Ireland blindsided by perfect storm of economic factors

Take a quick look at the main metrics and it appears that the year just gone was a vintage one. The unemployment rate dropped by over 1%.

Ireland blindsided by perfect storm of economic factors

The national debt-to-GDP ratio fell below 100%.

The Government took in more money than it spent.

Hard to argue with those facts isn’t it? So why are so many economists, and indeed so many consumers, feeling so edgy?

Oh yes, that’s right — 2016 could potentially go down as the year the Irish economy was cut adrift from the moorings and safe harbour that were its home for the past 30 years or so.

And it had all started well enough.

Despite pleadings, in the interests of stability and to placate the markets, that the electors opt for a majority government, voters instead returned a mixed bag of TDs.

They, in turn, took their time cobbling together ‘New Politics’. And while the occupants of Leinster House have done very little of substance since, the markets took a peek inside the Dáil chamber and left them to it.

While Fine Gael and Fianna Fáil trod the courtyards of Trinity College conducting their post-election negotiations, we would glance towards London and their curious Brexit referendum campaign and shrug our shoulders.

Occasionally, we would peer the other direction towards our American cousins and chortle quietly about how the Republicans had shot themselves in the foot by selecting Donald Trump.

Meanwhile, unemployment was edging downwards month by month, consumer prices were flat, and exports were growing. And then all hell broke loose.

First Brexit.

Despite being told that it would blow up their economy, British voters went ahead and did it anyway. All sorts of panic broke out in Dublin. Jobs have been lost here in the months since; many more could go the same way.

Then the ‘Leprechaun economics’ debacle occurred.

It turned out that, should a small number of multinationals wish to carry out a significant book-keeping exercise and move intangible assets to their Irish subsidiaries, they can make an absolute mockery of our growth figures.

Those once reassuring numbers suddenly appeared much less robust. The exercise exposed Ireland and its tax regime to scorn and ridicule at a particularly delicate moment — the European Commission’s ruling on Apple’s tax arrangements landing just a month later.

Much like with Brexit, official Ireland was blind-sided. There had been quiet reassurance that the commission would issue a mere slap on the wrist and a tax bill of well under €1bn. As with the sexed-up growth figures, our number crunchers badly misread the situation.

The €13bn bombshell means a lengthy and fraught legal battle lies ahead. Meanwhile, the Brexiteers of the new British cabinet were causing chaos and the pound was plunging towards parity against the euro.

Exporters, farmers, and those in the tourist industry were running around with their hair on fire. But it could be worse, we thought. At least Donald Trump doesn’t stand a chance against Hillary Clinton.

We had heard talk that Mr Trump might look to slash corporation tax and repatriate billions of tax dollars, but his interesting hair and quirky views on Nato and the like convinced us that it was a slam-dunk for the Democrats.

Oh dear. The turmoil has yet to abate and may only be getting going. Italian unhappiness with the European project, which they believe has helped condemn a generation of young people to a life without work, may manifest itself in a government committed to pulling Europe’s third largest economy out of the single currency. Likewise, the French could put the National Front into the Élysée Palace.

So, where does this leave Ireland and its economic fortunes? On the face of it, it is as well-placed as it can be. Underlying growth which strips out the ‘Leprechaun’ element is decent; the public finances are in better shape than they might otherwise be.

But open the bonnet and you’ll see that there are a number of things that need maintenance. The exchequer returns, over the course of the year, have come in just ahead of expectation — but not the way the Government might have preferred.

Corporation tax receipts rescued the forecasts made by the Department of Finance. Had an extra billion euro not rolled in from the large multinationals based here, then the overall target for 2016 simply wouldn’t have been achieved.

There is some disagreement on whether that additional revenue is here to stay or merely a blip. If it does prove to be fleeting, then the relative underperformance of Vat could soon be seen in a less benign light. Our reliance on corporation tax was repeatedly highlighted by the State’s fiscal watchdog throughout the year.

The warnings by John McHale, outgoing chairman of the Fiscal Advisory Council, seem more pointed in the context of international developments.

Ireland’s corporate tax rate of 12.5% may have had its day.

Over 20 years, it has served the economy well — bringing tens of thousands of high-quality jobs. But with America and Britain poised to enter the competition with low rates of their own — and — it seems increasingly old hat.

As for Brexit, only a fool would predict what exactly lies ahead.

But, from an Irish economic perspective, it would seem safe to say — it won’t be good.

Paul Colgan is economics editor with the IFTA-winning Ireland Live News on UTV Ireland. He recently won Business Feature of the Year at the Smurfit Business Journalist Awards.

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