Friday, October 18, 2019

Ireland has no post-Brexit economic plan

Leo Varadkar, the Irish taoiseach, gives Jean-Claude Juncker, European Commission president, a Thank You card from Ireland for the latter's support since the Brexit vote in June 2016, Brussels, February 6, 2019.

Ireland has no post-Brexit economic plan despite an Economic and Social Research Institute (ESRI) estimate last March that in an agreed deal scenario up to 45,000 fewer jobs would be created in a decade.

Matheson, a Dublin law firm that services big American FDI MNCs (foreign direct investment multinationals) in Ireland, noted in 2012 that "it can be frustrating to read commentary around Ireland’s so-called ‘reliance’ on FDI, or the persistent inference from some quarters that Government and its agencies should be refocusing their agenda towards domestic industry." However, 1) a low innovation economy (US MNCs spend 84% of R&D in the US and most of the rest in big economies) that can only provide occupational pensions to 29% of the private workforce 2) an Irish average annual per capita income/ material standard of living below the EU average 3) a poor level of entrepreneurship and 4) likely changes in international business taxation that may involve a minimum tax rate to prevent profit shifting to low or no-tax jurisdictions, merit a new 20-year Irish enterprise strategy. It has been 15 years since an enterprise strategy was reported on but efforts to support significant business innovation have failed.

In 2017 public data show that the small indigenous tradeable sector had direct expenditure (salaries, goods/materials and services) of €25bn (salaries at €8bn) compared with €21bn (salaries at €12bn) by MNCs. The food sector had high local linkages while the chemicals/pharma sector had low ones.

Permanent full-time employment for indigenous exporting companies with 10+ staff in 2017 was at 177,00 while FDI exporting firms (excluding firms such as foreign-owned retailers) employed 223,000 — 10% of total employment.

The MNCs pay well (Facebook had a global net income to sales ratio of 39% in 2018 and its material tax jurisdictions were the United States and Ireland) but attracting large numbers of foreign administration staff when Dublin struggles with a housing crisis could replicate the gulf in Tel Aviv between tech workers and the lower-income population  — at least Israel has attracted a large number of R&D centres. 

  • The Irish economic sectors with the biggest job gains since 2008 are in non-tradable areas. Even though the official headline exports value rose 157% (not reliable!; see below) in 2008-2018 and officially again, Ireland has the most productive workers in the world, the rise in jobs in public enterprise agency supported companies was 19%; 
  • The policy establishment is addicted to foreign direct investment 1) for politicians and public officials ready-made foreign provided jobs eclipse the multi-decade underperformance of the indigenous tradable sector 2) big accounting and law firms get lucrative business from FDI firms and they have been active for decades in promoting tax avoidance shenanigans;
  • A KPMG partner sees capital gains tax relief as the silver bullet for Irish and foreign entrepreneurs, and "owners of family businesses" — which begs the question: what is an entrepreneur? In 2016 Patrick Collison, co-founder of Stripe — the Silicon Valley-based payments firm that in terms of value is the most successful Irish-linked high tech startup ever — said, "John (his co-founder brother) and I have made a full-time job of talking to startups and it is incredibly rare that anything tax rate-related comes up. Tax complexity comes up all the time but as to the total absolute rate of taxes, it is not a problem.” Patrick referred to the famous quote from Picasso about when art critics come together they talk about form and structure, while artists talk about where to buy cheap turpentine;
  • Stripe had a valuation of $35bn in September 2019 while Baltimore Technology's peak valuation during the dot-com bubble was $7.72bn in the spring of 2000;
  • The British market remains important for Irish indigenous firms and the claim that the total export ratio has fallen to 11% is nonsense  — the denominator of total export value in 2018 of €383bn is bloated by tax shenanigans valued at €200bn;
  • The reliance on mainly foreign provided administration and sales support/call centre jobs is set to continue and last week the Irish Times reported that the Microsoft-owned LinkedIn looks set to follow the lead of Google, Facebook and Salesforce, by opening a major European campus in central Dublin that could see the online professional networking firm adding more than 3,000 jobs;
  • On October 9, 2019, the Organisation for Economic Cooperation and Development (OECD) — a think-tank for mainly rich country governments — unveiled Pillar 1 proposals that target big multinational firms whether involved in digital services or luxury goods or global car production. Big countries such as the US, China, UK, Germany, France, Italy and developing economies would gain from taxing corporate income earned from sales in their territories, while the companies themselves, tax havens and low tax jurisdictions such as Ireland would lose out. The OECD will publish Pillar 2 proposals in coming months that will deal with profits shifting and a minimum tax rate.
  • The Financial Times' editorial board noted, "International tax rules need to change. Current principles dating from the 1920s that tie tax to physical presence are no longer appropriate for a world in which California-based Google can sell ads in Bulgaria through a Dublin-registered subsidiary, or a Dutch branch of the Seattle-founded coffee chain Starbucks pays royalties to a British subsidiary for use of its roasting recipe. Public resentment has risen over companies that enjoy the benefits of society but do not pay a fair share in tax;
  • Ireland has had corporation tax windfalls since 2015 the year of 'Leprechaun economics' when GDP growth of 26% was contrived. Multinationals such as Apple reallocated more of their tax avoidance tools to Ireland including intellectual capital (IP). On October 8, 2019 (Budget Day), the Irish Government issued a report which noted that the share of taxes "arising directly from the corporate sector has increased sharply since 2015: at the end of last year, around €1 in every €5 collected in tax was paid by the corporate sector. Even more striking is the fact that nearly half of all corporate tax receipts are paid by just ten firms. This, of course, makes our public finances vulnerable to policy changes in other jurisdictions and to sector — and company-specific shocks. By way of illustration, a decline in the share of corporation tax receipts to historical ‘norms’ would imply a revenue loss of just under €2bn. Alternatively, if corporation tax receipts fell back to 2014 levels, i.e. the level immediately prior to the surge, this would imply a(n annual)  revenue loss of around €6bn."

