Big Tech crunch: How badly could Ireland be bitten?

Most forecasts relating to the Irish economy contain caveats: what economists call downside risks. Chief among them is the notion that, as a small, open economy, we are more adversely exposed to changes in the global business environment. An occupational hazard, you might say.

We’ve tended, for the most part, to gloss over these warnings largely because the changes, when they’ve come, have worked in our favour, acting as tailwinds to growth and employment here. When the State was mired in austerity and unemployment after the 2008 financial crisis, multinational exports and investment kept us afloat and kick-started a 10-year surge in activity that brought us back to full employment.

Despite repeated warnings that Ireland would come out the wrong side of a global clampdown on multinational tax avoidance, the opposite occurred. Business tax receipts flooded into the Irish exchequer (they are expected to hit a record €20 billion this year). And instead of exiting these shores, multinationals, in large part, doubled down on their investments here.

And when the global economy was hit by the pandemic and sent into lockdown, exports – on the back of increased demand for pharma and IT services – surged again, meaning we were one of the few countries to record positive growth in 2020 and double-digit growth in 2021.

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A certain amount of complacency in the face of such a winning streak is perhaps understandable. We are, however, firmly in the grip of a headwind now as tech companies, many with big operations here, beat a retreat in the face of a global economic slowdown.

Advertising plummets

Facebook parent Meta become the latest Silicon Valley giant to announce layoffs this week on the back of plummeting advertising revenue and a colossal 60 per cent stock market devaluation. The company said it planned to cut 11,000 jobs, some 13 per cent of its 87,000-strong global workforce. About 350 jobs are expected to be cut at Facebook’s head office in Dublin. There had been fears it could have been as many as 1,000. When the impact of the cut ripples outwards among the company’s 6,000 contract staff, it could yet be.

The latest worrying news follows Twitter’s decision last Friday to cull 7,500 staff from its workforce globally, with more than half of its 500 workers in Dublin expected to be axed. Payments company Stripe also revealed plans last week to cut 14 per cent of its staff worldwide with some 80 Irish jobs expected to be lost in the process.

[ Musk says Twitter could go bankrupt if it doesn’t raise more cash ]

Eyes are now on chipmaker Intel, which employs more than 5,000 people in Ireland, and which is also planning a major reduction in its headcount. Apple, Google and Amazon among others have, meanwhile, announced hiring freezes.

Explaining the company’s position, Meta’s founder and chief executive Mark Zuckerberg said: “At the start of Covid, the world rapidly moved online and the surge of ecommerce led to outsized revenue growth. Many people predicted this would be a permanent acceleration that would continue even after the pandemic ended.

“I did too, so I made the decision to significantly increase our investments. Unfortunately, this did not play out the way I expected,” he said.

Zuckerberg was echoing what bosses across the sector have been saying in recent months; namely that they invested too much during the Covid period and now find themselves on the back foot. “Right-sizing” is the industry euphemism being applied to the cuts.

Politicians have sought to play down the potential impact here. Tánaiste Leo Varadkar said it was important not to “catastrophise” the downsizing, while Minister for Finance Paschal Donohoe said “the Irish economy is as exposed as any other small, open economy that has a large digital or service dimension to it”.

But just what is Ireland’s exposure?

Layoff spate

According to a new data series from the Central Statistics Office (CSO), which breaks down the economy sector by sector on the basis of Revenue payroll records, the ICT sector – information, communications and technology businesses – which includes most of the big multinational tech services firms here, has added more than 25,000 jobs since 2019, an increase of 26 per cent.

The figures show employment in the ICT sector as a whole increased from 97,800 at the start of 2019 to 123,300 this August.

Fergal O’Brien, director of lobbying and influence at employers’ group Ibec, says the current spate of layoffs has to be seen in the context of this exceptional employment growth. “We’ve had the highest employment growth of any developed country in the last two to three years,” he says.

While we could see lower growth on the back of a wider global downturn, O’Brien doesn’t see the tech layoffs morphing into an unemployment challenge on a par with some of the crises we’ve seen in the past.

“The strength of the public finances should catapult us – to a large degree – to the other side of this global slowdown,” he says, suggesting that employment crises tend to come on the back of government austerity. “If – at a macro level – we can avoid the austerity challenges, then we could get through the worst of this without a significant spike in unemployment,” O’Brien says.

