Quiet Steps Towards an Irish Statistical Miracle

When Ireland’s Central Statistics Office (CCO) was preparing to release the final statistics for 2015, few people expected any major surprises. Back in March 2016, GDP growth was projected to be 7.8 per cent, and the majority of experts expected such figures. However, the CCO data came as a shock: in 2015, Ireland’s economy grew by 26.3 per cent (see Figure 1). In current prices, the jump is even more significant, amounting to 32.4 per cent. Thus, Ireland is formally the world’s fastest growing economy, outpacing such countries as Ethiopia (10.2 per cent), Turkmenistan (about 8 per cent) and Papua New Guinea (16 per cent).

The CCO press release is remarkable for its formulations. The CCO believes that the data reflects the open and globalized nature of the Irish economy; however, GDP “does not always reflect the true situation” inside a country. Why then did the authorities understate the significance of the strong economic growth and convene commissions to find new ways of determining the country’s economic health? The answer to this question lies in Ireland’s favourable taxation regime and the European Union’s financing rules.

REUTERS/Clodagh Kilcoyne

Cyclists ride dublinbikes in Dublin's docklands area, Ireland February 17, 2016

After the financial crisis that began in 2008, several U.S. companies saw Ireland as an ideal place to re-register. With a corporate tax of 12.5 per cent, an overall tax burden of about 17–18 per cent and a number of tax breaks (the majority of which will be gradually phased out), foreign investors, especially large conglomerates, were – and still are – promised billions of dollars in savings. Currently, the pharmaceutical companies Perrigo and Jazz Pharmaceuticals are registered in Ireland; Intel, Google, Facebook and PayPal have their European headquarters there; Apple is building its largest centre for processing and storing data in the country, and has most of its intellectual property registered there.

The example of the pharmaceutical giant Pfizer is telling here; in order to re-register in Ireland, the company pulled off the following manoeuvre: it was supposed to be the object of an acquisition worth $160 billion, with the acquirer being a rather small Irish company Allergan; subsequently, the new company, under the name Pfizer, would operate as an existing tax resident of Ireland. Barack Obama’s administration vetoed the merger of the two companies, as it was afraid of losing one of the United States biggest taxpayers.

Thanks to the re-registration of foreign companies, Ireland’s basic capital grew by 40 per cent. Goods manufactured by these companies were mostly exported, and consequently, Irish export grew by 102.5 per cent in 2015.

Figure 1. Ireland’s Gross National Product

Source: Ireland’s Central Statistics Office.

The statistics is also distorted by contract manufacturing, whereby products for companies registered in Ireland are produced by an independent contractor. The revenues from the goods manufactured by contractors are included in Ireland’s balance of payment. Thus, the economy received additional 80 billion euros, which, in essence, had never been seen in Ireland and was of no use for the economy – no new jobs were created, for instance. If we exclude the “alluvial” part of Ireland’s economy, experts believe the real GDP growth to be about 5.5–6 per cent. This is confirmed by consumer spending growth in 2015 (4.5 per cent) and the relatively small drop in the unemployment rate (1.2 per cent from January 2015 to January 2016).

Transferring tax registration to Ireland artificially expands the country’s economy. All the revenues of Ireland-based international companies earned in the United States and France are counted toward Ireland’s GDP, although the Irish authorities and population only “see” a part of this money. Moreover, now Dublin has to pay more into the EU’s common treasury proportionate to GDP’s growth, which is also a reason for concern for the authorities. It should be noted that up until 2014, Ireland (an EU member since 1973) received more from Brussels (as grants, for target programmes, etc.) than it paid out. By pan-European standards, Ireland’s indicators are far from disastrous: Ireland paid about €1.5 billion a year (to compare, Germany pays 17 times this amount).

The Irish statistical miracle has some positive consequences for Dublin. The sovereign debt to GDP ratio dropped by more than 15 per cent, to 78.7 per cent, which helped the yield on 10-year bonds to drop to the extremely low level of 0.36 per cent in August 2016. Thus, Ireland will be able to assume positions on international markets on more advantageous conditions. It should be noted that Ireland has also become more attractive as a result of Brexit. Several leading companies that had previously been based in the United Kingdom and considering the possibility of transferring their operations to Ireland in order to remain within the EU jurisdiction. Representatives of Morgan Stanley bank were the first to speak about such a possibility. The Irish authorities, in turn, announced they were ready to accept all companies that express such a wish.

Thus, the rapid growth of Ireland’s GDP in 2015 is both real and artificial. The most important thing for the Irish authorities now is to conduct a careful macroeconomic policy, a countercyclical policy where it is needed, remembering that the crisis of 2009 might happen again.