Multinationals bring many benefits

IDA Ireland-supported companies spend about €4 billion a year on goods and services sourced in Ireland

Google Dublin: US companies pay €2 billion of corporation tax in Ireland each year. Photograph: Bryan O’Brien

Google Dublin: US companies pay €2 billion of corporation tax in Ireland each year. Photograph: Bryan O’Brien

 

The contribution of multinational companies to the Irish economy is immense. Excluding the financial sector, there are about 1,000 US companies with operations in Ireland providing about 100,000 direct jobs.

Each year, these companies pay €6 billion in wages to Irish employees, spend an average of €3 billion on fixed capital investment in Ireland and contribute €2 billion in corporation tax to the Exchequer. That is €11 billion a year, every year.

There are other contributions which are difficult to quantify, such as VAT and other taxes, indirect expenditure on security, logistics, catering, cleaning and other services, as well as thousands of agency workers used by the companies.

There are also largely unseen issues like the outsourcing of manufacturing, quality control and research activities, and, of course, expenditure on professional services from legal, accountancy and tax firms here. The precise amount of these is difficult to pinpoint but figures show that IDA Ireland-supported companies spend about €4 billion a year on goods and services sourced in Ireland.

In addition, there are second-round effects when employees and suppliers of multinationals and the Government spend this money. Across all revenue sources, it is likely that Government benefits by well over €5 billion a year from the presence of US multinationals here.

And it is not just US multinationals that have operations here. There is substantial commentary that US multinational companies are in Ireland solely to avoid corporation tax. This sometimes ignores the fact the US companies pay €2 billion of corporation tax here each year. If it was so easy to avoid, how do we collect so much? About 80 per cent of corporation tax receipts come from foreign-owned companies.

Are there risks from this? Of course there are. These companies are here for commercial reasons. It is always a risk that better commercial offerings will see them move somewhere else.

If risks can be identified then it is prudent to do something to offset them. We should use part of the revenues from multinationals to build up a fund to help mitigate the effects of the next economic downturn which, in itself, could be the result of those companies downsizing their operations here.

We have adopted a set of useful, but imperfect, fiscal rules to provide a framework for government budgets. These deficit, debt and expenditure rules are calculated using gross domestic product (GDP), a measure of output, as the base. The related measure of gross national product (GNP) is a measure of the income earned by residents of the country.

Multinationals produce a significant amount of Ireland’s output and they make a massive contribution to our income. However, the profit from their activities accrues to non-resident shareholders so does not form part of Ireland’s GNP – apart from the corporation tax we collect.

It would be more appropriate if we assessed our fiscal rules in terms of GNP rather than GDP. On its own, this move would make little difference. A balanced budget is a balanced budget whether you measure it in terms of GDP or GNP. It would mean we would be targeting a slightly lower level of debt over the long term and might reduce the annual fiscal space allowable under the expenditure benchmark but not by much.

Profits from multinationals

The adjusted measure of government revenue could exclude an amount equal to 5 per cent of the gap between nominal GDP and GNP in the Government’s forecasts. The basis for such a figure is that it is about half of the current effective rate of corporation tax so approximates half the tax collected from profits made by multinational companies based here.

This scheme may sound similar to the National Pension Reserve Fund (NPRF) but it must be different. In most of the years following the establishment of the NPRF in 2001, the government budgeted to run a deficit on its operations and planned to subsequently borrow the 1 per cent of GNP to put into the NPRF.

The NPRF was not designed as a savings fund; it was designed as an investment vehicle.

Of course, the outcomes, unknowable at the time of the budget, were that surpluses resulted but the money to be put into the NPRF was never taken out of the budgetary arithmetic. The fund proposed here would do so and should be used in a counter-cyclical fashion. So how do we decide if the economy needs it?

The determinant could be the Government’s own forecasts. We could freeze contributions to the fund if the Government forecasts that annual employment growth is expected to drop below 1.5 per cent, thereby spending what would otherwise have been saved.

Further, we could allow withdrawals to finance capital spending projects if employment growth is expected to drop below 0.5 per cent. The Government only gets to avail of the benefits of the fund if its own forecasts show the economy needs it.

The last few years have been a harsh lesson in what happens when an economy becomes too dependent on any one sector. Maybe we can learn a lesson or two to help avoid having to go through this again. Understanding the two elements to a counter-cyclical policy would be a start. Seamus Coffey lecutres in economics at UCC

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