Ireland is booming, thanks to the impact of global tech. So you might expect Brendan, the managing director of a US-owned software development and IT centre in the country’s southeast, to be a happy man.
Instead he is worried about recruiting and retaining staff in a country whose creaking infrastructure is not keeping pace with its wealth.
Take housing. While the cost of living outside the capital is cheaper than in Dublin, Brendan – who asked for his real name not to be used – finds staff struggle to relocate because there are only a handful of properties for rent in the entire county where his firm is based.
Ireland’s acute housing crisis has consigned two-thirds of people in their mid- to late-20s to living in their childhood bedrooms because they cannot afford to buy or rent. But the country’s logistical problems go well beyond that.
Ireland’s transport, health, education, energy and water services are under increasing strain after a decade of underinvestment following the 2008 financial crash. In just one illustration of the bottlenecks in a country of 5.3 million people, nearly 10 per cent of adults on hospital waiting lists have been waiting for more than 18 months. The official target is 12 weeks.
For Brendan, his county’s poor train and bus connections are especially frustrating. A transport system designed “largely for people going shopping”, not commuting, is “hurting competitiveness,” he says. The IT centre could easily be located in another country so “we’ve got to work harder to actually make it a viable proposition” for workers, he adds.
Yet Ireland is awash with cash. Corporation tax receipts have more than tripled in the past eight years and hit a record of €22.6 billion last year. The Central Bank estimates that Ireland’s general Government balance swung from a deficit of €6.8 billion in 2021 to an €8 billion surplus last year, the largest surplus since 2006.
The boom times show no sign of slowing: corporate tax receipts are flooding in so fast that the Government has pencilled in a surplus of €10 billion this year, €16.2 billion next year, €18.1 billion in 2025 and €20.8 billion in 2026 – a colossal €65 billion in all over the next four years. (though it has cautioned that the real figure may be much lower, depending on externalities).
It doesn’t make sense to only ringfence that [windfall tax bonanza] for a rainy day because for many, it’s already raining
As a result, the once-rural economy is preparing to set up a sovereign wealth fund. Its GDP numbers, distorted as they are by the outsize role that globalised companies play in Ireland, were nevertheless so off the charts last year that they lifted the European Union overall. By the same measure, a country only half a century ago seen as the poor man of Europe is now one of the EU’s top 10 economies.
But Ireland’s future-focused economy is being held back by infrastructure stuck in the past, with companies such as Brendan’s caught in the middle. As the Government prepares to unveil its 2024 Budget on October 10th, debate is intensifying about how best to put the country’s newfound wealth to work. And despite the overflowing coffers, economists say the real recipe for funding Ireland’s future needs is not splurging temporary gains, but raising taxes.
“We are nouveau riche,” says Fergal O’Brien, director of lobbying and influence at business confederation Ibec. “What is the point of us being a wealthy country if we don’t have the things we need the most – physical infrastructure, social and public services?”
Ireland’s fortunes were transformed when the corporate tax rate of 12.5 per cent was implemented in 2003 , accelerating its policy of courting foreign direct investment. Global giants such as Google, Apple, Meta, Amazon and Pfizer soon piled in or expanded existing operations.
Using their booming contributions to state coffers to make long overdue investments to upgrade the domestic economy and improve services might seem like an obvious, and affordable, solution for Ireland’s Government.
As well as the sovereign wealth fund, whose returns could help ease long-term cost pressures such as pensions and the green transition, the Government has said it will set up a public investment fund to finance infrastructure projects.
But it is likely to approach next month’s budget with caution. There are three reasons for this: firstly, Ireland has been spectacularly rich before, during the Celtic Tiger boom of the mid-1990s to mid-2000s. The period was pithily summed up by Charlie McCreevy, a finance minister from that time, as “when you have it, you spend it”.
On his watch, public spending doubled and the Government splurged tax revenues from the booming economy on tax cuts and benefits. But a property crash and Government bailout of the banks whose reckless lending had fuelled the property boom, plunged Ireland into a fiscal hole that required a €67.5 billion bailout from the International Monetary Fund (IMF) and the European Union (EU) to climb out of.
In a humiliating turnaround, a “troika” of IMF, EU and European Central Bank (ECB) officials, swept into Dublin in 2010, to put Ireland’s house in order. Draconian budget cuts followed.
That bust still casts a traumatic shadow; no policymaker wants to be responsible for bringing austerity back. Minister for Public Expenditure Paschal Donohoe recently told an Irish Times podcast that “not spending every cent is the best insurance policy you can have”.
The second reason for caution is, as the Government, Central Bank, budget watchdog the Irish Fiscal Advisory Council and a string of other economists ceaselessly warn, Ireland’s corporation tax bonanza could evaporate as quickly as it emerged.
Last year, three-fifths of Ireland’s record corporate tax haul came from only 10 groups. A third of the total paid between 2017 and 2021 came from just three companies, according to the IFAC, which did not name them.
Using potentially temporary revenues for permanent spending would be disastrous. Ireland is poised to raise its corporation tax rate to 15 per cent from January under a global deal, and while officials stress there are no signs on the horizon that any firms are planning to relocate, they are queasy at what might happen if they did.
Minister for Finance Michael McGrath and Mr Donohoe warn that as much as €11 billion of last year’s record haul was a not-to-be-relied-upon “windfall” without which Ireland would have had a nearly €3 billion deficit.
Indeed, without excess corporation tax receipts, which have “flattered” Irish state accounts, the country would be running its 17th consecutive annual deficit this year, IFAC, the budget watchdog, noted.
