretend that the Irish economy is as rich as these figures imply.

The basic problem, as explained by the Irish national statistics office, is that “a lot of Ireland’s GDP includes profits that are generated here but then go straight out to the owners of companies abroad”.

This is the main reason why Irish economists prefer to use Gross National Income (GNI), which differs from GDP by the net amount of incomes sent to or received from abroad. Or they use a modified version of GNI which, among other things, excludes the depreciation of intellectual property and leased aircraft.

Even then, modified GNI fails to strip out all the globalisation effects. For this reason, Irish economists tend to put more weight on measures of household income and expenditure. In particular, real consumer spending (per capita) is significantly lower in Ireland than in the UK.

Put another way, if Irish household incomes really are twice as high as those in Brexit Britain, then it’s about time someone told the Irish.

The upshot is that the Irish economy is not doing as well as many suggest. But it is certainly richer than it would otherwise have been, thanks to a low corporation tax rate.

The Irish are definitely benefiting in one respect from creating such an attractive environment for multinational companies – the boost to tax receipts. As a result, Ireland is expected to run budget surpluses worth tens of billions of euros over the next several years. It’s hard to find a better example of how a lower tax rate can actually bring in more revenues than a higher tax rate. Ireland’s headline rate of corporation tax is only 12.5 per cent and, while it will rise to 15 per cent next year, this will still be super-competitive.

This was the driver behind Apple’s decision to shift its intellectual property assets to Ireland in 2015 (pre-brexit, of course). And it is the main reason so many international companies base themselves in Ireland rather than elsewhere in the EU.

Ireland is certainly not just a “one-trick pony”. Among other things, it has a well-educated English-speaking workforce, strong in science, technology, and finance. But there are valid concerns that the government has become too dependent on revenues from multinationals. More than half of Irish corporation tax is now paid by just 10 companies, including Apple and Alphabet (parent company of Google).

These businesses could easily decamp elsewhere. Indeed, more than a third of Irish goods “exports” are not actually produced or physically traded in the country.

This is a big part of the thinking behind the proposed creation of an Irish Sovereign Wealth Fund (SWF). Norway is a good example here.

Booming revenues from oil and gas mean that the Norwegian government has run huge budget surpluses for many years (2020 was a rare exception). Knowing that this bonanza will not last for ever, it has built up a portfolio of global assets worth more than $1trillion (£790bn).

An Irish version would be able to bank corporate tax revenues for investments that will also benefit future generations, whether by purchasing global assets or by investing in local infrastructure, such as much-needed housing.

The new fund could also help to pay future pensions. All these options should deliver higher economic and social returns than the alternative of simply using budget surpluses to pay down debt.

This part of the Irish model is perhaps not so relevant to the UK. Sovereign Wealth Funds need seed capital to get them started and it is unclear where this would come from here. The UK government is set to run budget deficits for the foreseeable future.

But Ireland’s experience of low taxes does offer a valuable lesson. It backs all the economic theory and historical evidence which suggests that the UK’S new 25 per cent headline rate of corporation tax will deter investment, despite attempts to offset this with more generous allowances for capital spending.

The drag is most obvious in the energy sector, where the extension of arbitrary windfall taxes is having a disproportionate impact on the UK firms who are most active in the North Sea. But other companies are starting to grumble too. The fintech giant Revolut is only the latest in a long list.

This is not to say, of course, that the UK economy doesn’t have other big problems, including dysfunctional energy and housing markets.

But pinning these on Brexit is just lazy, and adding to the tax burden on businesses is not the answer either. Just ask the Irish.