Ireland’s volatile economic path of recent decades has wider European policy implications
The ‘Celtic Tiger’, Ireland’s rapid transformation from the ‘poorest of the poor’ western European states to one of the richest, is often attributed to its low corporation-tax rate. The Irish government, its agencies and all Irish political parties pander to this portrayal of the Tiger success by claiming low corporation tax the cornerstone of Ireland’s industrial policy.
Yet the reality is different and more complex. The low 12.5 per cent corporation tax rate did help but other factors played important or even bigger roles.Nor does Ireland’s historical support from European Union structural and cohesion funds explain the Tiger phenomenon as some have posited. The EU funds helped too but they amounted to less than 1 per cent of national income a year in the period received—albeit EU oversight ensured the money was well invested and generated high returns.
The biggest factor boosting Ireland’s economy to exceptionally high growth and employment was its immediate, open access to the 500 million consumers and millions of firms in the EU’s single market after 1992. Thus, it is remarkable that Britain should want to leave such a vast single market.
A prior step was curbing the rampant inflation of the late 1970s and 80s. While recognising that inflation was largely externally driven in a small open economy, the government, trade unions and employers sought to contain indigenously driven inflation with a social-partnership agreement from 1987.
Ireland also had a positive attitude to globalisation and a highly interventionist state promotion agency, IDA Ireland. The IDA encouraged foreign direct investment (FDI) in the growing sectors of information and communications technology andpharmaceuticals, later also services, and successfully sought out the leading firms in these sectors. Then there was the cluster effect of such firms and a pro-EU, English speaking, well-educated and flexible workforce.
Investment in education, political stability, good regulation, good services such as banking and insurance, and favourable taxes also helped to create a virtuous circle, which generated the key Tiger phase of economic progress. The revolution in communications and transport costs ended the disadvantage of being a peripheral economy. Further, Ireland’s industrial strategy meant its exports had a high value-to-volume ratio.
There was a benign demographic dividend, with a fall in the dependency ratio and growth in labour-force participation especially by women. There were surpluses on the current account between 1995 and 2007 and net debt was also reduced to a very low level. Interestingly, Ireland had had a 0 per cent rate of corporation tax on exports for decades before, with little impact on economic development or FDI. The 12.5 per cent rate did not take effect until 2001, while the Tiger lift-off had begun in 1987. It did however help as a headline rate and a distinct attraction in marketing to FDI firms.
The period 1987-1993 saw gross national product rising annually by on average 3.8 per cent per capita, but jobs increasing only by 1.3 per cent a year. The second phase, between 1994-2000, was the real Tiger period, with every economic factor working at peak and a remarkable annual rise in per capita GNP of 7 per cent. Employment rose also rapidly, by an annual average of 6 per cent.
Growth (% per annum) in GNP and jobs over three seven-year phases
Jobless growth 1987-1993 3.8 1.3
Real Tiger 1994-2000 7.0 6.0
Bubble 2001-2007 6.7 3.9
The third seven-year period of bubble, or artificial growth, between 2001 and 2007 saw average GNP rise by a still substantial 6.7 per cent and jobs by 3.9 per cent per annum. It was based on unsustainable pro-cyclical policies, largely domestically generated, assisted by low eurozone interest rates and deregulated finance and construction.
Since Independence in 1922, the number of jobs in Ireland had remained stagnant at 1.1 million. Mass emigration was the Irish story. Yet in the 20 years from 1987 the number doubled to 2.1 million. Net take-home pay of the average worker in manufacturing also doubled over these two decades.
Because of the bubble economics pursued from 2001 to the crash, however, jobs and incomes were to decline for most.
The third growth phase was so different because a new government came in at the end of 1997. New policies included large cuts in direct taxes on incomes, profits, capital gains and inheritances, combined with massive, uncosted tax subsidies, especially to property speculators—during a property boom.
This in a context of low interest rates, after Ireland joined the euro in 1999, inappropriate to a booming economy. Government should have been prudent, tightening fiscal policy and bank and construction regulation, but it went the other, unregulated way. This third growth phase, based on unsustainable right-wing economic policies, introduced by the new government after 1998 did generate growth in GNP and jobs, mostly in construction, but both were quickly to disappear when the stimulus of tax cuts, tax subsidies and cheap uncontrolled credit was taken away.
Some of these policies were to be reversed by the same government—slowly and due to necessity—from 2004.
The crash in 2008 was largely a property and banking crisis. Borrowing for property investment had become excessive in a low-interest, unregulated era while direct taxes had been cut substantially. Much of the indirect tax revenue was coming from the booming construction sector and collapsed with it. The crisis was exacerbated by the decision to bail out all liabilities of the six private Irish banks by borrowings forced upon Irish taxpayers by government and the European Central Bank. In spite of its domestic stimulus in this third phase of the Tiger, Ireland had a low level of public spending at around 30 per cent of gross domestic product before the crash, with exchequer surpluses and a low national debt of only 24 per cent of GNP. Thus the cause of the crash had not been excessive public spending but financialisation. Further, a major programme of privatisation of efficient public enterprises was undertaken by the government, along with public-private partnerships. There was no need for either, because the exchequer was in surplus and the public enterprises were profitable. This privatisation was purely ideological, and the timing was bad because the €9 billion from it enabled more reductions in direct taxes, further stimulating the bubble. Such capital could have assisted recovery in bad times, if so chosen. Had the prudent economic policies of the first two Tiger phases, 1987-2000, been sustained over the third phase by the government elected in 1997, Ireland probably would have had a soft landing amid the global financial crisis. But the new government changed policy radically from prudent to reckless. Ireland’s crash was thus one of the worst in the world and most was attributable to unsustainable, ultra-liberal polices. Ireland, one of the poorest states in Europe in the 1980s, had seen its per capita income rise to one of the highest. A series of sound economic and social policies had generated this spectacular growth in incomes, but these were undone from the late 1990s. After some difficult years, however, Ireland made a very rapid recovery. The reasons why are examined in the next article.
A version of this post recently appeared in article form in Social Europe
Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.