Santa has come early for Minister for Finance Paschal Donohoe. The tax revenue figures to the end of November represented the best Christmas present for the Department of Finance.
Once again there was a dramatic surge in corporation tax revenue, with this revenue up 32 per cent so far this year. This will cover up the serious overrun in health spending, and may even deliver a budget surplus for the year as a whole.
In late 2015 there was an even bigger surprise in corporation tax revenue. At the time it was difficult to make out exactly what was going on. However, because corporation tax revenue is a fairly stable share of profits, it suggested a massive increase in profitability.
At the time nobody outside the CSO put two and two together. When the CSO published the national accounts for 2015 the following July, the world was amazed to learn that Irish GDP had grown by a quarter that year.
This time around the surge in corporation tax suggests a similar bumper growth rate for GDP in 2018. While the Central Bank and the ESRI have forecast growth this year of 7-8 per cent, it now seems highly likely that it will be over 10 per cent.
This massive increase in profits, and related tax revenue, is due to the changes in US tax law implemented by President Donald Trump’s administration last year.
One of the provisions of the law was that firms making large profits from intellectual property held abroad would have to pay US corporation tax unless they had already paid corporation tax abroad at a rate of more than 10 per cent.
This meant that profits accruing in jurisdictions with a zero rate of corporation tax had to find a friendly new location, with a tax rate just above the threshold set by the US tax law. Ireland’s 12.5 per cent rate has met this requirement.
As was the case in 2015, this "flight" to Ireland of intellectual property owned by American multinationals has not brought with it any significant employment. Nonetheless, the additional corporation tax revenue that it generates amounts to almost 1 per cent of adjusted Gross National Income. While more than 10 per cent of the additional tax revenue will go in additional EU budgetary contributions, the balance that accrues to the exchequer still represents a substantial increase in Irish resources.
The increased profits of multinationals could raise our measured GDP by up to 5 percentage points. With the CSO quarterly national accounts showing growth in the first three quarters of this year of more than 7 per cent, this would mean that the figure for the GDP growth rate for 2018 as a whole could be significantly above 10 per cent.
The current US administration has neither the bonhomie nor goodwill that we associate with the real Santa
This would make headlines around the world, suggesting that Ireland is a super economy, but we know that the story, while good, is much less spectacular.
GDP, the standard international measure of economic activity, is a poor guide as to what is going on in Ireland's real economy. While we have alternative measures like Net National Income (NNI) and GNI* that are closer to the true picture, it is still hard with current data to strip out from our statistics the distortions caused by multinational activity, and to understand what is going on in the real economy.
As a result the Minister for Finance is flying blind to a degree. The absence of useful information creates a concern that unwise decisions are being taken.
Last month the CSO published data on the top 50 multinationals in Ireland. This showed that they account for 40 per cent of Irish GDP, but only 5 per cent of NNI, the best measure of economic welfare.
The rest of the foreign multinationals account for around 10 per cent of NNI because they have a much higher employment content. So while multinationals dominate the GDP figures, they play a much smaller role in the real economy.
We clearly urgently need data that can fully separate the activity of multinationals from the rest of the economy.
The current US administration has neither the bonhomie nor goodwill that we associate with the real Santa. There is a real danger that future changes in US tax law could wipe out much of our current corporation tax revenue. In addition, these frequent “windfall gains” detract from our reputation among our friends and neighbours.
All of this argues for saving the unexpected rise in tax revenue for a future rainy day.