Taxpayers’ money from the technology sector is supporting Ireland’s economy against the recession

Economic prospects are bleak for much of the EU as fears of recession mount and public finances tighten. Then there is Ireland.

The republic is enjoying an unexpected €8 billion in corporate tax gains after the pandemic boosted revenues from tech and pharmaceutical companies. Tax revenues from companies, attracted by Ireland’s 12.5% ​​corporate tax rate, have risen sharply since 2015 and increased by a further 30% last year compared to 2020.

Ireland’s economy grew 6.3 percent in the second quarter compared to an EU average of just 0.6 percent. Such was the influence of multinationals that Ireland’s figures skewed EU figures, despite the nation of 5.1 million accounting for less than 3 per cent of the region’s economy.

With employment and foreign investment also hitting record highs, “the economy is even hotter than the weather,” said Danny McCoy, chairman of the employers’ association Ibec, citing recent record temperatures.

But Ireland is not without problems. Prices rose 9.1 percent in the year to June. Ordinary families feel priced out by the housing market in Dublin and other cities.

“We don’t have bad wages,” said Mark Murphy, 39, a regional director of a charity based in West Cork with his wife, who has been delaying marriage and starting a family to work for a “very modest” home nearby save the 300,000 euro mark. “But now the same houses cost 400,000 euros – we just can’t get a loan.”

Consumer spending fell 1.3 percent in the first quarter compared to the previous three months. Modified domestic demand, a measure of the volume of economic activity that excludes spending by some multinational companies and considered a better indicator than GDP, fell 1 percent in the first quarter.

Officials warn that the corporate tax rate is vulnerable to fluctuations. Half of last year’s €15.3 billion in corporate tax revenue came from just 10 companies – including Apple, Google, Intel, Meta, Amazon and Pfizer.

But for now, healthy tax revenues give Ireland a practical 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 27.09.

Dermot O’Leary, chief economist at brokerage firm Goodbody, said Ireland doesn’t need to go the “Robin Hood route” as it can use the windfall corporate tax gain to fund nearly €7 billion in spending already earmarked for the UK budget were announced.

Even after removing the multinational sector, Ireland’s domestic economy contracted less in 2020 and recovered faster than the EU average in 2021, rating agency DBRS Morningstar said.

Speaking at an event last month to unveil record foreign investment data, Leo Varadkar, Deputy Prime Minister, said: “The jobs and revenue generated by multinational companies helped keep us out of recession when the pandemic hit and are now giving us the financial firepower to bring down the cost of living crisis and avoid another recession.”

But if the global economy takes a downturn, Ireland’s multinational sector could be its Achilles’ heel. The danger of a recession in the EU and the USA is growing. Any downturn would hurt the profits of companies investing in Ireland and result in lower tax revenues.

The central bank said corporate tax receipts, which have beaten expectations over the past seven years, were 8 billion euros higher than expected last year, bringing in nearly 9 billion euros in the first half of this year alone.

The government is reluctant to say if or how it will use the tax windfall in the budget, but the central bank and Ireland’s Fiscal Advisory Board have warned against relying on tax revenues, which could prove volatile.

“There is nothing to suggest that corporate tax revenues will fall quickly,” said Seamus Coffey, a senior lecturer at University College Cork and a corporate tax expert. “But five, six years ago, there was nothing on the horizon that indicated they were going up.”

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

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

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

Ireland might be lucky. Although the government predicted that its decision to join an OECD global corporate tax treaty setting a minimum tax rate of 15 percent could cut revenue by €2 billion, implementation has been delayed.

Foreign direct investment continues to rise, with investments up 9 per cent in the first half compared to the same period in 2021, including an 18 per cent increase in new names establishing themselves in Ireland. Conall Mac Coille, chief economist at Brokerage Davy, saw “no real reason” that the taxes paid by foreign companies investing in Ireland would “collapse shortly”.

At the moment Ireland faces the problem of managing abundance. “We’re the equivalent of a household that just won the lottery,” McCoy said. “Are we mature enough as a household to say, ‘Actually, this happiness can be used for future generations’? Or will we just go mad and regret so much for half a generation?”