Phantom menace

The Irish economy as a model for Northern Ireland’s future? 

Much of the chatter around the anti-Brexit voices in Northern Ireland, has been around the notion that Northern Ireland will benefit from the “all-Ireland” economy closely alined to the EU.

The all-Ireland economy is a nationalist fiction. It conflates the geography of the island or Ireland with some notion of an integrated economy. That doesn’t stand up to any exploration of facts.

The much talked about ‘all Ireland’ energy market conveniently ignores energy links to GB, and seems to conflate the State-owned ESB with a market. Animal and plant health checks long precede the EU for Northern Ireland, and siren calls of the threat to food hygiene conveniently forgets that the horsemeat scandal of 2013 originated in the Republic of Ireland from meat sourced elsewhere in Europe – not the only food scandal to be talked down or forgotten.

The debate focusing on an “all-Ireland” economy is useful to the Irish Republic. It is self-promoting, and self-congratulatory. It impresses upon anyone who listens that the Irish economy is the success story and that ties to GB are of less importance that those to the EU, of which the Republic makes itself to be a successful small nation in the Club.

The Republic of Ireland barely acknowledges the value of the ‘ALL-ISLANDS’ economy to which it is largely integrated and on which it depends. East West links, far more than in just goods and services, are way far more important to both the NI economy and the ROI economy that either is reliant on North South trade.

The Republic’s view of itself and its economy, however, is coming under increasing scrutiny. The sustainability of the economic model it has used to take itself out of the meltdown at the end of the Celtic Tiger years is being questioned. Rightly.

The proposition that Northern Ireland would be ‘better off’ in a united Ireland with the Republic of Ireland are little more than phantom menaces.

There has been a number of points over the past year that have not been commented upon individually, but taken together raise significant doubts as to the strength and stability of the Republic’s economy going forward.

The Republic of Ireland is lauded for its high growth and business friendly economy – particularly the low level of corporation tax.

A shot across the bows of this strategy was taken by the EU Commission and the Apple case, with a decision that: “Ireland granted illegal tax benefits to Apple” ordering Apple to pay €13m plus interest for unpaid tax 2004-2014. That case rumbles on, with Ireland appealing (unsurprisingly).

Why does this matter?

The Republic’s focus on GDP growth enables it to make the case that its National Debt to GDP ratio is declining. This is true. It is also true that the actual debt remains at about the same level as it was at the time of the banking crisis in 2010. The per-capita debt is higher than Greece.

The impact of Apple adjusting its accounting procedures to run all of its European sales through its Irish office was to cause a leap in Irish GDP of 25%, though it generated zero income for the Government.

No wonder than that an IMF study reported that almost two-thirds of Irish FDI is “phantom’.  Yes, Luxembourg and the Netherlands account for half of global phantom FDI, but not to the extent represented within the Irish economic balance sheet.

The Dutch have already recognised the way the world is turning and are starting to make changes to the country’s tax structures, though high profile tax investigations by the EU Commission and their out-workings will be a duel that has lots of cross and parry.

Maybe not tomorrow, but a day of reckoning is coming.

The debate on corporate taxation goes beyond the EU. The OECD has made proposals on global tax policy that includes more than just the high profile US tech companies.

In some ways the proposals can be seen to be a shift in economic activity to online purchases, a focus on consumer behaviour rather than physical assets of corporations and goods production.

Whatever the reasons, a perfect storm is heading towards the Irish economy. There are hints that this is understood. The Irish Central Bank has warned that Government spending supported by corporation tax spending is unsustainable. The Irish Department of Finance acknowledges the concern highlighted in the paper and says that the surge in revenues from corporation tax had left public finances “somewhat exposed to a potential shock to these receipts.” No kidding!

The nature of the Irish economy is outlined in a new report from Global Britain. Much of this is technical, outlining the Effective Tax Rates (ETR), Base Erosion and Profit Shifting (BEP) and the various models used by global businesses to ‘manage’ their tax liabilities though Ireland.

The paper concludes that:

“Ireland has materially gamed global tax codes and norms and thereby inflated its GDP by in excess of €130 bn per annum to its benefit. This has moved production and other business activity from other European countries to Ireland that would not otherwise have been there.”

“Given the sheer scale of the Irish ‘flag of convenience’ it is not credible to believe it is sustainable in the long term. Other EU countries will sooner or later not tolerate the loss of revenues and employment to Ireland. The numbers are increasingly materially well beyond the ‘blind eye’ that might initially have been turned.”

So much for ‘level playing field’ Ireland demands in Brexit talks. With the UK out of the EU, which will happen at some point, a significant blockage to more level taxation within the EU will have left the room. Though internationally, the UK, France and Germany remain broadly on the same page on global tax issues.

That is possibly the reason for the incoming (German) EU President making tax reform a key part of her manifesto.

hashtag #FairTaxation
hashtag #QualifiedMajority (that National Veto on taxation is going to be tackled too).

It would be easy to dismiss the manifesto of Van von der Leyen as of no real consequence – what manifesto is ever the basis of future policy enactment. It is however a direction of travel, and likely to reflect the ideas of the German government – von der Leyen was the nominee of the EPP, which is dominated by Angela Merkel’s CDU. Germany is a loser in the global tax shifting game.

All this gives added pause to those who might wish to jump on board the great success of the Irish economy. Not everyone is on board that train.

Those suggesting adoption of the low corporation tax regime of the Republic as a panacea to Northern Ireland’s ‘weaker’ economy miss the point. The Irish model is a short-term fix, accelerating the economy out of a crisis; a clever plan, not a long-term sustainable model.

Wrapping up Northern Ireland into that model, as suggested in the Report commissioned by the Knights of the Red Hand Inc  and favoured by Sinn Fein, falls at the first jump – and the rest. Nor have other suggestions from populist economists such as David McWilliams or other blue sky thinkers provided any real idea of how Northern Ireland is not best to remain an integral part of the UK economy, in every way.

Whether Brexit happens or not, the economy of the Republic of Ireland is not all that its leaders would want you to believe. It is a parasite tax economy, and the pesticide mix of EU and global tax reform is being prepared.

Those believing their future is within a United Ireland should be careful. There is no pot of gold at the end of that rainbow.

UPDATE: the Apple tax case mentioned above has since been resolved (for now). However, the direction of travel remains the same.

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