Jim Power: Global tech trouble clouds Irish economic outlook

Layoffs at Twitter and Stripe, and poor results at Facebook and Amazon, bring a new uncertainty about the tech sector

There is renewed caution about the prospects of businesses built on disruptive tech, following layoffs at Twitter and Stripe, and poor results at Facebook and Amazon owner Meta.  Picture: Mary Altaffer/AP

The contrast between what the former British chancellor Kwasi Kwarteng announced in his mini-budget and what the two Irish finance ministers did in the Irish budget was amply demonstrated by the latest exchequer returns.

Tax-revenue buoyancy remains incredibly strong, with the overall tax take up by almost €13bn in the 10 months to the end of October. Income tax continues to perform very strongly, which reflects the strong labour market, the high quality of employment, and the very progressive income-tax system here.

Of most interest, however, was the ongoing and remarkable buoyancy of corporation tax receipts, with €16.2bn already collected this year. Corporation tax has now overtaken Vat as the second-largest tax source.

The exchequer so far was running a surplus of €7.3bn, which neatly compares with a deficit of €7.4bn in the same period last year. The surplus is being driven primarily by the amazing level of tax revenues.

Paschal Donohoe and Michael McGrath were quick to point out that the exceptional receipts from corporation taxes were putting a gloss on the public finances and that it would be dangerous to base future spending on what could be a transitory tax base.

Indeed, the concentration risk on the corporation-tax front should be of concern and should be watched closely.

However, if corporation tax receipts are excluded, tax revenues in the first 10 months were still 15.4%, or €6.4bn, up on the same period in 2021. Of course, there are Covid-19-related distortions, but the figures were indicative of a still-strong level of economic activity.

Finance Minister Paschal Donohoe and Public Expenditure Minister Michael McGrath cautioned that future spending should not be based on exceptional corporation tax receipts. File picture: Colin Keegan/Collins

The bottom line is that the tax-revenue buoyancy is providing the funding required for what was a very expansionary budget in September, without needing borrowing. This stands in marked contrast to the recent British experience.

In Ireland, there is cause for caution and concern. Global interest rates are still rising aggressively. It struck me as incredibly stark when the Bank of England governor last week said the UK economy is now in recession, but still delivered an interest rate increase of three quarters of a point. The US Federal Reserve also delivered a similar rate hike and we can be pretty certain that the European Central Bank is not yet finished with its rate increases.

All of this adds up to what is likely to be a very challenging year ahead for the global economy, compounded by the war in Ukraine. This intensely uncertain global outlook will obviously affect Ireland and its ability to generate taxation in the future.

There is another emerging trend that should be watched carefully, and that is the growing pressures on the global tech sector. Twitter is laying off people, Stripe announced job losses, and Amazon and Facebook-owner Meta posted weaker results. Global tech is under pressure.

These trends should be a cause for concern, given that many of those companies provide lots of employment and tax revenues in Ireland.

However, the strength of the chemical/pharmaceutical sector provides a very solid anchor.

In the first eight months of this year, overall merchandise exports expanded by over 30%, with chemicals and related products (which include organic chemicals and medical and pharma products) posting export growth of almost 35%. It has to be hoped that many of those firms here in Ireland are largely recession proof.

The overall conclusion is that while Ireland is still doing very well, the global headwinds that are gathering strength should be watched and managed closely.

Intense uncertainty is now the global mantra.