He also notes that many companies here have been frustrated in hiring tech staff because of shortages and that many of those laid off could find jobs with other companies or in other parts of the economy.

A bigger and more obvious pitfall is the public finances.

Publishing the latest exchequer returns last week, the Department of Finance somewhat matter of factly, and without elaborating, said that up to €2 billion of this year’s corporate tax haul would not be repeated in 2023. Business tax receipts have surged to record levels this year with €16.2 billion collected in the year to October (€6.6 billion ahead of the same period in 2021).

The department’s statement may be directly connected to the tech sector’s troubles.

Corporation tax receipts are heavily concentrated, with more than a half coming from just 10 firms, known to include Apple, Microsoft, Google, Facebook and Intel. More than a quarter of the State’s total tax take now comes from corporation tax.

Taxation windfall

A €2 billion reversal in the context of €20 billion windfall wouldn’t spell disaster. But a pronounced downturn in tech could place pressure on the public finances. Most of the ammunition in the Government’s recent €11-billion budget and the once-off measures deployed to deal with the cost-of-living emergency came directly from corporate tax revenue.

“Within the top 10 corporation taxpayers, the largest of the tech multinationals play a very big role,” says Eddie Casey, chief economist with the Irish Fiscal Advisory Council (Ifac). “A fall in profits there could hit Ireland’s tax take substantially.

“Another risk is that firms could change their tax arrangements or that the global tax regime could change,” he says. “The council sees these as major risks, although they might not materialise immediately.

“While some companies in tech are faring poorly, others are continuing to do well. The risk is partly mitigated by having a spread of firms and different sectors, like pharma, medical devices, financial services,” he says.

The wise thing for the Government to do, Casey says, is to insulate itself from any sudden losses in unpredictable corporation tax receipts.

“It can do that by continuing to stick to its 5 per cent spending rule, only growing permanent spending in line with more sustainable growth rates and not further increasing spending in line with unpredictable corporation tax receipts,” he says, noting it has sensibly used temporary measures to support households through the cost-of-living crisis. Donohoe has also pledged to place €6 billion of corporate tax receipts in a new National Reserve Fund as a buffer against future shocks.

Multinational employees, many of whom are in the tech sector, also account for an increasing share of income tax revenue (over €15 billion in 2020) on account of the high wages paid by the sector, creating a sort of double exposure for the exchequer.

The average IT worker in Ireland earns €74,000 annually, 64 per cent higher than the overall average, placing them in the top bands for both income tax and universal social charge.

Workers in the tech sector are also among the few who can afford Dublin’s astronomical housing rents, suggesting the fallout from these layoffs could be felt in other sectors.

Historic overvaluation

The boom in tech over the last 20 years is undeniably a product of fundamental changes to the way we live and consume goods and services. Netflix and Amazon now seem integral to household consumption patterns. The pandemic seemed to cement a digitisation trend.

Tech companies tend to generate huge incomes from hosting advertisements. Ten years ago, the top five ad revenue generators were media companies, now they are – in descending order – Google, Meta, Alibaba, Bytedance (TikTok’s owner) and Amazon. Typically the first budgets to be slashed in a recession are the marketing and advertising ones, hence the difficulties for Big Tech can be seen as a harbinger of a wider global reversal.

Historic levels of overvaluation in the sector can also been seen as a product of the benign monetary conditions and quantitative easing projects that have been deployed by central banks, now in reverse. Low interest rates enhance the value of future earnings, the converse is also true.

“Ireland has been exceptionally successful at attracting FDI [foreign direct investment] from its targeted sectors over recent years. This has served Ireland well over the period since the global financial crisis, boosting employment, the office sector and tax revenues,” Goodbody economist Dermot O’Leary says.

“The Government has highlighted the vulnerabilities associated with the concentration of corporate tax receipts and taken some actions already. From a wider economic perspective, the trend in employment over the coming quarters will be even more important,” he says.

A cold wind is blowing over the tech sector. It’s almost certain to get worse before it gets better and appears to signal a wider global slowdown.

The Government has reheated an announcement about the State’s enterprise policy and the publication of a White Paper in a bid to look busy but in reality there is little it can do when the decisions are being made on the other side of the Atlantic.