Ireland’s economic turnaround is real but comes with major concentration risk

In terms of its macroeconomic indicators, and you can justifiably quibble with the value of these measurements, the Irish economy is among the strongest and most resilient in the world. It produces blockbuster GDP (gross domestic product) while tax receipts, not just corporation tax, are consistently ahead of expectations. That generates bigger and bigger surpluses for government. Debt as a percentage of GDP, a key metric for creditors, has been falling rapidly.

It has also sailed through two unprecedented, economy-stopping crises related to the pandemic and global energy prices without registering a significant reversal in growth or employment.

At the height of the pandemic in 2020, when the global economy fell off a cliff, the economy here grew by 3.3 per cent, the fastest level of growth recorded anywhere in the developed world. In 2022, at the height of a global energy and cost-of-living crisis, it grew by 12 per cent.

There may be endemic problems related to housing and health, but there is also near full employment and a flood of inward investment.

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What’s driving this winning streak? Multinationals. Ireland would look and feel like an entirely different place without the billions of foreign direct investment (FDI) that has flowed in over the past 20 years. It has become one of the biggest pharma and IT hubs in the world, playing host to most of the leading pharma players and the who’s who of big tech.

The Government’s recent €11 billion cost-of-living budget was entirely predicated on corporate tax receipts from these companies. The UK tends to play up its special relationship with Washington but in reality it pales in comparison to Ireland’s.

The on-shoring of such vast business interests, however, comes with a caveat. In its latest commentary the Economic and Social Research Institute (ESRI) highlights the growing concentration risk at the heart of the Irish economy, not just in corporation tax where 80 per cent of receipts come from just 100 firms but also in employment and trade.

“While total tax intake continued to grow in a robust manner in 2022 and unemployment levels were at record lows, the growing vulnerability of the domestic economy to concentration risks is particularly apparent as the ICT and pharma-related sectors continue to account for the majority of corporation tax receipts and have contributed significantly to recent employment gains,” it said.

The institute noted that the ICT sector lost 10,900 workers in the third quarter of last year amid a spate of high-profile layoffs but perhaps surprisingly gained 9,700 additional workers the following quarter. Nonetheless the growth in exports of computer services has been trending downwards. “As computer services exports account for approximately half of Irish service exports any fall-off will strongly pass through to overall trade levels,” it said.

The ESRI warns that a major correction in either pharma or IT “would not just adversely impact headline economic indicators such as value added and employment, but would also have substantial repercussions for the public finances”.