Ireland’s economic figures should carry a health warning. This week the Central Statistics Office estimated that Gross Domestic Product (GDP), the standard measure of the size of the economy used internationally, increased by more than 12 per cent last year. This puts Ireland at the top of the euro zone growth league.
But the Irish GDP figures are meaningless as a guide to to how the economy is doing, entirely distorted by the activities of multinationals here. The underlying Irish economy will have grown way above the EU average last year – as has been the case in recent years. But we all know that the economy we live and work in did not expand by 12 per cent plus.
The way the activities of multinationals here distort much of our national economic data is well understood, but the scale of this has stepped up sharply since around 2015. And this is now a key factor in how people internationally look at and talk about the Irish economy.
There is, for example, no longer a debate in international economic circles about whether Ireland is a tax haven. It is taken as a fact, with our crazy data cited as evidence. Influential author and Financial Times columnist Adam Tooze recently wrote that in a longer-term analysis of euro zone growth it was necessary to exclude the Irish figures as “they are spectacularly distorted by its role as an offshore tax haven”.
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Economists noted that this week’s figures showing a small 0.1 per cent rise in euro zone GDP would have been flat or perhaps shown a small decline had Ireland not recorded such hot growth. US economist Brad Setser, who works for the Council on Foreign Relations, pointed out that the euro zone figures were distorted by “one small but actually not so small European economy”.
Ireland has pushed its luck, only slowly phasing out the controversial double-Irish regime and giving attractive tax breaks for the IP moved here
Ireland’s economic data has long been messed up, but things started to really go off the rails in 2015 when GDP shot ahead by 26 per cent, leading US economist Paul Krugman to coin the phrase “leprechaun economics”. The Irish embassy in Washington complained – unwisely – to the New York Times where the Krugman article appeared that this was an “ unacceptable slur”. It would have been better to keep the head down as the GDP figures that year were driven by a massive relocation by US multinationals – notably Apple – of some their so-called intellectual property (IP) assets, the copy rights, patents, licenses and so on underlying products like the iPhone and high-tech pharma drugs to Ireland. A legitimate question from a US viewpoint would be why all this IP was not located in the US, given that was where the products were developed in the first place.
Since then, Leprechaun economics has lived on. The gap between GDP and measures of “real” economic activity has remained large. A big issue is that multinationals, including giants like Apple, have increasingly arranged production abroad from their Irish-based international headquarters. Much of this artificially boosts Irish export data – and thus Irish GDP. But an iPhone produced in China doesn’t create any real economic activity in Ireland.
The economy has gained not only from tax revenues but also from the creation of tens of thousands of jobs and real economic activity generated by these multinationals. Real activity has followed the movement of IP investment here, even if the location of the latter is largely an accounting device to help hold down tax bills.
Government ministers and officials can’t quite believe it has all worked out so well. Ireland has pushed its luck, only slowly phasing out the controversial double-Irish regime and giving attractive tax breaks for the IP moved here.
Irish sources point out, with justification, that the tax structures of US multinationals are fundamentally based on American tax law, which has changed in recent years, but continues to encourage offshore investment. Why otherwise would big US pharma firms be manufacturing high-value drugs in Ireland for the US market?
Ireland, through policy guile and good fortune, has had an extraordinary run. We just can’t forecast for how much longer it can continue
Astute handling by former minister for finance Paschal Donohoe has limited damage from the next phase of international tax reform, which will kick off with a new 15 per cent tax rate across the EU for major players next year. This will boost revenue in Ireland, though other parts of the reform plan – if ever implemented – will cost the Irish exchequer.
But Ireland’s tax haven status and the extraordinary growth of GDP and corporate tax does put the country in the spotlight. Post-Covid and the Russian invasion of Ukraine, there are new questions about international investment and how supply chains are set up. The Biden administration is seeking to bring investment “home” initially through a special programme for investment in computer chips and big incentives for firms focusing on green projects as part of the Inflation Reduction Act. The EU, fearing that the US is trying to lure investment from Europe, is preparing to respond by loosening rules on State aid to industry.
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Neither of these developments are good news for a country which relies on US investment and on a free flow of trade and capital. Transatlantic tensions over aid to industry would not help Ireland – small EU countries will not have the resources to compete with big players like France and Germany if EU state aid rules are loosened. If countries like the US really want to bring “supply chains” closer to home, what will this mean for future investments in tech manufacturing and pharma?
The game is changing, in other words, and the big countries will happily try to cherry-pick some of the extraordinary economic froth shown in our ballooning GDP figures and huge corporate taxes. Changes in US policy, in particular, will be vital.
The plus for Ireland is that the massive US investment already here has built up a base of skills and activity which make the country attractive for ongoing investment. Ireland, through policy guile and good fortune, has had an extraordinary run. We just can’t forecast for how much longer it can continue.