As a result of the fragile economic situation, the Irish government had no alternative but to bail out the three main banks at a huge cost to taxpayers.Readers may ask: can Malta ever learn the ropes and like Dublin start to be noticed on the radar screens to attract the attention of internet giants like Google and Facebook? During a recent visit to Dublin to attend a PKF symposium I was invited to presentations given by IDA and Enterprise Ireland which centred on the swift revival of the economy and how the country has managed to trim its fat and end up in a lean administration – now totalling just 300,000 civil servants, which is almost 15% down from its peak.
The dreaded Irish austerity budget started in 2008. Many remember that this was due to the collapse in house prices that weakened tax revenues and led to huge losses to banks heavily dependent on non-performing loans to the construction industry. As a result of the fragile economic situation, the government had no alternative but to bail out the three main banks at a huge cost to taxpayers. With hindsight, we recall how the Irish government was forced to take €67.5 billion in rescue loans after the collapse of its property market and banking system, which led to it being shut out of bond markets in 2010.
International creditors stopped lending to Ireland after the costs of recapitalising its troubled banks escalated, causing its budget deficit to balloon to 32% of gross domestic product. In September 2008, Ireland became the first eurozone country to officially enter recession. The recession sounded the death knell for the Celtic Tiger. The figures show the gross domestic product (GDP) fell 0.8% in the second three months of 2008 compared with the same quarter of 2007. Nearly 90,000 people emigrated between April 2012 and April 2013 and close to 400,000 have left since the 2008 crisis. For a country with a population reaching about 4.5 million, that’s a lot of people.
Yet with courage and determination, the Irish bit the bullet and took the bitter medicine prescribed to recover from past sins of profligacy. They saw a healthy rebound in their domestic economy. Fiscal reforms also contributed to improved affluence such that Dubliners now have more money to spend, a better chance of getting jobs and are slowly finding their feet again after a marathon recession even though more needs to be done to spread such economic revival to other cities. For some unexplained reason, Ireland continues to appeal to American multinationals to choose it as a European production base, thanks to its well-educated labour force and a low corporate-tax rate of just 12.5%. Ireland is favoured by pharmaceutical giants such as Pfizer and has also become a magnet for tech and social-media firms.
Apple continues to build up its activities in Cork; Dublin hosts the likes of Facebook and Google. With an engineered revival it looks back with nostalgia to the dark days of austerity measures imposed by the so called Troika. As a general comment, one notes how a healthy increase in domestic demand was the main contributor to GDP growth, with an acceleration of private consumption expected this year and projecting a rebound of investment next year. The wonder kid on the block is certainly Dublin – having witnessed a spectacular growth since the days of bailouts by the EU of its three banks, which led to a string of austerity measures.
It now welcomes the FDI, thanks to effective promotion by agencies such as IDA and Enterprise Ireland that has seen to the maintenance of the existing portfolio of multinational companies with some notable new additions. The emphasis is on competitiveness, with the government building on existing efforts to encourage exports, while aggressively promoting the adoption and innovative use of new technologies.
For instance, Apple is set to make its biggest ever investment in its European operations by spending €1.7bn on two new data centres, the first of such facilities it will have built outside the US. One of the new buildings will be in Ireland, which will also see a massive investment in renewable energy sources to supply power to the facilities to be fully operational by 2017. It did come with a sigh of relief to Dubliners as they read about the government’s intention to finally declare an end to seven years of austerity. Hurray for taxpayers who will be welcoming cuts in income tax rates as the first step in a three-year programme to ensure they will hold on to more of their earnings, meanwhile accelerating the multiplier effect.
All this bravado came about when the Irish Finance minister presented the 2015 budget, predicting that the Irish economy will grow 3.9% in 2015 ( compared to 3.5% in our case) and continues at the rate of 3.4% for the future up to 2018. More good news follows that the budget deficit will narrow to 3.7% of gross domestic product this year but upon reflection Malta has done even better as we succeeded in reducing our deficit to 2.1 per cent of GDP by the end of this year.
Continuing on the Irish scene we congratulate their finance minister on his sunshine budget promising to reduce the deficit to 2.7% of GDP next year, thus honouring a pledge to the IMF and EU to bring it below the limit of 3% under EU rules in 2015. The reduction in deficit did not come at the cost of additional taxes, on the contrary there will be cuts in income taxes amounting to €580 million matched with increases in excise taxes on tobacco of €167 million. The Celtic tiger has come out of the infirmary and is now poised to sprint ahead. It is a miracle how, as a result of biting the bullet and enduring strict discipline, Ireland has managed to meet its budget targets while reducing unemployment (now just under 10%) and tiptoeing the path to sustainable growth.
Certainly the Irish government is perched for more rational decisions on how to avoid profligate tendencies of the past where credit was cheap and banks simply made hay lending to building contractors while the sun shone and inflating a property bubble. Having burnt their fingers, Dubliners are careful never to return to the boom-and-bust model so beloved by previous administrations. A pragmatic move was the decision to remove the “Double Irish” tax loophole where in the past a number of multinational companies used it to avoid paying tax on a wide scale.
This was a pre-emptive move following heavy criticism at EU level on how typically a company such as Apple, advised by its accountants, had used the loophole to drastically reduce its tax liabilities. The tax loophole caused some resentment by rich countries which triggered the latest attempt by OECD and Group of 20 to recommend the introduction of restrictive tax measures called “the avoidance of Base erosion and profit shifting” (BEPS) – even though the controversy over Ireland’s corporate tax regime opens up broader questions, namely the lack of juridiction by the EU over domestic tax.
At this juncture, with hindsight, it is interesting to compare and contrast how both Ireland and Malta have made hay for a number of years by promulgating incentive legislation to attract non-resident companies to set up business and create employment. In conclusion, while tourists and Dubliners alike, share a pint of Guinness at one of its thousand friendly pubs, we augur that the economic revival of the Celtic Tiger will continue to roar. Will this magic feature permeate beyond its emerald shores to grace other EU countries?