US tax plan could kill off the ‘leprechaun’ in Irish economics

Trump border adjustment tax might curb contract manufacturing, says Karl Whelan

Karl Whelan: The UCD economist questioned whether the Trump administration had the competency to get tax reforms through the US Congress. Photograph: Brenda Fitzsimons

Karl Whelan: The UCD economist questioned whether the Trump administration had the competency to get tax reforms through the US Congress. Photograph: Brenda Fitzsimons

 

The introduction by the US of a so-called “border adjustment tax” could kill off the leprechaun in Irish economics but will unlikely dampen real economic activity, according to UCD economist Karl Whelan.

He said the Trump tax plan, ostensibly designed to reduce the offshoring of profits, may curtail the practice of contract manufacturing, which has inflated Ireland’s headline growth number for several years.

Prof Whelan was speaking at a conference on fiscal risk hosted by the Irish Fiscal Advisory Council.

Contract manufacturing is a popular type of outsourcing used by multinationals, including Apple, whose Irish subsidiary hires third parties in China to produce and assemble computers.

Because the output is still recorded as Irish exports, it bolsters gross domestic product (GDP) without adding to employment. It was a major factor in 2015’s 26 per cent jump in Irish GDP, dubbed “leprechaun economics” by US economist Paul Krugman.

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Risk factor

Prof Whelan said he did not view tax reform in the US as a major risk factor for Ireland because US multinationals need to be based here for access to the EU, and it was questionable whether the current administration had the competency to get it through Congress.

“However, it could be a threat to Irish leprechaun economics GDP,” he said. “If all the computers that Apple is contract manufacturing in China were to be made in Ohio, Irish GDP would collapse and nobody would really notice.”

Because of distortions such as contract manufacturing, Prof Whelan said GDP had almost become irrelevant as a measure of Irish economic activity .

On the wider risks to the economy, he said the sustainability of Ireland’s debt, often touted as a major risk factor, was far more comfortable than many would have predicted just a few years ago. That is because so much of it was “locked in at low rates”.

Nonetheless, Prof Whelan said the international outlook was very uncertain.He highlighted the chief threat in Brexit. “Given the risks, the Government should probably be charting a path towards a sustained period of budget surpluses,” he said.

Foreign influx

Also speaking at the event was Rossa White, chief economist with the National Treasury Management Agency, who highlighted how ownership in the property market had changed since the crash with the influx of foreign investors.

“Ireland now had a property market that was not domestically owned anymore,” he said. The upside to this was that it would be better insulated from the type of crash that undid the economy in 2008.

Mr White pinpointed the concentration of corporation tax revenue around a handful of firms in one or two sectors as a serious risk to Government finances.