For most of the member states of the European Union, the economic outlook looks quite gloomy, in view of the increasing fears of a recession and the pressure on government spending. In Ireland, however, the situation is different.
The state’s income from corporate taxes in 2021 was 8 billion euros higher than forecasts, this after the epidemic increased the income of technology and pharmaceutical companies. The income from taxes paid by companies that came to Ireland thanks to a tax of 12.5%, has been climbing since 2015 and jumped in 2021 by an additional 30% compared to 2020.
The Irish economy expanded in the second quarter by 6.3% compared to an average of only 0.6% in the European Union. The influence of the international companies was so great that Ireland’s data disrupted the statistics of the European Union, even though the country of 5.1 million inhabitants represents less than 3% of the regional economy.
Additional tax on energy companies
Employment and foreign investment rates also climbed to record highs. “The economy is hotter than the weather,” said Danny McCoy, chairman of employers’ confederation Ibec, referring to temperatures that have recently climbed to record highs.
But Ireland is not without problems. Prices climbed 9.1% in the 12 months to June. Many families are unable to purchase a home in Dublin and other cities.
“Our salaries are not bad,” said Mark Murphy (39), a charity regional manager, who lives with his wife in west Cork. They initially rejected plans to get married and start a family to save for a “very modest” house in the 300,000 euro price range. “But now those houses cost 400,000 euros – this is not within our credit.”
Private consumption in Ireland contracted by 1.3% in the first quarter compared to the previous quarter. Modified domestic demand, a measure of the size of the economy that excludes some of the country’s international companies and is considered more accurate than GDP, fell by 1% in the first quarter. Senior officials in the country also warn that the corporate tax is prone to volatility. Half of last year’s 15.3 billion euros in revenue It came from only ten companies, including Apple, Google, Intel, Meta, Amazon and Pfizer.
But for now, the fertile income from taxes gives Ireland a strong safety net, and a small budget surplus is also expected, assuming that the level of expenses remains unchanged. However, Ireland, like other countries in the Union, including Spain, is now considering imposing an additional tax on energy companies in the 2023 budget, which will be published on September 23.
Dermot O’Leary, chief economist at the brokerage firm Goodbody, argues that Ireland has no reason to adopt the “Robin Hood” route because it can use the income from corporation tax to finance the nearly €7 billion in expenses already announced in the budget. Even without the international companies, the economy contracted in 2020 at a low rate and recovered faster in 2021 than the average in the European Union, according to the credit rating agency DBRS Morningstar.
“The jobs and income created by the international companies helped us avoid a recession when the epidemic broke out, and now they give us financial ammunition to ease the cost of living and avoid a recession once again,” said Deputy Prime Minister Leo Vardakar last month at an event where he presented record investment figures in the country.
But if the global economy experiences a slowdown, Ireland’s international corporate sector could prove to be the country’s Achilles’ heel. The chance of a recession in the European Union and the United States is increasing, and any slowdown will hurt the income of companies invested in Ireland, so that the payment of taxes will also be lower.
Chronic housing shortage
The Central Bank reported that corporate tax payments, which were higher than forecasts for the past seven years, were already close to 9 billion euros in the first half of 2022. Although the government is not prepared to reveal whether and how tax revenues will be used in the budget, the Central Bank and the Irish Fiscal Advisory Council have already warned from relying on tax revenues that may prove to be unstable. “There is nothing on the horizon to suggest that corporation tax revenues are going to fall rapidly,” said Seamus Coffey, a lecturer at Cork University and a corporation tax expert. “But five or six years ago there was nothing on the horizon that indicated the sharp increase.”
John Fitzgerald, an economics lecturer at Trinity College, said that the worst-case scenario of a drastic drop in corporate tax payments is a loss of 3-4% in national income, which would severely damage public finances. Ibec warns that the Irish economy is facing a “turning point”, and that “for Ireland, as an open and small economy, a change in the flow of capital through the world economy may have a disproportionate effect on the growth model”.
The central bank also warned against the slow pace of building new homes, which should help solve the chronic housing shortage. According to the forecast of the Institute for Economic and Social Research, one out of three people aged 35-44 will not be able to purchase a home before retirement.
Nevertheless, fortune may continue to shine on Ireland. Although the government estimates that its decision to join the OECD agreement to set a minimum corporate tax of 15% could reduce revenues by 2 billion euros, the implementation of the agreement has been postponed for now.
Foreign direct investments continue to climb, and their number in the first half climbed by 9% compared to the corresponding period in 2021, including an 18% jump in companies moving to Ireland. Connell McCoyle, chief economist at brokerage Davy, said he saw “no real reason” why foreign company taxes investing in Ireland would “collapse any time soon”.
For now, Ireland faces the problem of managing abundance. “We’re the equivalent of a household that just won the lottery,” McCoy said. “Are we mature enough to say that the new capital can be used for the benefit of future generations, or will we simply leave the reins for half of this generation and regret it in the future?”