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Celtic Phoenix or Celtic Tiger revisited?

by Frank Schnittger Fri Sep 19th, 2014 at 09:39:52 PM EST

Ireland has been producing some fairly decent economic statistics for a couple of years now - despite the general stagnation in the Eurozone and the continuing "consolidation" of the public finances as the Troika imposed austerity plan seeks to reduce the current budget deficit to below 3% by next year. But the latest figures showing 9% GNP growth and 7.7% GDP growth in the last 12 months take the breath away, and even if they prove to be something of an anomaly, would seem to indicate that the Irish economy has reached take-off velocity despite the heavy gravitational pull of public sector spending cuts, a 125% debt to GDP ratio, and stagnant external markets.

About 5% of Irish GNP and GNP can be attributed to the tax avoidance strategies of (mainly US) corporates basing themselves in Ireland for tax purposes, whilst in reality, the vast bulk of their activities take place elsewhere. The marked divergence between GNP and GDP growth above can also be attributed in large part to the so called "Patent Cliff" which has resulted in a large fall in the value of pharmaceutical exports as blockbuster drugs like Lipator and Viagra come off-patent.

Ireland is the fifth biggest exporter of drugs in the world, and Irish chemical and pharmaceutical exports surged by more than a quarter in the five years to 2011 when they peaked at €56bn, a figure equivalent to almost a third of gross domestic product.  But the employment content of those exports is relatively small, and what is clear from these recent figures is that there is a much more broadly based recovery taking place in the Irish economy which is now even making up for the fall in drug export revenues.


The composition of the Irish workforce has been transformed into a much more knowledge based workforce, and the unemployment rate has declined steadily - from 15 to 11.5% - below the Eurozone average rate of 11.8%, aided, to some extent, by continuing but declining net emigration.

However the size of the total workforce has yet to recover to pre-recession levels and there is controversy as to the actual number of real additional jobs being created:

Property prices in Dublin have risen 25% from their bottom at the height of the recession and are now also starting to rise again in the rest of the country prompting some fears that we may be back into a boom and bust property price cycle.  However they are still over 30% below their peak at the height of the boom, and there are signs that the construction industry is beginning to ramp up output again from very low levels to meet pent-up demand. These price rises are also helping to reduce the number of households in negative equity and the number mortgages in arrears or in default - which should enable the banks to survive the stress tests due to be published on October 26th.

Partly as a result of this and increased employment levels, consumer confidence is at a 7 year high and private spending is beginning to increase from a low level - even as households continue to deleverage and rebuild their balance sheets after the recession. Government tax revenues are running about €1 Billion ahead of target which means that the c. €2 Billion adjustment which was expected to be required in next months budget to meet the Troika (and EU) 3% deficit target can be met without further tax rises, and indeed some income tax reductions and spending increases are being signaled as forming part of the budgetary arithmetic. The Irish state can now borrow on the markets at O% interest and is negotiating with the EU and IMF to repay bail-out loans early and save c. €400M p.a. in interest payments in the process.

The government remains under pressure to reform its corporate tax code but claims that the 12.5% corporate profit tax rate will become progressively more attractive as all countries are forced to close their corporate tax loopholes. One of the unstated reasons why the Government remained largely silent on the Scottish independence debate was that it feared an independent Scotland would become a more aggressive and successful competitor for FDI. There also appears to be considerable optimism that a British exit from the EU could leave Ireland inundated with banks and other corporations  relocating from London to Dublin in an attempt to retain access to the Single Market.

So are we witnessing the emergence of a Celtic Phoenix from the ashes of the Celtic Tiger, or is Ireland once again in the throes of an irrational exuberance which could have a very sorry ending? Certainly the strategy of attracting FDI partly through tax competition has been very successful, at least in the short term, but this is not a strategy which the rest of the Eurozone could pursue without diluting the benefits for all. Ireland's national debt is due to peak at c. 125% of GDP next year - up from just 25% in 2008 - and this will remain a headwind for the public finances for many years to come. Much of the burden of adjustment during the recession fell on those dependent on state benefits and services and Ireland's GINI index has yet to recover to pre-recession levels.

It will be some considerable time before the bulk of the people actually feel that the recession is over for them personally, and in the meantime the Government is trying to "manage expectations" by limiting expansionary policies as much as possible until the 2015 Budget where it will have maximum impact on electoral perceptions ahead of the next general election due in 2016.  Some will no doubt benefit from improved employment prospects in the meantime, but if you are dependent on state benefits and services your situation will still take quite some time to improve.