Underscoring that vulnerability, Ireland’s corporation tax receipts fell by a whopping €1 billion in August alone compared with the same month last year, although the tax has still netted nearly €13 billion so far this year.
The third reason to tread carefully is that a Government spending spree risks fuelling inflation, which has been persistently high in Ireland as it has elsewhere in Europe since Russia’s full-scale invasion of Ukraine last year. After falling to an 18-month low of 5.8 per cent in July, the consumer price index rose again to 6.3 per cent in August.
So far, the Government has squirrelled away €6 billion of those corporation tax profits in an existing rainy-day fund, which will be subsumed into the new sovereign wealth fund. Separately, it has promised to spend €2.25 billion of its surplus between 2024-26 on key infrastructure such as schools, hospitals and transport projects, as well to fund environmental challenges ahead.
But economists say what the Government really needs to do is increase other taxes to be ready if the corporate revenue tap runs dry. “There’s a real risk with the sovereign wealth fund that it will breed complacency in terms of the need to do hard things,” says O’Brien.
The Government is reluctant to boost taxes, however. A general election is just under a 1½ years away at most, and with the ruling parties under pressure from Sinn Féin’s popularity, cutting taxes is more on officials’ minds.
“We’re going to have a proper conversation about revenue,” says Tom McDonnell, codirector of the Nevin Economic Research Institute (Neri), as Ireland faces multiple crises “coming at us like a speeding train”.
‘It’s already raining’
Ireland has one of the EU’s fastest growing populations: the number of people living in the country has risen by nearly a third in the past two decades, largely driven by immigration. In the year to April alone, Ireland’s population has grown by almost 100,000.
But it also has the bloc’s fastest-ageing population, with the proportion of people aged 65 and over, as a share of the working-age population, set to almost double to 46 per cent in 2050 from 25 per cent in 2020.
That sets up a mismatch between those contributing taxes and the number drawing pensions. The Government estimated two years ago that by 2030, Ireland would have to find at least an extra €7 billion a year to fund age-related costs, a cost that will grow as the Government predicts the number of over 65s will increase 60 per cent in the next 20 years.
In addition, the Government estimates that investment of some €119 billion will be needed by 2030 in low-carbon technologies and infrastructure – such as wind power, electric vehicles, heat pumps, reforestation and changes in agricultural practices – and the Government has already warned that policymakers need to “use taxation as an instrument in the transition towards a lower carbon economy”.
But in the meantime, simply funding today’s needs remains a challenge. Over 670,000 people in Ireland live below the poverty line, says Colette Bennett, an economic and social analyst with Social Justice Ireland, an independent think-tank and advocacy group, including 100,000 who have jobs.
Income tax, corporation tax and the VAT sales tax together make up 90 per cent of Ireland’s overall €83 billion national tax take
She urged the Government to recognise that using some of the corporation tax windfall to tackle social needs should also be considered an investment in the future. “It doesn’t make sense to only ringfence that [windfall tax bonanza] for a rainy day because for many, it’s already raining,” she says.
But at the same time, she adds, raising taxes is now becoming “an imperative”. Mr McDonnell agrees. “For now, the implication is that we need not to cut taxes but to increase them so we can have an extra level of public spending,” he says.
Ireland’s ratio of tax revenues to GDP is the lowest in the EU, according to the IMF – and still below the EU average when compared to the government’s preferred measure of modified gross national income, which strips out some of the distorting effects of the country’s globalised economy.
Income tax, corporation tax and the VAT sales tax together make up 90 per cent of Ireland’s overall €83 billion national tax take – a reliance on income tax that is well above the Organisation for Economic Co-operation and Development (OECD) average, the IMF notes.
Mr McDonnell says real reform would mean looking at VAT, excise duties, income tax and social insurance taxes.
Yet the Government seems more interested in going in the opposite direction. Three junior ministers ignited furious debate in May when they called in a national newspaper for a €1,000 tax break in the budget for full-time workers on average wages.
That €1,000 tax break may not happen but cuts to the universal social charge (USC) – essentially another form of income tax – are expected as part of a €1.1 billion tax package in this month’s budget. As Mr Varadkar put it recently, “there are many ways to skin a cat”.
The Government is planning to increase core spending by 6.1 per cent in the 2024 budget.
The Irish Congress of Trade Unions (Ictu) has warned against across-the-board tax cuts that it says would disproportionately benefit better-off people. Owen Reidy, Ictu general secretary, says polls show people want spending on health, education and other public services to be prioritised.
The Government is walking a tightrope, as it seeks to deliver much-needed investment while not alienating voters or increasing inflation. It says its budget package will total €6.4 billion, but it has been sternly upbraided by the Irish Fiscal Advisory Council (Ifac) for serially breaching its own spending rule that commits to keeping annual increases in core spending to 5 per cent. The Government is planning to increase core spending by 6.1 per cent in the 2024 budget.
But its parallel task is to ensure that the corporate tax bonanza from the multinational firms that pay a third of Ireland’s wages can be used to build an economy that will not just be a magnet for global giants but a breeding ground for home-grown companies it hopes might one day rival them.
“I think that there is an opportunity to spend the money wisely,” says Edel Clancy, director of corporate affairs at Musgrave Group, a supermarket and food retail business whose suppliers include small firms and sometimes low-margin, family companies, “so that we do actually put in the foundation for the next phase of development in the country.” – Copyright The Financial Times Limited 2023