Cliff Taylor: Has the boom in Ireland got too boomy?
A legitimate question on the implications of an investment's temporary effects
Workers entering the Intel facility at Leixlip, Co Dublin. The company is poised to announce a major investment in the facility. File photograph: Dave Meehan/The Irish Times
Another big investment from Intel for Ireland looks to be on the way, running into billions of euro. And you just have to look down at Dublin’s Docklands to see the extraordinary expansion of the big digital tech firms such as Facebook, Google and LinkedIn.
We are used to wondering how much of the economic and tax boost from these investments are temporary, potentially leaving our public finances exposed.
This is a legitimate question – but so too is wondering what the implications might be if a lot of it turns out to be permanent.
Corporate profits – and the tax paid on them – go up and down with the economic cycle
It is no contradiction to say that 2019 brings an unusual level of economic risk, but that this comes as the economy is experiencing an extraordinary phase of growth.
This week the focus of reporting on Ibec’s latest economic forecasts was that GDP growth would slow from 7 plus per cent last year to 4.5 per cent this year.
But a growth rate of 4.5 per cent, were it to happen, would still be way above the EU average – and comes on top of the rapid expansion we have seen here in recent years.
Some of the growth in our GDP figures is based more on multinational accounting changes than on what might be termed “real” investment and growth. But there has been a huge surge in investment on the ground and hiring too.
Employment has been rising at more than 1,200 each week and the unemployment rate is heading down to 5 per cent.
Investment is the hardest area to assess, and the data has been seriously disrupted by the relocation of multinational intellectual property assets here for tax reasons, which caused the “leprechaun economics” distortion to our 2015 and 2016 figures in particular.
But investment in the first three-quarters of this year came to €50 billion nearly twice the level of 2013.
The ESRI estimates that total investment will be €75 billion this year, or about €1.5 billion a week. Compared with the size of our economy, this is exceptional. (No wonder you can’t find a plumber).
The other key indicator is corporation tax. Ibec’s report pointed out that since 2015, the State has collected €14.5 billion more than it then expected from these revenues.
With corporation tax now representing not far off one euro in every five of tax collected, and 10 companies responsible for 40 per cent of corporate tax payments, it is little wonder economists are warning about the risks.
Corporate profits – and the tax paid on them – go up and down with the economic cycle.
While multinational accounting practices have undoubtedly been a factor here – and these can change overnight – so, too, has been the more straightforward factor of a big rise in profits reported.
What does all this mean?
The boom is real, but so are the threats – and the risk of a no-deal Brexit – is still very much there
Changes in international accounting rules largely led by the OECD have shifted multinational investment and Ireland has seriously cashed in. Given the possibly transient nature of at least some of this revenue, it makes sense to use it towards once-off investment costs, rather than to prop up current spending.
We are not short of places needing investment – housing, hospitals, ports, airports and third-level education, for example. We missed a chance to do a lot of this during the Celtic Tiger boom.
It would be an awful shame to miss it a second time around.
This is all the more essential given the pressure put on infrastructure and skills by the foreign direct investment boom.
It is a sign of the times that the Intel announcement, as well as being greeted as a positive signal about its long-term future here, will raise questions about where the construction workers will come from and then the electronic engineers. And where they will all live.
In general, the influx of investment has caught Ireland, post-crisis, unprepared. The housing crisis is the clearest sign. Job shortages are now spreading through the economy.
Demand from the big players is pushing up wages, costs and congestion, certainly across the greater Dublin region. As well as the need for investment this creates, these are also longer-term questions. Is this leading to a competitiveness squeeze on SMEs? What does it mean for housing and rents?
We are almost hard-wired as a nation to chase foreign direct investment at any cost.
But as one senior business figure put it to me this week, is there a risk that big business in Ireland is now getting too big, sucking up too much resources? Should we be using our builders to build houses, rather than offices?
As we look into 2019, this all creates an almost-impossible job for the Government in planning the public finances.
The boom is real, but so are the threats – and the risk of a no-deal Brexit, while possibly reduced a bit by events in the House of Commons this week, is still very much there. Indeed there are signs that this uncertainty is already delaying business decisions here.
The FDI boom and the surge in tax revenues has one important implication for Brexit, too. Our exchequer coffers are strong and while some short-term supports might be available from Brussels, any thought of the EU providing significant cash to protect us from a hard Brexit can be forgotten.
We are now one of the EU’s better-off members. Indeed, even asking for much by way of financial assistance risks the rest of the EU raising the thorny issue of our corporate tax regime.
What we will need to look for is EU clearance to spend our own money to protect businesses and jobs, not somebody else’s money.
Europe will stand behind us on the backstop, but will not be writing big cheques to bail us out of a hard Brexit.