Ireland might have recorded the Eurozone’s biggest GDP slump last quarter but a healthy cash surplus, the product of huge corporate taxes paid by a handful of US tech giants, has kept ambitions for its own sovereign wealth fund on track.
As the Euro area slid into recession last week, of all its members Ireland fared the worst as its GDP shrank by 4.6%. On average, EU member economies contracted only 0.1%.
Both the GDP drop and the sovereign wealth fund are symptomatic of Ireland’s reliance on US tech firms like Google, Apple, and Microsoft, all with European headquarters in Dublin.
The sovereign wealth fund is “all to do with corporate tax receipts, much of which comes from only a handful of tech companies,” explained Andrew Johnston, a Donegal-based consultant in asset management.
Those businesses chose to headquarter in Ireland largely thanks to both its low 12.5% corporate tax rate and post-Brexit role as an English-speaking EU member.
Johnston said the presence of a few tech behemoths in a country of just 5.1 million people has “a significant concentration risk on a small number of tech companies”.
Half of Ireland’s corporate tax revenue comes from just 10 US companies despite tech businesses having laid off 3,000 Irish workers since that sector started declining in 2022.
Irish banks previously considered Google employees the best possible mortgage candidates, a Dublin-based Google employee told Brussels Signal. Now banks ask for letters from Google saying the applicant will never be made redundant, and these letters are impossible to obtain, she added.
Nevertheless, Eurostat’s GDP measure doesn’t measure Ireland very well, said Conall MacCoille, chief economist at Dublin’s Davy Stockbrokers who added that measuring output for multinationals like Google and Meta is “difficult” with there being “extraordinary volatility to the Irish GDP data”.
“We shouldn’t take the 4.6% contraction in Q1 2023 at face value,” or for that measure Ireland’s 12% GDP growth in 2022, he said, adding that an alternative measure, “modified domestic demand,” grew by 1.7% in the first quarter of 2023.
Former professor at the London Business School, economic consultant Dr Alina Kudina, said the fact that Ireland was “rolling in cash” was a “cumulative effect of previous years”.
It had accumulated “significant reserves” during previous boom years of high tax revenues and lower government spending, she said, suggesting that the current recession “doesn’t ask for much extra support from the government”.
The GDP data, she said, was “more of a blip, than a trend” and GDP was expected to grow by 5.5% in 2023 and 5% in 2024. Meanwhile, unemployment was low, and the recent contraction “happened on the back of significant reduction in multinational activity, 18%, which can be highly volatile from quarter to quarter and is expected to recover”.
Ireland “is not the EU’s basket case,” agreed a senior employee of a major Irish bank who asked not to be named. It will “almost certainly be the fastest growing economy yet again this year despite what one quarter’s print says,” he claimed.
While Dublin might be pushing ahead with its plans, one leading academic warned of the political danger that “citizens might oppose the idea of government ‘saving’ money in a sovereign wealth fund”. Dr Ana Nacvalovaite, a research fellow specialising in sovereign wealth funds at Kellogg College, Oxford, said this was especially true in times of economic hardship or if immediate public spending needs were high.
She added, putting the government’s surplus cash in a wealth fund, which can make investment decisions “at arm’s length” from politicians, would let Ireland diversify its income, giving it more security and stability in a volatile economic and geo-political climate.
As for the benefits of a sovereign wealth fund, “you only have to look at Norway versus the UK”, said asset manager Johnston. Norway invested its North Sea oil tax revenue, while the UK’s went into budget spending.
“The best time to start a sovereign wealth fund is 40 years ago, the second best time is today,” he added.