Tech sector tax windfall props up Ireland’s economy against recession

For much of the EU, the economic outlook is bleak with fears of a growing recession and tight government finances. Then there is Ireland.

The republic is enjoying an €8bn corporate tax windfall after excellent pandemic-enhanced revenues from tech and pharmaceutical companies. Tax collection from companies lured by Ireland’s 12.5 per cent corporate rate has soared since 2015 and jumped a further 30 per cent last year compared to 2020.

the economy of ireland it expanded 6.3 percent during the second quarter, against an EU average of just 0.6 percent. So great was the impact of the multinationals that figures for Ireland distorted figures for the EU, even though the nation of 5.1 million accounts for less than 3 percent of the region’s economy.

With employment and foreign investment also at record highs, “the economy is even hotter than the weather,” said Danny McCoy, head of the employers’ confederation, Ibec, pointing to recent record temperatures.

However, Ireland is not without problems. Prices rose 9.1 percent in the year to June. Families feel marginalized from the housing market in Dublin and other cities.

“We’re not underpaid,” said Mark Murphy, 39, a West Cork-based regional manager for a charity with his wife. He delayed getting married and starting a family to save for a “very modest” house of around 300,000 euros. “But now, the same houses cost 400,000 euros, we just can’t get the credit,” he said.

Consumer spending contracted 1.3 percent in the first quarter compared to the previous three months. Modified domestic demand, a measure of the size of economic activity that excludes spending by some multinationals and is considered a better indicator than gross domestic product, fell 1 percent during the first quarter.

Officials warn that corporate tax is vulnerable to fluctuation. Half of the €15.3bn corporate tax revenue last year came from just 10 companies, including Apple, Google, Intel, Meta, Amazon and Pfizer.

Line chart of corporate tax receipts (€bn) showing that Ireland's corporate tax receipts have skyrocketed

But for now, good tax revenues give Ireland a useful cushion, with a very modest fiscal surplus expected if spending levels are maintained, although Ireland, following some EU neighbors including Spain, is now considering an additional tax. to energy companies in the 2023 budget on September 27.

Dermot O’Leary, chief economist at the brokerage firm Goodbody, said Ireland had no need to go down the “Robin Hood route” because it can use the corporate tax windfall to fund almost €7bn of already announced spending to budget.

Even after excluding the multinational sector, Ireland’s domestic economy shrank less in 2020 and recovered faster in 2021 than the EU average, ratings agency DBRS Morningstar said.

Leo Varadkar, deputy prime minister, at an event last month presenting record domestic investment data, said: “The jobs and income created by multinationals helped keep us out of recession when the pandemic hit and now they give us the financial power to alleviate the crisis. the cost-of-living crisis and avoid recession once again.”

But if the world economy experiences a downturn, Ireland’s multinational sector could be its Achilles’ heel. The threat of a recession in the EU and the US is increasing. Any recession would hurt the profits of companies investing in Ireland and translate into lower tax collections.

The central bank said corporate tax revenue, which has beaten expectations for the past seven years, was €8 billion higher than expected last year and brought in almost €9 billion in the first half of this year alone. .

The government has been reluctant to say whether or how it will use the tax windfall in the budget, but Ireland’s central bank and Tax Advisory Council have warned that reliance on tax collection could prove volatile.

“There is nothing on the horizon to suggest that corporate tax revenues are going to fall rapidly,” said Seamus Coffey, a professor at University College Cork and an expert on corporate tax. “But five, six years ago, there was nothing on the horizon to suggest that they were going to move up..”

John Fitzgerald, an economics professor at Trinity College, said the worst case scenario for a drastic drop in corporate tax revenue would be a loss of 3 to 4 percent of national income, a huge blow to public finances.

Ibec warned that the Irish economy was facing a “tipping point” and that “for Ireland, as a small open economy, changes in the flow of capital through the global economy can have a huge impact on our growth model.” .

The central bank has also warned that housing construction to deal with Ireland chronic housing shortage Varadkar calls Ireland a “homeowners’ democracy,” but the Institute for Economic and Social Research, a think tank, recently predicted that one in three people now between the ages of 35 and 44 will not own a home. home when you retire.

Ireland could still be lucky. Although the government anticipates that its decision to join the OECD global corporate tax agreement setting a minimum rate of 15 percent could cut revenue by €2 billion, implementation has been delayed.

Foreign direct investment continues to rise, with the number of investments rising 9% in the first half over the same period in 2021, including an 18% increase in new names locating in Ireland. Conall Mac Coille, chief economist at brokerage Davy, said he saw “no real reason” why taxes paid by foreign companies investing in Ireland would “collapse any time soon”.

For now, Ireland faces the problem of managing abundance. “We are the equivalent of a household that just won the lottery,” McCoy said. “Are we the household mature enough to say ‘actually this good fortune can be put to work for future generations’? Or will we just go crazy for half this generation and regret it so much?

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