Since mid-2008, before the property bubble burst, the top category job gainers have been Health at 47,000 followed by Accommodation/food and drink services at 45,000; Education at 36,000 and Information and communication at 30,000, split 50/50 between Irish and non-Irish.

The main losses since 2008 are Construction at 68,000; Wholesale, retail and vehicle repair at 33,000; Industry at 23,000 and Agriculture, forestry and fishing at 16,000 — see charts below .

ICT and R&D personnel

The NACE (Nomenclature statistique des activités économiques dans la Communauté européenne) EU classification categories of interest here are Information and communication for computer-related work while research and development (R&D) personnel are classified as part of Professional, Scientific and Technical Activities. Call centre staff and administration staff of the likes of Google should be in the Administrative and support service activities category for example. 

Information and communication include publishing of newspapers, books, computer games, software; TV and radio broadcasting/production; telecommunications including internet Wi-FI; computer coding/web development, facilities management and consulting. 

In contrast ICT- Information and communications technology includes manufacturing.

ICT specialists are defined as persons who have the ability to develop, operate and maintain ICT systems and for whom ICTs constitute the main part of their job (OECD, 2004). The number of ICT specialists in the EU grew by 39.1 % from 2011 to 2018, over 6 times as high as the increase (6.5 %) for total employment. Eurostat data shows that in 2018, 83.4 % of men were employed as ICT specialists in the EU against 16.6 % of women.

In 2018, some 8.9m people worked as ICT specialists across the EU-28. The highest number (1.6m) worked in the United Kingdom, which provided work to almost one fifth (18.4 %) of the EU-28’s ICT workforce. Germany (also 1.6m) had the second-largest ICT workforce (18.3 % of the EU-28 total), followed by France (1.1m; 12.2 %). None of the remaining EU member states accounted for a double-digit share.

Eurostat data for the whole of the EU-28, show that ICT specialists accounted for 3.9 % of the total workforce in 2018.

"Finland had the highest relative share of its total workforce employed as ICT specialists, as its 182 thousand persons employed as ICT specialists represented 7.2 % of total employment, followed by Sweden where 346 thousand ICT specialists represented 6.8 % of total employment. Relatively high shares were also recorded in Estonia, Luxembourg, the Netherlands and the United Kingdom — in 2018, they each reported that at least 1 in 20 persons within their total workforce was employed as an ICT specialist. By contrast, at the other end of the range, ICT specialists accounted for 2.8 % of the total workforce in Italy followed by Lithuania and Cyprus with 2.7 %, 2.4 % in Portugal, 2.2 % in Romania, 1.8 %, in Greece and 1.7 % in Latvia."

