Contrary to the wishes of many who have commented on this blog, I don’t want to “feck off back to America”. I really like it here. Ireland has a lot going for it. But, as someone who spends a lot of time thinking about Ireland, lately I’ve been plagued by one vital question:
“With corporate taxes already set perilously (humiliatingly) low, few natural resources, and crippling national debt, what industry or enterprise will foster Ireland’s financial turnaround?”
That a financial turnaround, nay, another “boom”, will happen seems to be taken as a foregone conclusion. In many quarters, the levels of spending still seem quite high. And the general mood seems to be that the current financial situation is but a temporary slowdown until we get back to what we so richly deserve. Notice I said “deserve”.
If the sentiment were “get back to what we are capable of”, I would say that’s the plucky Irish spirit and eternal optimism, and would believe that they/we are willing to work hard to get back to Celtic levels of financial “security”. Instead the feeling seems to be that we are all just waiting for Angela Merkel to wake up and realize how much she needs Ireland, and turn the money tap back on, just because, well, we’re Ireland.
The spoiled years of prosperity seem to have created a sense of, “We deserve that. It’s our right and due.” Granted, that was/is the general attitude in the U.S., and seems to be prevalent in other places that have undergone a major boom and bust cycle in the last few decades. Perhaps that’s just the nature of corporatist-fueled human greed.
The problem comes when people listen to their leaders who tell them that they can spend their way out of crisis. Those leaders, with their ties to big business, gladly tell the masses that a strong retail sector is the key, and that once spending comes back, it’ll all be grand. That happens everywhere there is a boom/bust cycle and the leaders have strong links to business.
The result is that people spend like drunken sailors, whether they can afford it or not. They’ve been told that they are doing their bit for the economy, and believe that when things turn around they’ll be able to pay the tab. For small, under resourced countries like Ireland, that’s a huge problem. Booms are rare in economies like ours. And you have to have something to go boom.
Ireland, as beautiful as it is, has no substantive, exploitable mineral wealth. There is talk of natural gas reserves in the west. Where, and how much? What kind of infrastructure do we need to profit from it? If it’s handled anything like Ireland’s oil reserves, we’ll likely sign away the rights and leases for a pittance. Ireland is perfect for wind power generation, but how do we develop that beyond cheap power for ourselves? Can we build turbine factories? There is a significant pharmaceuticals and biotech community in Ireland already. But, like the current tech sector, how/why would that expand? Ireland’s corporate tax rates are now at around 12%. With the brightest minds at Google (and the other multinationals in Ireland) hard at work exploiting loopholes to get the effective rate below 5%, you have to ask, what manner of guile and seduction will Ireland use to tart itself up next time?
We say we want to be the best small country for business, but with a capital city sporting an antiquated public water system, mass transit lines that don’t connect (yet), and national connectivity still in its infancy, how do we compete in a way that goes beyond simply holding corporate attention until somebody undercuts us ten years down the road?
As a profoundly creative country, with a history of innovation in the arts, sports, and most recently food, I’d like to think that the boom will come in the form of some new endeavor, a (literal) cottage industry, endemic to Ireland. But what will that be?
For Prospective Immigrants: To anyone considering moving somewhere based on the fact that said country is undergoing a boom, I say, “That’s great”. But, before you go, ask yourself a few questions. What is that boom based on? Will it last? When it’s over, how are the people, and the country likely to react? Where will the country’s next boom come from, and the one after that?
Things to look forward to in upcoming posts:
- Corporate Taxes Abroad, and the Con Artistry of Luring Foreign Investment
- Ireland’s Upward Only Rent Review
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Alright Glenno, here we go again!
1. “With corporate taxes already set perilously (humiliatingly) low, few natural resources, crippling national debt, what industry or enterprise will foster Ireland’s financial turnaround?”
The low corporate tax rate is neither perilously nor humiliatingly low. On the contrary, the 12.5% rate initially came about as an “up yours” to the European Commission. The shortened version of the story is that for fifty years Ireland had two tax rates: 10% for foreign companies and 30% for domestic companies. Despite having been the status quo, the Commission convinced itself in the early 1990s that Ireland’s nuance of two tax rates (heaven forbid!) constituted illegal state aid, and there was a threat of legal action to overturn what had been accepted practice. Ireland had other ideas, and retorted by lowering the tax rate for everyone. It was a very public act of fiscal independence. In no way was it humiliating. And it precipitated large foreign direct investment.
