What’s bad for multinationals is bad for Ireland

By Tony Foley

The Irish economy continues to perform excellently. We remain the fastest-growing economy in the EU. Growth is forecast to continue, in 2018, at 4%.

That would be six consecutive years of substantial growth. Employment is rising and full employment is approaching. The Government’s finances are back in balance, although the level of public debt remains high.

The next three budgets will each have €3bn in fiscal space to spread between lower taxes and increased expenditures, if the expected economic performance is realised. This is much more than in previous years.

A health warning should come with any broad, positive statement about current and future economic performance.

While the economy is performing well and is the star of the EU, much of the previous, austerity-related economic pain remains for many people.

Lest we get too complacent, in the four years before the economic collapse, in 2008, there was also excellent economic growth, with rates of as much as 6.7%.

There is nothing guaranteed about the ongoing good performance and there are substantial threats and risks to economic improvement.

These threats arise from both domestic and international sources, including EU corporation tax policy, US tax policy, Brexit, external demand, interest rates, domestic cost-competitiveness, and housing supply.

US policymakers’ annoyance at US companies investing abroad has become more of an issue recently. There are also international concerns, including in the EU, about inadequate taxation of multinationals.

There are several reasons why multinationals locate in Ireland. The tax factor is considered significant, both in terms of the tax rate and the possibility of locating profits in Ireland to avail of the low tax rate.

The role of multinationals in the Irish economy is substantial. Many of the impressive features of the economy derive from multinationals, such as the export performance and their presence in sophisticated industrial sectors.

These could be described as IDA-type multinationals, in contrast to other multinationals, which have a presence in Ireland to sell in the local market, such as Tesco, Lidl, Aldi, or McDonald’s.

The extraordinary growth, of 26%, in the 2015 GDP numbers, was linked to multinationals relocating whole balance sheets to Ireland.

The relocated balance sheets were dominated by intellectual property, classified as intangible assets. IDA-type multinationals, involved in the production of goods and services, employ 205,000 people, or about 10% of total employment, but this understates the sector’s significance.

Multinationals account for 46% of manufacturing and industrial employment, and account for 57% of international services employment.

The US has reduced its corporation tax rate. Some in the EU want to alter the corporation tax regime in ways that would erode the benefits of the Irish regime.

International and national rules on more accurate reporting of multinational finances are being strengthened. Overall, the Irish tax regime will be less attractive, relative to other countries, than it has been.

This will reduce the role of tax as a feature for attracting inward investment.

The magnitude of the impact is uncertain and any EU-determined changes will take time. The 2018 and 2019 economic forecasts will be unaffected.

However, multinationals are critical in the Irish economy and anything that will make it difficult to attract, retain, and develop them is bad news.

Tony Foley is associate professor of economics at the Dublin City University Business School.