Cormac Lucey explores the misunderstood roots of Ireland’s FDI success and questionable management of surging tax revenues against the backdrop of rising state spending

Two important aspects of Ireland’s multinational success story are generally misunderstood. 

The first concerns the low-tax strategy that has been the key reason many multinationals have located in Ireland. 

As Professor Frank Barry of Trinity College Dublin revealed in his essay “Foreign Investment and the Politics of Export Profits Tax Relief 1956”, this low-tax strategy resulted from then Taoiseach John A. Costello overruling the Department of Finance and forcing an idea promoted by the Department of Industry and Commerce into the Budget. 

Underlining the precariousness and capriciousness of life, this strategy didn’t begin to really function until the 1990s. 

The second aspect of our multinational story, not generally understood, is how utterly dependent our economy is on American business. 

While it is widely known that more than 85 percent of the state’s corporation tax revenues come from multinationals, their contribution to other tax headings is not so well-known. 

When you consider multinationals’ 55 percent share of Ireland’s income taxes and 54 percent share of VAT – and apply this lower 54 percent rate to other tax headings – you will see that the multinational sector contributes over 60 percent of the State’s total tax revenues. 

How well is the state managing the resulting surge in tax revenues? Well, it’s all being spent, and then some. 

According to the Irish Fiscal Advisory Council’s Fiscal Assessment Report published in June 2024, “Excluding excess corporation tax receipts, a deficit of €2.7 billion (0.9% GNI) is forecast for this year. This comes despite a strong economy, with record high employment and historically low unemployment. The question arises: if underlying surpluses are not being run now that the economy is strong, when would they be run?”

The quality of much of this spending is highly questionable. The epicentre of rampant State spending growth is occurring in healthcare. A recent Department of Health report analysed hospital activity and expenditure between 2016 and 2022. 

It reported a 3.8 percent increase in overall activity, compared with an inflation-adjusted rise in expenditure of 45 percent (nominal rise of 68 percent) and a 29 percent increase in staffing numbers.

The Department of Health badly needs budgetary incontinence pads. Or maybe members of the Irish public service simply need to learn how to manage. 

Consequence-free management is the key obstacle to effective budgetary control. When staff are treated the same regardless of whether they perform extraordinarily well or extraordinarily badly, should we be surprised when mediocrity results? 

The Republic’s governing political class is happy to bask in the reflected glory of multinational-induced prosperity. However, according to the 2023 annual report from the IDA, Ireland’s inward investment agency, the global foreign direct investment landscape is becoming “increasingly challenging and complex.” 

And, if he becomes the next US President, Donald Trump plans to significantly undermine Ireland’s attractiveness to US multinationals by putting a 10 percent tariff on US imports.

Even though it accounts for 69 percent of employment, Ireland’s domestic sector of small and medium-sized enterprises (SMEs) is the orphan of this story. SMEs need targeted tax incentives along the lines of those outlined by Deloitte’s Kim Doyle in the Accountancy Ireland newsletter Briefly.

The SME sector also needs a systematic programme to reduce the regulatory burden imposed upon it. Under the guidance of Michael Diviney, Chartered Accountants Ireland recently published Reducing Red Tape, a detailed position paper showing just how that could be done.

 The instinctive mindset of government – that ministers are in charge of a great national trainset they can play with at will – flies in the face of the reality that policy decisions involve tricky trade-offs not amenable to facile headlines. 

Cormac Lucey is an economic commentator and lecturer at Chartered Accountants Ireland

*Disclaimer: The views expressed in this column published in the August/September 2024 issue of Accountancy Ireland are the author’s own. The views of contributors to Accountancy Ireland may differ from official Institute policies and do not reflect the views of Chartered Accountants Ireland, its Council, its committees, or the editor.