ESRI: EU tax plans will hamper Irish growth

Ireland’s growing labour force should help the country sustain a real economic growth rate of 3% over the next decade, a leading economic think-tank has forecast.

However, in its latest medium-term outlook for the economy, the Economic and Social Research Institute (ESRI) has warned that as well as Brexit threatening the Irish recovery, the European Commission’s new corporation tax proposals known as the common consolidated corporate tax base plan could shave 1.5% off underlying annual growth.

“The proposal — which could affect both revenue and the attractiveness of Ireland’s low corporation tax rate, as it would apply to a smaller proportion of a multinational company’s income — is estimated to result in Irish potential output being 1.5% lower than the baseline,” the ESRI said.

Furthermore, Ireland’s corporation tax revenues, the outlook suggests, could fall by 6% on the back of the common consolidated corporate tax base being implemented.

“For small countries, such as Ireland, where considerable multinational production takes place for export, the use of sales location as part of the basis for sharing the tax base would reduce the amount of multinational income available for taxation,” the institute said.

The ESRI said that it bases its 3% long-term real growth forecast for the economy on “the expected continued expansion of the labour force through the natural increase in the working age population, together with increases in female participation and a return to net immigration.”

However, it also said that there are “potential threats to the underlying factors that make Ireland attractive to foreign direct investment” — particularly stemming from the the common consolidated corporate tax base proposals.

“Previous research has shown that foreign direct investment is sensitive to the corporation tax regime and, in particular, investment in sectors such as financial services locations with the lowest taxes,” it said.

Regarding Brexit, the ESRI has maintained its stance that Britain’s decision to leave the EU is “likely to have a significant negative impact on the UK and wider world economies, and thus on the Irish economy.”

However, it added that Brexit “might present a potential opportunity for Ireland to attract additional foreign direct investment”, either by attracting new investment that might otherwise have been destined for the UK or by attracting some of the foreign direct investment that is currently in the UK but that might relocate to remain within the EU.

“Already there are signs that the foreign direct investment flow into the UK is declining. “However, where investment is not accompanied by a shift in demand to Ireland, the effect on output and employment would be negligible,” the institute said.

Meanwhile, it emerged yesterday that British companies continued to grow modestly in the three months to November and are expected to keep up that pace into 2017.

A survey, published by the Confederation of British Industry, chimes with a resilient picture for the British economy so far since June’s EU referendum vote.

The CBI found that private-sector growth gathered a little bit of speed compared with the three months to October. However, for manufacturers, growth slowed and the outlook remained sluggish as cost pressures, linked to the post-referendum fall in the value of sterling, caused many companies to worry about inflation.

Investment intentions for the year ahead stabilised after falling sharply after the referendum but remained below their levels before the June referendum, the CBI added.

The British government launches a challenge, today, against a court ruling that it requires parliamentary approval to start the process of leaving the EU.

It is a decision that could upset Britain’s Brexit plans.

If the Supreme Court, the UK’s highest judicial body, dismisses the government appeal it could derail Prime Minister Theresa May’s timetable for triggering Article 50 of the Lisbon Treaty and leaving the EU.

If Ms May wins, she can proceed with her plans to invoke Article 50 by the end of March. n Additional reporting by Reuters

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