Ireland’s financial strategy can be summed up as Talk European, Walk American, Sound Irish – The Irish Times
“No experiments” was the simple saying of good governance that was reinforced, time and time again, by Konrad Adenauer, the first chancellor of post-war West Germany. He understood that government should be taken seriously; it is not a laboratory where politicians “test” notions. Germany would no longer be fascinated by the suicidal “experiments” imagined by ideologues. From 1949, Adenauer’s Germany will be predictable, solid, boring, committed to slow and methodical progress. No surprises, no solo runs, no erratic movements, no experiments. A stable ship is a happy ship. His mantra was to understand the pattern, change it slowly, and take no chances.
Contrast that with the credo of the most recent incarnation of the conservative leadership, the most radical model in a whimsical product line of eccentrics. Which manager is most likely to see Christmas: Liz Truss or Leicester City’s Brendan Rodgers? Place your bets.
In all honesty, looking at the UK right now is not uplifting. The real impact of Brexit – and the delusions of geopolitical power of Brexit-style thinking – involve cutting the welfare state, dismantling aid for the poorest, while lining the pockets of the richest. It is a repugnant ideology and incompatible with democracy, which is why the UK’s nervous breakdown is far from over and may just be beginning. When the financial markets, longtime allies of the Tories, conclude that the Conservative Party is a doomsday cult, hurtling the UK into financial apocalypse, you know something is deeply wrong.
Although Ireland may be aiming to become more European, we are doing it with American money
In the week when two budgets have been announced, one here and one in London, it would be too easy to compare. The reaction of the financial markets is enough: nonchalance here, Armageddon there. The direction of travel of the two countries is now completely different. Ireland tries to be more like Denmark, UK rushes to Alabama. Brexit reinforces this trajectory. Ireland is now unambiguously committed to a European social democratic standard; the UK is rapidly moving towards Dixieland.
Although Ireland may be aiming to become more European, we are doing it with American money. Irish strategy can be summed up as speaking European, walking American, sounding Irish.
Sounding Irish is essential because to carry out this policy you need a sovereign political entity that can redirect policy and taxation to make the country or region ready for investment. It also helps if that country has deep ties to the United States, because culture matters. Walking American is also crucial because if institutions, trade agreements, and the legal system support American businesses, it helps the goal of making money. Speaking European is essential because you have to be in the EU market; and by devoting tax gains to redistribution and employment, as required by the European social-democratic model, we have a European-style social and political framework.
Once these policies – economic, trade, social and cultural – are in place, they are self-reinforcing. Ireland has gone through four decades of rampant industrialization and massive capital investment, creating an entirely new economy that sits alongside the local economy and is integrated into the country’s social fabric through jobs, taxes and spinoffs. No other Western country has industrialized at such a pace. In fact, deindustrialisation and underinvestment have been the norm in wealthy countries, especially the UK.
The resulting huge fiscal surpluses for the globally integrated multinational sector allow Ireland to aspire to the standards set by Scandinavia. In a fascinating juxtaposition due to multinational corporations, Ireland is a low-tax, high-spending economy, where most economies want to be. For years, it has been taken for granted that countries can have a high-tax/high-spend economy or a low-tax/low-spend economy, but not a low-tax/high-spend economy. Today, Ireland is the exception that confirms this rule. Without foreigners, attracted by relatively low corporate taxes, personal taxes would be much higher here, or government spending and services would be much lower.
Have we hit a sweet spot? Undoubtedly. Can it stay like this? Why not? The key to everything is productivity. Wages, taxes, profits are all based on productivity and its servants, capital intensity and education.
The new British framework does not agree with this fundamental economic truism. Low taxes without higher productivity mean poverty for the many and outsized wealth for the few. Low taxes by themselves do not boost productivity; capital investment does that; it takes decades and must be accompanied by years of investment in education and people. The reason Irish corporation tax is so high is because companies that locate here make so much profit. They do this because the output per employee is high.
In a service-based economy, the constraints in this regard are not as obvious as in the manufacturing sector. Once this surplus is transformed into Treasury revenue, it becomes real. It is spent on roads, hospitals, unemployment benefits, pandemic payments, teacher salaries. Those who suggest that the multinational presence here is somehow illusory need to explain why a euro spent on building a bike lane collected from Google is less real than a euro spent on a bike lane collected from Google. an excise duty on a pint. Once it is spent, it is real. Now that Ireland has signed on to OECD minimum taxes, the slander of tax havens is over. The money is real.
In a globalized world, where capital lives nowhere, Ireland functions more like a state like Connecticut than an old-fashioned nation.
Let’s look at the numbers. Corporate tax has risen from just over 10% of total tax revenue in 2011 to 25.088% in 2022. Foreign multinationals account for 32% of all employment taxes and 53% of corporate employer employment taxes, and account for €12.342 billion in net revenue, or 80% of net income tax companies. With a population of five million, this means corporation tax amounts to just over €3,000 per capita per year. And of this €3,000 per head, around €2,600 comes from multinationals. Without this money, taxes on Irish income, expenditure and wealth would have to be much higher to pay for health, education, civil servant salaries and the levels of welfare citizens currently enjoy.
Can this manna stay in place? In a globalized world, where capital lives nowhere, Ireland functions more like a state like Connecticut than an old-fashioned nation. There is no national pool of money limited by Irish savings or Irish businesses. Money, like water, follows the path of least resistance. Ironically, the stronger the state, in our case from US corporate (small state) taxes, the more stable the flow of funding. If we were to provide decent housing, it would further strengthen the commitment of multinationals. A strong, well-funded state provides the essential stability for people to make their investment decisions over longer horizons.
Sticking to Adenauer’s doctrine of “no experiments” when the world is unstable seems like the sensible option. Doubling chaos upon chaos, as the UK does, is precisely the wrong thing to do, especially if you’re a small country. That’s a lesson the UK could learn this week.