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Tech sector tax windfall shores up Ireland’s economy against recession

For much of the EU, the economic outlook is bleak, with growing fears of a recession and tight public finances. Then there is Ireland.

The republic is benefiting from a €8 billion corporate tax windfall after the massive pandemic boosted revenues from technology and pharmaceutical companies. Tax payments from companies attracted by the Irish 12.5 percent corporate rate have soared since 2015 and increased by a further 30 percent last year compared to 2020.

The Irish economy grew by 6.3 percent in the second quarter, against an EU average of just 0.6 percent. The impact of multinationals was such that Ireland’s figures skewed the EU figures, despite the country of 5.1 million people making up less than 3 percent of the region’s economy.

With employment and foreign investment also at record highs, “the economy is even hotter than the weather,” said Danny McCoy, head of the employers’ federation Ibec, pointing to recent record temperatures.

However, Ireland is not without its problems. Prices increased by 9.1 percent in the year to June. Normal families feel priced outside the housing market in Dublin and other cities.

“We don’t have bad wages,” said Mark Murphy, 39, a regional manager at a charity based with his wife in West Cork, who postponed getting married and starting a family to save for a “very modest” house around the €300,000 mark. “But now the same houses are $400,000 – we just can’t get the credit.”

Consumer spending contracted 1.3 percent in the first quarter compared to the previous three months. Adjusted domestic demand, a measure of economic activity that excludes the spending of some multinationals and is considered a better indicator than GDP, fell 1 percent in the first quarter.

Officials warn that corporate tax is sensitive to fluctuations. Half of its corporate tax revenue of $15.3 billion last year came from just 10 companies, including Apple, Google, Intel, Meta, Amazon and Pfizer.

Line chart of corporate tax receipts showing Irish corporate tax has skyrocketed

But for now, healthy tax revenues are giving Ireland a handy cushion, with a very modest budget surplus expected if spending levels are maintained, although Ireland, following some EU neighbors including Spain, is now considering an additional tax on energy companies in the 2023 budget on 27. Sept.

Dermot O’Leary, chief economist at brokerage Goodbody, said Ireland didn’t have to go the ‘Robin Hood route’ as it could use the corporate tax windfall to fund nearly €7 billion in spending already announced for the budget .

Even after eliminating the multinational sector, Ireland’s domestic economy shrank less in 2020 and recovered faster in 2021 than the EU average, according to rating agency DBRS Morningstar.

Leo Varadkar, Deputy Prime Minister, told an event last month to present record inward investment data: “The jobs and income created by multinationals have kept us out of the recession when the pandemic hit and now give us the financial firepower to to reduce costs. to live in a crisis and avoid another recession.”

But if the global economy goes into a downturn, Ireland’s multinational sector could be its Achilles heel. The threat of a recession in the EU and the US is increasing. Any downturn would hurt the profits of companies invested in Ireland and feed through in lower taxation.

The central bank said: corporate tax receiptswhich have exceeded expectations over the past seven years, were €8 billion higher than expected last year and brought in nearly €9 billion in the first half of this year alone.

The government has been hesitant to say if and how it will use the fiscal windfall in the budget, but the central bank and Ireland’s Fiscal Advisory Council have warned against reliance on a tax intake that could prove volatile.

“There is nothing on the horizon to indicate that corporate tax revenues will fall any time soon,” said Seamus Coffey, a lecturer at University College Cork and a corporate tax expert. “But five, six years ago, there was nothing on the horizon to suggest they would rise.”

John Fitzgerald, a professor of economics at Trinity College, says the worst-case scenario of a… drastic drop in corporate tax revenues would mean a loss of 3 to 4 percent of national income – a major blow to public finances.

Ibec warned that the Irish economy was at a “turning point” and that “for Ireland, as a small open economy, shifts in capital flow through the global economy could have an excessive impact on our growth model”.

The central bank has also warned that home construction to address Ireland’s chronic housing shortage is stalling. Varadkar calls Ireland a ‘property democracy’, but think tank the Economic and Social Research Institute recently predicted that one in three people between the ages of 35 and 44 will not have a home by the time they retire.

Ireland might be lucky. While the government predicted that its decision to join a global OECD corporate tax agreement, which sets a minimum rate of 15 percent, could cut revenues by €2 billion, implementation has been delayed.

Foreign direct investment continues to rise, with investments up 9 percent in the first half from the same period in 2021, including an 18 percent jump in new names in Ireland. Conall Mac Coille, chief economist at Davy brokerage, saw “no real reason” that taxes paid by foreign companies investing in Ireland “would soon collapse”.

For now, Ireland faces the problem of abundance. “We’re the equivalent of a household that just won the lottery,” McCoy says. “Are we the household mature enough to say, ‘Actually, this happiness can be put to work for future generations’? Or are we just going to go crazy for half this generation and regret so much?

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