With the local and European elections over, the starting gun has already been fired on a general election.
The economic backdrop to that election is taking shape — low unemployment, rising wages, moderating inflation, and a gradual fall in interest rates. Some of these trends are driven by global events but others are to the Government’s credit. If it could find ways to turn those resources more effectively into the infrastructure and public services society needs, we would be in a very good place indeed.
Extremely healthy budget surpluses are already leading to rampant speculation about the Government going to the country with a giveaway budget. Manifestos will follow thereafter with promises of five years of the land of milk and honey. All this excitement belies one very clear global trend. Ireland’s business model, the tax producing engine which will pay for these commitments, is increasingly precarious.
In a global context, we are a small open regional economy. Openness to flows of trade, capital, and people are central to our economic model. It drives investment in our offices and factories and ensures we have a constant flow of innovation and ideas. The income companies earn in global export markets is then recycled into the domestic economy. This largely determines how much money is available here at home for both households and the exchequer.
Those exporters, mostly Irish owned and foreign multinationals, paid over €21bn in corporate tax in 2023 — one fifth of our total tax take. Ireland collects three times more in corporate tax per person than other EU states. Without these outsized tax payments by corporates, the Government would be borrowing to run the State. The same exporters pay a large share of our wages, at €33bn annually, and consequently our income tax.
The landscape facing our exporters in global markets is very challenging. The battle for investment in the global economy is changing. Large countries like the US and China are increasingly competing using aggressive investment subsidies and tariffs on imports. Europe is now moving in the same direction; this was clear this week when the EU increased tariffs on Chinese car imports.
There is a major risk for Ireland that an outsized EU response in a subsidy war could damage the level playing field in the single market, by allowing large countries a free hand to ladle on subsidies which small countries could never match.
The rise of state-driven competition for investment, increasing geopolitical tensions, and decreasing trade openness are not beneficial for small countries like ours. We will never be able to compete with big countries when it comes to subsidies and have had our tax edge blunted by global changes in recent years. Now, more than ever, we need to have compelling evidence that we intend to compete based on our other strengths.
There is growing concern amongst the leaders of major Irish and global multinationals about our ability to compete. I hear regularly from business leaders about the gaps in our critical infrastructure, like energy, transport, and water, which they see as a blockade on future growth.
Neither can we afford to spend more years prevaricating on decisions around how we fund key economic enablers like higher and further education, our innovation system, in unlocking the surplus in the National Training Fund, and how we invest in net zero to reduce energy costs.
The signals we send in the budget and subsequent election debates are being watched not just by a domestic audience, but global corporate decision makers.
- Gerard Brady is chief economist at Ibec