As Krugman has noted, if you measure success as any improvement on the disastrous consequences of austerity, you are setting the bar for success very low indeed. Ireland is recovering, but it is from a relatively low base, and it will still be quite some time before those who felt the brunt of austerity the most see any tangible benefits in their real lives.

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I mentioned, but did not go into the the details of the distortions in Irish national accounts caused by the tax avoidance strategies of major (mainly US) corporates.  A comprehensive discussion can be found in the linked article:

The idiot/ eejit's guide to distorted Irish national economic data

In recent years GNP, excluding the profits of the foreign-owned sector has been typically about 20% smaller than GDP.

In 2013 the difference was 15% because of the decline in profits related to the drugs patent cliff.

While GNP has been seen as a better indicator than GDP of Ireland's living standard and output, it has become distorted in recent years by the rise in tax inversions/ redomiciling.

Prof John FitzGerald of the ESRI in a 2013 paper [pdf] estimated that global profits re-domiciled in Ireland added almost €7.5bn to recorded GNP in 2012, making it appear 5% larger while the balance of payments surplus officially 6.1% of GNP was in reality 0.6%.

Medtronic, the US medical device maker, will likely complete its planned tax inversion by the year end.

So GNP will have an artificial boost from the new faux-Irish group that will have a payroll of about 50,000.



Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat Sep 20th, 2014 at 05:09:06 PM EST
Advisory Council. These economists have never heard of Krugman or Stiglitz, obviously, and see their role as preventing "populist" governments from actually addressing real needs... and telling them to focus on market perceptions instead.

Fiscal council says tough budget necessary

The Irish Fiscal Advisory Council has urged the Government to proceed with a another tough budget next month, saying considerable work is still required to repair the public finances.

Only days after Minister for Finance Michael Noonan said there would be no need for a new round of tax increases and spending cutbacks next year, the council says in a pre-budget report that the Government should still go ahead with its original plan to retrench by a further €2 billion .

"Budget 2015 will be the first since Ireland exited the EU-IMF programme. By adopting a prudent budgetary stance, the Government can send a strong signal reinforcing its stated resolve to rectify the remaining weaknesses in the public finances," it says.



Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 22nd, 2014 at 05:26:49 AM EST
Well, considering that those institutes always give the same recommendation, could we not start applying it by scrapping their funding? We should be able to just re-use the previous report. It will have as much non-value.


Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Mon Sep 22nd, 2014 at 05:36:45 AM EST
[ Parent ]
No.  The Irish way is to praise them for their acumen and then totally ignore what they say. In reality the Government will be delighted by their contribution as it aids their campaign to "manage" (i.e. lower) public expectations leading up to the budget which will allow the Government to portray any small crumbs given to the populace as part of the budget as "a major achievement and step forward in moving away from austerity".

I can write the script now for them if they want...

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 22nd, 2014 at 05:43:35 AM EST
[ Parent ]
Financial Times says Ireland sets example for the rest of Europe

Struggling European economies should learn from how Ireland put its economy into recovery mode, the Financial Times says in an editorial in today's newspaper, arguing that Ireland provides "growing evidence of how countries that shape up after a crisis can recover strongly despite and unfavourable international outlook".

"Few countries soared as high or crashed as hard," the newspaper says. However, a combination of "the toughest choices" for the country's "long-suffering people" and the rebuilding of the banking sector, means that the economy is now in recovery mode.

Noting while countries such as France and Italy stagnate, "while bickering about long overdue reforms", Ireland has posted an "astonishing" second quarter growth rate, "a pace unseen since the heady days of the early 2000s".

"Others should learn from its example," it says, adding that "for small, open economies such as Ireland external conditions are far less important than steps taken at home".

In common with virtually all mainstream media comment, the Financial Times editorial makes no reference to the fact that much of Ireland's "success" is based on distorted national account figures and a tax competition strategy that is not replicable across the Eurozone without drastically diluting the benefits for all.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 22nd, 2014 at 05:37:43 AM EST
They never do: the FT used Ireland as their poster child for austerity before it was called austerity. I believe it was called "Freedom" or "Competitiveness" or something. Different names, same old story.
by Colman (colman at eurotrib.com) on Mon Sep 22nd, 2014 at 06:19:49 AM EST
[ Parent ]
"for small, open economies such as Ireland external conditions are far less important than steps taken at home".

They certainly switched the word order there.

by IM on Mon Sep 22nd, 2014 at 12:20:53 PM EST
[ Parent ]
Dublin's ranking as a financial centre continues to plummet

Dublin has slid to 70th place in a ranking of 83 global financial centres,behind smaller centres like Guernsey (67), Cayman Islands (54) and Gibraltar (53), and far behind Luxembourg (15th), which alongside Dublin is Europe's top hub for investment funds. In 2009 Dublin ranked in 10th place.

