These are eventful times for the Irish economy. We are told a variety of ‘storm clouds’ have been forming internationally which, it is claimed, has necessitated a tightening of the purse strings domestically. The budget, for instance, was framed in terms of the threat a no-deal Brexit would have on the Irish economy, leading to what was one of the more upwardly-redistributive budgets of recent times. With that threat subsiding for now, another concern is the incoming reforms to international corporate taxation. While this threat is real, some important points have been absent from the debate thus far. Moreover, other international developments, especially low interest rates, work decidedly in our favour. This also should be recognised as we gear up to the election season.
One claim is that Ireland's level of indebtedness is a major cause for concern and needs to be reduced ASAP. This is false. Ireland's government debt-to-GDP ratio was 65% in 2018 and is set to fall below 60% in 2019. The more economically meaningful for Ireland debt-to-GNI*, based on the CSO measure of national income, put our debt at 104% in 2018. But so what? It is not the level of indebtedness that puts a drag on economic resources but the burden of servicing payments. Japan, for instance, has a debt ratio in excess of 250%, and investors are not the least bit spooked - Japan can borrow at negative rates. As long as we are living within the fiscal rules, which requires our debt to be less than 60% of GDP, we should not concern ourselves that the level of debt is a problem.
For the burden of payments, the relevant measure is interest payable (principal payments can be rolled over - refinanced by issuing new debt). At 2.6% of national income, the burden of debt payments is high by EU standards. However, a 2018 snapshot that compares us with other countries neglects the fact that these are extraordinary times. Interest rates have fallen over a sustained period and are currently at unprecedentedly low levels. The burden of servicing our debt is actually below the level it was in 1999, when the Celtic Tiger was roaring. It is also below the historic average, and even when we strip-out the public finance disasters of the late-1970s, 1980s, and the recent crisis, we're still around average. Point is the government has the capacity to borrow and invest, within the confines of the fiscal rules.
The other way the government finances itself is through taxation. As before, the storm cloud on the horizon here is the probable changes to the system of international corporate taxation. Corporate tax receipts have surged in recent years and now account for a record 18.7% of tax. Ireland will likely lose out from incoming changes through the OECD BEPS process, which is attempting to clamp down on multinational avoidance. Though they don't state explicitly that Ireland would lose this amount, the Irish Fiscal Advisory Council warns that some €3-6 billion of Ireland's €10.4 billion in corporate tax receipts for 2018 could be considered excessive. This is in line with the worst case scenario modelled by the government, though IBEC puts estimates potential losses to be €1 billion.
It is unlikely that a fall in corporate tax revenues would lead to a one-to-one cut in spending/increase in non-corporate taxation - it would be partly funded by borrowing. Nevertheless, depending on the make-up of tax and spending measures, draining even €1 billion from the economy could lead to significant job losses. Probably the most employment-unfriendly method would be to reduce public investment by €1 billion, which could lead to about 12,000 lost jobs. Raising €1 billion in capital taxation (such as inheritance taxation and standardising pension relief) would have negligible ‘multiplier’ or knock-on effects. If, however, the losses to Ireland from corporate tax reform exceed €1 billion, then so would the job losses.
It is important to acknowledge that the precarious reliance of our tax base on corporation tax is, in part, policy-driven. The surge in corporation tax receipts is welcome (from a selfish Irish perspective) and is mostly driven by external factors. But the government has chosen to reduce taxes elsewhere, exacerbating the reliance on corporation tax. If the government had instead chosen to keep other taxes constant as a share of national income at, say, the 2014 level, then it would have had on average €2.7 billion more in each of the last three years. This money could have been saved in the event that these receipts dry-up (which would have lowered other tax receipts due to less economic activity) and/or be used to fund one-off capital projects such as investments in public housing (as suggested by SJI), or a mixture of the two. Either way we would be in much better shape to withstand a considerable shock to the system.
We thus have a greater capacity to borrow to fund public investments than is generally acknowledged. As Mario Draghi hands the ECB reins over to Christine Lagarde, the favourable borrowing conditions look set to persist for some time. In the event that things go awry for us in the international tax negotiations, we can plug some of the hole by borrowing. Further tax reductions are unwise, independent of the need to save for a Brexit no-deal. It increases our reliance on potentially transient corporation tax, and similar to our fixation on debt, diminishes our ability to fund the state. If this or the next government is serious about addressing the various challenges that beset us, a change in direction is needed.
Robert Sweeney @sweeneyr82
Robert Sweeney is a policy analyst at TASC and focuses on issues surrounding Irish political economy and distribution. He has a PhD in economics from University of Leeds, which concentrated on financial markets and investors, banking, international macroeconomics, and housing. He is also interested in debates on alternative schools and methodology in economics, and ownership.