As for the claim that 12.5% is perilously low, you’d wonder why many in Europe are upset with it. The reason is that it gives Ireland a competitive advantage. Our “price” is lower. With free movement of capital, it’s very easy for companies to relocate within the EU. For a silly example, see U2 now basing their business from Amsterdam. If you’re looking for something perilous, your best bet would be an increase in the rate.
2. “The problem comes when people listen to their leaders who tell them that they can spend their way out of crisis. Those leaders, with their ties to big business, gladly tell the masses that a strong retail sector is the key”
I don’t like the innuendo here. Would you please extrapolate on leaders’ ties to big business? Ideally be specific about, say, who you think Michael Noonan is linked to. Say what you want about Irish politicians, and there’s plenty to talk about there, but they have enacted laws that leave them largely free of corporate influence. For a standard three-seat constituency, politicians are only allowed to spend €30,000 on campaigning.
3. “Booms are rare in economies like ours.”
Indeed, booms and busts are really quite rare in all developed economies. For example, see this graph of US GDP over the last 100 years: http://bit.ly/145nZxo. Observe how major events like WWII and the oil shocks are but blips in the grand scale of things. Irish people are well used to recessions. The unemployment rate of 13.5% will stick around for a few years but the country will bounce back, no question.
4. “Ireland, as beautiful as it is, has no substantive, exploitable mineral wealth.”
Exploitable resources, as with manufacturing, hold this romantic allure in people’s minds as some pinnacle of economic bounty. This is one of the least true “strongly held beliefs” in the modern world. Farming accounts for about 2% of Irish GDP. In contrast, services contribute 67%. The US have about 23 billion barrels of oil in reserve. At $100 a barrel, that’s $230 billion. Sounds like a lot? It’s about 1.5% of US annual income. Alaska’s 10 billion barrels don’t sound that amazing anymore. Talk of minerable wealth reminds me of people storing gold in case of a breakdown of society. The strategy may have made sense in 1700, but the world has moved on.
You know what Ireland’s most valuable resource is? I’ve said it on this blog before: her people and their brains. You ask why biotech would expand in Ireland. The answer is because our intellect, communication skills, and salesmanship are better than other countries’. It really is as simple as that.
You note that Ireland is “a profoundly creative country, with a history of innovation”. You’re right. I find it peculiar that you admit as much, but worry for Ireland’s economic future. I can’t tell you which industry will provide the largest surge when Ireland’s next boom comes, but I can tell you that I’m not doubting the certainty that it will come.
Don’t mind the people telling you to feck off back to America. Dubs have often told me to feck off back to the countryside.
All the best,
Enda
Oh Enda,
I think you’ve missed my point. As much as anything, my point is that Ireland, while it may have done these things (taxes, etc.) in the name of growing foreign investment, and “sound” fiscal policy, etc., the country may have used up all its tricks. That’s my worry. We lowered taxes, and still had a crash. We can’t lower them again. Though it may not always be the answer,mineral wealth is AN answer. But Ireland doesn’t have that either. So where do we go from here?
Ireland’s tax rate is “perilously” low because, at 12.5%, the effective rate drops to something like 3-5% (or less) once the brain trust at Google (and others) figure out the nuances of the so called Double Irish Dutch Sandwich, and other techniques we can only guess at.
I say, it is “humiliating”, because as much as Ireland needs the business, it effectively says to the world that we aren’t worth paying for the things we help you produce. This is yet another case of Irish low self-esteem trumping long term fiscal sense. Ireland has effectively said, “Oh, gee, we’re just poor old Ireland, lowly, lousy, miserable, don’t have anything worth paying fair market value for Ireland. Come on over and raid the refrigerator, sleep in our bed, use the laundry, and feel free to leave when somebody down the street offers you steak for dinner. And, no you don’t have to give us anything for our trouble.” It’s a bit pathetic.