According to the 16th bi-annual Global Financial Centres Index (GFCI) prepared by research group Z/Yen, out of the 23 western European centres polled, Dublin places fourth last, ahead of Madrid, Helsinki, Lisbon and Reykjavik.The top ten western European centres all saw a decline in their ratings. Leading centres in the region all fell in the ratings, with Zurich, Geneva, Luxembourg and Frankfurt joining London in losing ground.

Globally, New York, London, Hong Kong and Singapore remain the top four financial centres, with New York just one point ahead of London. Uncertainty over the UK's position in Europe, regulatory creep and the UK appearing to be less welcoming to foreigners were all cited as being contributing factors.

Isn't "regulatory creep" a terrible thing? Not sure about the methodology of this survey, but if it effects/reflects investor perceptions no doubt it will influence "market liberalization and reforms" in downwardly mobile centres...

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 22nd, 2014 at 06:20:24 AM EST
There is good news, then.
by IM on Mon Sep 22nd, 2014 at 12:21:40 PM EST
[ Parent ]
Is ongoing, but will it get anywhere anytime soon?

Why we should jump first on corporate non-taxation

One of the little-noticed aspects of the rise in global income inequality is the extent to which it has been driven by the increasing income (and wealth) of corporations. The share of the economic pie that accrues to firms has been rising for years in many - most - economies, at the expense of workers. Even uber-capitalists recognise that this cannot continue without limit. Pragmatic governments, desperate for new sources of tax revenues, salivate over an obvious pot of cash, albeit an elusive one.

And what should Ireland do?

Why we should jump first on corporate non-taxation

Anyone with any degree of familiarity with cross-border taxation will be familiar with double-taxation treaties. The thinking behind these cross-border arrangements was an attempt to provide a level and fair playing field so that, as the name suggests, companies (and individuals) didn't get taxed twice. What we have now, with the latest OECD initiative, is an attempt "to eliminate double non-taxation". The language speaks volumes. Again, the aim is to establish a fair and level playing field, albeit from a different starting point.

For Ireland, the only issue is whether or not to follow Ibec's advice and try to seize the initiative. Our choices will tell us a lot about ourselves. The right thing to do, broadly defined, would be to accept both the logic and inevitability of change and to show some leadership. That approach would have, at least, an ethical advantage. It might also have more concrete benefits in terms of reputational enhancement.

The risk, of course, is that it takes ages for the OECD initiatives to bite and that if we jump first we could lose inward investment and jobs. It's a cold calculation. The default position, to do as little as possible and wait for somebody else to jump, will in all likelihood prove tempting. But that would be a missed opportunity.



Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 22nd, 2014 at 06:36:22 AM EST
Why we should jump first on corporate non-taxation

Any day now, some country will indeed do that and abolish corporate tax. It is only the logical end.

by IM on Mon Sep 22nd, 2014 at 12:31:04 PM EST
[ Parent ]
It's only red tape anyway...we want FREEDOM!

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 22nd, 2014 at 12:55:13 PM EST
[ Parent ]
Fianna Fail, main opposition party, comes out against corporate tax reform...

Government warned against acting unilaterally on tax

Ireland must not surrender its competitive tax position by moving unilaterally to change its corporation tax code, Fianna Fáil finance spokesman Michael McGrath has said.

His comments come amid reports the Department of Finance may move to close off tax loopholes like the "double Irish" in the budget on the back of concern over multinational tax avoidance.

In the wake of last week's OECD report on Base Erosion and Profit Shifting (Beps), director of its centre for tax policy Pascal Saint-Amans said Ireland should move sooner rather than later to scrap the contentious scheme.

The scheme, used by multinationals operating here, including Google's Irish arm, exploits differences between Irish law and other jurisdictions to avoid tax.

Nonetheless, Mr McGrath said changing the State's tax code without putting in place the long-term reforms to improve Ireland's competitiveness "could prove very costly".

"Instead of jumping the gun at this stage we should honour our commitment to fully participate in the [BEPS]process while at the same time developing national strategies to retain our competitive positions."

"While some commentators are claiming that unilateral action would enhance our reputation internationally we need to be cautious in how we approach the Beps process," Mr McGrath said.



Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Sep 22nd, 2014 at 01:22:14 PM EST
I have a sense that any story detailing Ireland's economic "success" is unwelcome here for a number of reasons:

  1.  It is sure to be exploited as an exemplar of how neo-liberal reform "works" as part of the conservative media ideological battle elsewhere in Europe - cf Financial Times

  2. It cuts "across the Austerity at time of recession is always wrong" narrative even if it still involves extensive borrowing to fund current expenditure

  3. It is based at least partly, and perhaps largely on tax competition as a means of attracting FDI which is not a model replicable on a wider scale without greatly diluting the benefits and moreover would lead to a "race to the bottom" on corporate taxation if more widely adopted.

  4. It is based on distorted GDP and GNP figures and ignores the degree to which the success has benefited the rich at the expense of the poor.

All very substantive objections, I would have to agree.

But realistically, what other option does Ireland have as a small open economy on the edge of Europe?  It has to achieve growth somehow to lower its debt to GDP ratio and reduce borrowing costs.  Absent tax incentives, larger corporates will always base themselves in larger metropolitan centres in larger markets. The Irish economy simply doesn't offer comparable economies of scale, and could never, for instance, host a viable automobile industry.  

But perhaps most crucially of all, absent EU or Eurozone wide industrial policies or fiscal transfers through common social welfare, health and education policies, there is no way Ireland could achieve a comparable level of economic development without competing on tax as a means of overcoming other structural disadvantages.

I'm sure this is a controversial thesis, but I think it is worthy of discussion, and if it is true, then the EU as a whole is paying a heavy price for not implementing common industrial and social policies as an alternative to tax competition.

At the moment, there isn't even a theoretical EU commitment to more equal development across the regions - the regional, structural and cohesion budgets have been gutted.  So should there be any surprise that Ireland has resorted to other means to achieve some measure of equality?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Sep 23rd, 2014 at 09:08:48 AM EST
 So should there be any surprise that Ireland has resorted to other means to achieve some measure of equality?

Equality? Have you considered tompeddle this theory in say eastern europe?

 "wide industrial policies or fiscal transfers through common social welfare, health and education policies,"

there is no way Ireland wouldn't be a net payer.

by IM on Wed Sep 24th, 2014 at 04:30:07 AM EST
[ Parent ]
Having incurred huge debts to help support the European banking system I'd argue its a net payer now.
by Colman (colman at eurotrib.com) on Wed Sep 24th, 2014 at 05:49:14 AM EST
[ Parent ]
Not that old myth. The famous guarantee was an unilateral step by the Irish government. They even bragged about it  at the time that it would attract further business.

Apart from that Ireland should be a net payer or should Slovakia subsidize Ireland?

by IM on Wed Sep 24th, 2014 at 06:14:35 AM EST
[ Parent ]
They say everything will attract further business. That's what they do.

Guarantee seems to have been what happened when all the other more sensible options were closed off, but don't worry, the nice people in the core weren't involved at all, all local decisions.

by Colman (colman at eurotrib.com) on Wed Sep 24th, 2014 at 06:44:55 AM EST
[ Parent ]
In autumn 2008 there were still other options

"Guarantee seems to have been what happened when all the other more sensible options were closed off"

" but don't worry, the nice people in the core weren't involved at all,"

The decision of the irish government to issue an all out guarantee caught the other governments and the EU institutions cold and quite enraged them. Rightly.

by IM on Wed Sep 24th, 2014 at 07:03:02 AM EST
[ Parent ]
At this stage I'm hoping the history books will sort it out.
by Colman (colman at eurotrib.com) on Wed Sep 24th, 2014 at 07:27:42 AM EST
[ Parent ]
"Net payer" is such a stupid framing.
by Colman (colman at eurotrib.com) on Wed Sep 24th, 2014 at 06:45:33 AM EST
[ Parent ]
Well perhaps. But if there is a fiscal transfer in the EU or the eurozone, the money will flow from the richer to the poorer regions.
by IM on Wed Sep 24th, 2014 at 07:00:15 AM EST
[ Parent ]
It sounds so zero-sum, which is silly. "Net-investor" would be better.
by Colman (colman at eurotrib.com) on Wed Sep 24th, 2014 at 07:26:05 AM EST
[ Parent ]
Ireland's recovery is in spite of austerity, not because of it.

I'd contend that austerity delayed the recovery by about three, maybe four years. That's three years of dropping unemployment and economic growth foregone - we'd probably have a better debt-to-GDP ratio etc now and probably lower debt without austerity.

And that's just in terms of the most useless measures of an economy that we can think of.

I still don't know how much tax competition helps Ireland attract actual FDI - a lot of the companies using the Irish tax net either really don't have substantial operations here or have huge operations they'd very likely have anyway because Ireland is a good site for them.

by Colman (colman at eurotrib.com) on Wed Sep 24th, 2014 at 05:53:37 AM EST
[ Parent ]


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