From the foundation of the State, Ireland’s economic history could typically be characterised by a lack of things: a lack of money, a lack of jobs, and frequently a lack of both at the same time. The economy of 2023 is pretty much the opposite of this. We are running very large surpluses while being close to full employment. It is not a position with which we are familiar.
There are lessons to be learned from our past attempts to overcome the nation’s financial constraint with borrowing and deficits. Correcting the fiscal deficits of the late 1970s contributed to the prolonged recession of the 1980s, while the ending of the credit and construction bubble in 2008 plunged the economy into its sharpest recession.
However, these episodes are not the correct lens through which to view our current position. Yes, there are some similarities, perhaps most significantly the concern that the current burgeoning corporation tax receipts could evaporate in a similar fashion to the stamp duty and other property-related tax receipts of the mid-2000s.
This is certainly a risk, but the broader circumstances are different. The boom in corporation tax receipts is not directly linked to domestic activity. Almost all the excess receipts arise from a small number of US multinationals, none of which are here to serve the domestic market. They use Ireland as a base outside the US to serve customers in Europe, the Middle East and further afield.
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Just like stamp duty of the 2000s, corporation tax receipts have quintupled in just a few years and are likely to be around €25 billion this year. In the 10 years to 2008, employment in the construction sector rose from 100,000 to almost 250,000. There were also increases in sectors that support the construction sector. When the tax disappeared, so too did the jobs.
One of the main risks the economy faces is not being able to provide the things that people need. This is not because we do not have the financial resources to do so
There has been employment growth in recent years from US multinationals. They currently have around 175,000 direct employees in Ireland with an annual pay bill of close to €12.5 billion and are a huge part of the domestic economy.
While US multinationals do have growing significance here, the surge in the corporation tax they pay is due more to OECD-led international tax agreements and legislation passed by the US Congress. The scale of the receipts presents a positive risk for the public finances and, if managed correctly, need not be a risk for the broader economy.
One of the main risks the economy faces is not being able to provide the things that people need. This is not because we do not have the financial resources to do so. The concern is about having the real resources, mainly labour, to do so.
Essential things
Stripping out the effect of multinationals, the economy is running a balance of payments surplus of €20 billion or around 8 per cent of national income, according to the CSO’s modified current account of the balance of payments. The periods prior to 1980 and 2008 saw the building up of large deficits as borrowing was used to grow spending beyond the capacity of the economy to generate income.
Evidence for the current surpluses can be seen in the growth of bank deposits of the household sector and the excess of revenue over expenditure for the government sector.
It is likely that both households and Government would like to increase their spending but need the economy to deliver on some essential things. If these could be imported, there really would not be a difficulty. We could get workers in Germany or France or Japan or China to make what we need and buy it from them.
But we can’t do this for those things where our need is greatest, such as housing and healthcare services. If we want more of these, we must produce them ourselves. We cannot import them by container.
If new housing is the priority, then maybe we need to push back, at least temporarily, against pharmaceutical plants, data centres, retrofitting existing housing or other activities
We could devote more money to housing and health. We have plenty of it. However, without additional workers there can only be limited increases in supply. We have hundreds of thousands of workers producing medicines, IT services, computer chips and medical devices, but almost all of these are being produced for consumers abroad.
If the goal was simply one of full employment, than this might be okay. Policy goals, however, need to be more complex. A country ravaged by emigration, such as Ireland of the 1980s, is not going to have a housing crisis. In those circumstances, a concentrated focus on employment is appropriate.
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We now have the employment and this is a country where people want to stay and others want to move to. Our housing stock has not kept pace with population growth.
Our history as an underperforming economy means putting the brakes on is not built in to our psyche. The forthcoming budget will likely see pronouncements that housing supply is a priority and plans for the expansion of health services. While previously a target, full employment has become a barrier to achieving these.
Stoking inflation
One approach would be to throw money at these priorities in a bid to attract workers out of other sectors. This could work in the short term, which can make it attractive, and an increase in housing output would certainly be visible.
However, such outbidding for workers at a time of full employment would result in a medium-term cost of stoking domestic inflationary pressures. This would be hidden, or at least removed, from the push to build more housing but would be damaging to everyone. A loss of competitiveness could see full employment returning as a priority target.
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An alternative would be to set out how we are going to make space in the economy to accommodate our current priorities. This is not as attractive as simply offering more money. If new housing is the priority, then maybe we need to push back, at least temporarily, against pharmaceutical plants, data centres, retrofitting existing housing or other activities. We are unlikely to see such push back and will then wonder why more houses are not being built.
Seamus Coffey is a lecturer in the Department of Economics in University College Cork and a former chairman of the Irish Fiscal Advisory Council.