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The Irish economy earned itself the title ‘the Celtic Tiger’ for its spectacular growth between 1995 and 2007.
The Celtic Tiger is now being widely regarded as tamed and toothless. The Tiger’s best hope now is to lean on the companies that have for so long enjoyed riding on its back.
The Irish economy’s current predicament derives from three factors: access to cheap money due to low interest rates (set by the European Central Bank), low taxes, and government real estate policies that created market distortions. These factors fuelled a real estate bubble, subsequently followed by a crash and the ongoing European debt crisis.
Current Irish economic growth is non-existent as the Irish Government continues its path of fiscal austerity with no possibility of currency devaluation.
The aforementioned story is now infamous, well known by economists and citizens alike.
The open question is how best to stimulate the Irish economy.
Expansionary policy is the best option to stimulate growth, but the Irish Government has little capacity for further debt and, moreover, it is subject to the fiscal austerity constraints imposed by its European partners.
Fortunately, there is an obvious answer — raise the corporate tax rate.
At 12.5%, Ireland’s current corporate tax rate is the lowest in the EU, bar Bulgaria and Cyprus. By raising it to 16% — the same rate as Romania and the next lowest rate in the EU — the Irish Government could generate additional tax revenue for expansionary policies, such as infrastructure spending and research and development grants.
Naturally, with a 28% increase in the tax rate many large corporations will threaten to relocate, but these statements are always made, regardless of how low the rate already is. In Ireland’s case, most corporations will stay for the still-low tax rate and the strategic advantages Ireland offers: a highly educated, English speaking labour force, relatively lower costs than most other European countries, and an advantageous geographical location.
By implementing this policy, Ireland can both stimulate the economy through expansionary policy while keeping to the fiscal commitments demanded by other European partners and the bond markets.
If Irish policy makers can make this progress, the Celtic Tiger may yet roar again.
Yu Rong and
(MBA students) Judge Business School University of Cambridge
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