Tech sector tax windfall pushes Irish economy into recession

In many EU countries, the economic outlook is bleak, recession fears are mounting, and government finances are being constrained. Ireland is next.

The republic is enjoying an €8 billion corporate tax shelve after a surge in pandemic-enhanced revenues from tech and pharmaceutical companies. Tax revenue from businesses lured by her 12.5% ​​corporate tax rate in Ireland has surged since 2015, and last year he surged another 30% compared to 2020.

The Irish economy expanded by 6.3% in the second quarter, while the EU averaged just 0.6%. The influence of multinationals has been so great that Ireland’s figures have distorted her EU figures, even though Ireland, with a population of 5.1 million, makes up less than 3% of her regional economy.

Employment and foreign investment are also at record highs, and “the economy is even hotter than the weather,” said Danny McCoy, head of employers’ coalition Ibec, referring to recent record temperatures.

However, Ireland is not without its problems. Prices he rose 9.1% in the year to June. Regular families feel overpriced from the housing market in Dublin and other cities.

“We’re not on bad pay,” said Mark Murphy, 39, who is the regional manager for the charity with his wife in West Cork. €300,000 mark. “But now the same house he is €400,000. Can’t get the credit.”

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

Officials warn that corporate taxes are volatile. Half of last year’s €15.3 billion in corporate tax revenue came from his 10 companies, including Apple, Google, Intel, Meta, Amazon and Pfizer.

Line chart of corporate tax revenues showing a sharp rise in Irish corporate tax revenues

For now, however, healthy tax revenues provide Ireland with a convenient cushion, and while we can expect a very modest budget surplus if spending levels are maintained, Ireland has the potential to benefit some EU neighbors, including Spain. Subsequently, the 2023 budget is considering additional taxes on energy companies. September 27th.

Dermot O’Leary, chief economist at brokerage firm Goodbody, said Ireland need not follow the ‘Robinhood route’. The corporate tax windfall could be used to cover the nearly €7 billion in spending already announced in the budget.

Even after stripping the multinational sector, Ireland’s domestic economy did not contract much in 2020 and recovered faster than the EU average in 2021, according to rating agency DBRS Morningstar.

Deputy Prime Minister Leo Varadkar said at last month’s event to release record foreign investment data: Avoid life crisis and avoid recession again. ”

But if the global economy falters, Ireland’s multinational sector could become an Achilles’ heel. The threat of recession in the EU and US is growing. Any recession will hurt the profits of companies investing in Ireland and reduce their tax burden.

The central bank said corporate tax revenues exceeded expectations over the past seven years, 8 billion euros above last year’s forecast and bringing in nearly 9 billion euros in the first half of this year alone.

The government is reluctant to say if or how the unexpected tax revenue will be used within the budget, but the central bank and Ireland’s Fiscal Advisory Board have warned against potential instability. It warns against dependence on certain tax revenues.

Seamus Coffey, a lecturer at University College Cork and a corporate tax expert, said there was “nothing to suggest that corporate tax revenues would fall sharply.” “But five or six years ago there was nothing to suggest they would rise.

John Fitzgerald, an economics professor at Trinity College, said the worst-case scenario of a significant decline in corporate tax revenues would be a loss of 3% to 4% of national income, which would hit the public economy hard. says.

Ibec said the Irish economy is facing a “tipping point” and that “for Ireland, a small open economy, changes in the flow of capital through the global economy could have a very large impact on our growth model. there is,” he warned.

The central bank has also warned that housing construction has stalled to address Ireland’s chronic housing shortage. Varadkar has called Ireland a “homeownership democracy,” but the Economic and Social Research Institute, a think tank, recently predicted that one in three people aged 35 to 44 today will not own a home by the time they retire. is doing.

Ireland has been lucky enough to continue. The government estimates that its decision to join the OECD Global Corporate Tax Agreement, which sets a minimum tax rate of 15%, could cut revenue by €2 billion, but implementation has been delayed.

Foreign direct investment continues to surge, with 9% more investments in the first half than the same period in 2021, including an 18% surge in new names in Ireland. Conal Mac Coyle, chief economist at brokerage Davie, believes there is “no real reason” that the taxes paid by foreign companies investing in Ireland will “collapse anytime soon”.

For now, Ireland faces the problem of managing affluence. “We are the equivalent of a household that has just won the lottery,” he says. “Are our families mature enough to say, ‘In fact, this fortune can be put to work for future generations’? mosquito?”

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