Ireland had 97,000 ICT specialists working across the economy  and accounting for 4.3% of total employment — just above the 4.1% average for the EU-15 countries (prior to the enlargement to mainly Eastern European countries from 2004.)

There were 10,800 research and development full-time equivalent researchers employed in the Irish business enterprise sector in 2017.

There were 27,600 in Denmark which has a population that is 1m higher than Ireland's. Finland had 20,500 and Sweden 52,000.

Eurostat reported that the relative importance of the different sectors varied considerably across the EU member states, with the business sector accounting for three fifths or more of all researchers in Sweden, the Netherlands, Austria, Slovenia, Hungary, Denmark and France. By contrast, the government sector employed the highest share of researchers in Romania (37.3 %). A majority of researchers working in Latvia (65.0 %), Portugal (61.3 %), Cyprus (58.6 %), the United Kingdom (58.2 %), Slovakia (57.4 %), Croatia (55.6 %), Lithuania and Estonia (both 52.5 %) and Greece (50.8 %) were employed within the higher education sector. 

The Irish business sector ratio was 53% with Higher Education and Government at 47%.

Reckless economic endangerment

In November 2015, Catherine Mann, the then chief economist of the OECD, said in Dublin that Ireland will have to sell itself as more than just a low-tax destination in the new era of global tax transparency. She also highlighted the poor links between the FDI sector and the rest of the economy, with Ireland having one of the lowest EU spends on R&D (research and development), despite housing some of the most innovative firms in the world.

"Global capital has come into Ireland...but somehow it hasn't translated into Irish-owned firms," said Dr Mann. "The patents are here, but they're not being linked into the domestic economy, not being levered up by domestic firms or married to domestic workers." 

In 2014 Patrick Honohan, then governor of the Central Bank of Ireland said in a speech:

"One hoped-for element of the policy of encouraging foreign-owned firms is the inward transfer of technology and business know-how including to locally controlled firms. As the decades passed, this transfer does seem to have happened to an increasing extent. But the reliance on foreign-owned firms has lasted a long time. Irish-owned companies have grown and prospered over the past half-century, and the most pessimistic of prognostications have not materialised. Nevertheless, this systemic dependence on foreign capital and know-how has skewed Irish development. In the interests of robust diversification, most Irish economists observers would hope for a greater convergence towards normality in this aspect of Irish economic development, with a stronger emergence of innovative Irish companies alongside those steered from abroad."

Denmark is a knowledge economy that relies on its own companies for at least two-thirds of the value of goods and services exports. Ireland can do better than indigenous exports of only €5bn in 2018 to the 340m population of the 19-member country Euro Area, 20 years after the euro eliminated exchange risk.

Ireland can reduce its risks by having both FDI jobs and a vibrant indigenous sector that can innovate.

Denmark was like Ireland in the 1950s, dependent on agricultural exports

In 2014 UCD (University College Dublin) selected Denmark as Europe's top agri-foods innovator. It noted that “Ireland has a number of truly world-class innovative companies, but at present, there are too few newly emerging companies that will develop into world-leading companies,” said Prof Alan Renwick, UCD School of Agriculture and Food Science, the lead author of a report. “There is a high level of government support for the agri-food sector and for science and technology within agriculture and food sectors in particular, but much of the science and the efforts at encouraging innovation are supply pushed rather than demand pulled,” he said. 

Related links   

Irish prices 27% above EU average, adjusted disposable income below

Ireland's missing exporters

Ireland's 2018 standard of living per capita below EU28 average

The poor state of entrepreneurship in Ireland

Minimum corporate tax rate to imperil Ireland's FDI model

Ireland’s Faustian Bargain with hyper- globalization

The fiction in Irish Times Top 1000 2019 leading companies

Few Irish firms in FT 1000 & Inc. 5000 Europe lists of fastest-growing companies

Irish Government as alchemists in innovation game

Ireland's underperforming indigenous exporting sector

Irish workers most productive in world or same as Italians?

Ireland's global social, economic, business rankings 2019