I know that the companies coming here pay people’s salaries, and boosts tax revenue. But that doesn’t last, particularly when somewhere like Bulgaria realizes they just have to set their rates at 11% and they’ll get all the business. You don’t really think Google et al. are here because they love Ireland do you? I like it. It’s a great place. But get real.
Regardless, we lowered taxes, and things are still in the toilet. How’s that secondary income stream working now?
As for your claim that Ireland actually lured foreign investment here by raising the corporate tax rates from 10% to 12.5%, I think your numbers must be off somewhere.
As for campaign finance laws limiting or eliminating political incentives from businesses and cronyism, campaign finance is only a small part of the ways that business wields political influence. The ruling and business elites everywhere (and from what I’ve read, seen, and been told particularly in Ireland) are a small closed, and impossibly inbred group that all wash each others’ backs at the country club, in the board room, and in the pubs at the Dail.
Mineral wealth is just one example of areas which have traditionally spurred growth, that Ireland is too small and under resourced to benefit from.
I’m sure Ireland will bounce back, but I wonder what that mechanism will be. And how big a bounce will it be? The bigger problem is that many people are still spending like the next Celtic is a given. So even if the economy does come back to a reasonable level, consumer debt will likely keep the population struggling, and by extension the economy as well.
Cheers.
-Glenn
Actually the low corporate tax rates were set because Ireland was considered a “donkey and cart economy” up until the 1990s (search the Economist for a quote in about 1997). The corporate tax rate here was initially set to zero, and then the low current rate. It was absolutely to encourage investment here. One book I am reading about the Celtic Tiger made the point that Ireland could offer this low rate without affecting its tax returns because…. it wasn’t getting any. England, say, couldn’t do it without losing money on existing corporates. Ireland literally had nothing to lose.
And you know what, the combination of very low tax rates, and English speaking people (thank you England, ironically) made Ireland attractive for American European head offices. It had nothing to do with some magical quality of the Irish people, apart from the fact they spoke English (thank you England, again).
Without English Ireland would be even broker than it is. Same with the low tax rates. Apart from basic agrigultural products (turnips etc) Ireland doesn’t produce anything. Tourism exists because of the nostalgia of the descendants of those forced to flee due to prior Irish economic and military disasters. But that’s it really.
I would say the biggest asset Ireland has at the moment is its expats. That is, people who have obtained skills in first world countries abroad. They should really look after them more. The attitude seems to be you didn’t like it go f*ck yourselves. But the truth is if anyone is going to drag this medieval place into the 21st century, it is those people.
The answer certainly isn’t in a past that never even existed.
Glenn for a writer who professes to specialize in Arts, culture, travel etc….. you are getting very economic on us.
Unless you haven’t figured it out yet, we don’t want another boom. Steady growth in GDP with a reduction in unemployment will do for starters . I would imagine that since we have the ability to feed many more people than occupy our small island and the expected surge in world population over the next 50 years, coupled with the changes to the EU milk quota system next year, the answer to your question is obvious.
We have been around for a long time Glenn, we aren’t going anywhere in a hurry.We are just getting the train back on the tracks again , once done, we will be off on another journey.
Colm,
Agreed. But it feels like people are still spending with the next boom in mind.
HI Glenn,
Just found your blog and will have to check it out more often.
As an Irishman living in the US, I have to comment that the apparently “low” rate of corporate tax is something of a red herring when comparing what different countries to do attract foreign business. You’ll known, no doubt, how municipalities and states offer packages of tax cuts and other benefits (reduced or free municipal utilities like water, freedom from paying various taxes for a set time, millions of dollars in state or local direct investment, even agreement not to pass certain laws) to large companies considering setting up in the area. These packages are directly tailored to each business, and often amount to that business living a practically tax-free existence in exchange for whatever jobs (often a paltry few) they provide. Once the time frame of this package of benefits expires, they are either extended or the multinational relocates elsewhere. So, on the global stage, Ireland is simply competing in kind. This doesn’t make me any happier about Ireland getting little benefit from a low rate of corporate tax, but I do appreciate the market pressures the government are under.
And the spending like there’s no tomorrow? ‘Twas ever so. It’s the usual reaction of people who never had money to getting some: If you have it, better enjoy it. Ah sure, you might die tomorrow.
Rich,
Thanks for the comment. Fair point.
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