If multinationals pull out, we need a Plan B to sustain recovery
We have been very lucky to escape from recession, but our good fortune could disappear if US corporations relocate to growing markets elsewhere. Ireland needs to focus on promoting entrepreneurship, writes Eddie O'Connor
Ireland has been fortunate of late. Job creation is up, unemployment is down and incomes are rising. But we should be aware. Things can easily go wrong. Manna from heaven is fine, for as long as it lasts. It might disappear. Here is why.
Much of our recovery has been based on the arrival here of a new wave of US multinationals. Some are even carrying out the tax-avoidance 'inversion' into smaller companies with their headquarters here for tax purposes. Much of the income tax derived is akin to unearned income. We need to be super-cautious about such windfalls.
The big recession of the 1980s was brought to a close with the arrival of 56 US multinationals. They came to Ireland at a time when France, in particular, was enforcing technical barriers to goods manufactured outside the EU. Fortress Europe was a phrase often heard. US multinationals had to find a way of accessing 500 million Europeans.
Ireland was chosen because, firstly, it was a member of the EU. It was a country with a stable political system, with no great changes of policy from one Government to the next, unlike our nearest neighbour. There was a relatively benign corporate taxation regime in place, taking a lot less than almost all other jurisdictions. There was an English-speaking, well-educated, young population, with a growing number graduating every year.
This group of multinationals had a multiplier effect on the economy, insofar as it gave rise to a large supply chain. The ensuing employment was very significant in terms of the new housing and infrastructure that had to be built to accommodate them. The EU also helped with funding our infrastructure spend.
By the mid-noughties, Ireland was scarcely recognisable compared to the situation before 1987. The population was growing, in contrast to the falling one of the 1980s. There had been a complete transformation in the general wealth of the country. We were up there along with Luxembourg in terms of wealth per head. Unfortunately, much of the wealth was driven by debt. The banking sector was the area where the biggest changes could be seen.
During the 1980s, everyone became familiar with the new approach to bank loans, which were in vogue at the time. Perhaps such measures existed in the noughties, but no one ever referred to them. Debt was flung at people by banks. The traditional conservatism had completely gone. From the outside, it looked like the bank credit committees had been discredited by their peers and their staff given early retirement. Money was handed out for deposits on mythical housing in Bulgaria; second mortgages were given out like sweets.
There was a collective losing of the run of ourselves.
How could this have happened? Where were the regulators? Why did politicians not act prudently? We have always been weak at risk assessment and regulation, particularly where the insurance industry is concerned.
There was the PMPA, ICI, Quinn Insurance, and, latterly, RSA. All selling below cost and we are paying for their losses still
Perhaps more importantly, why should we be asking these questions now?
This last question is the one that matters.
Because we are again the recipient of vast unearned wealth.
A second wave of US multinationals has decided to locate here. They are copying the success of their predecessors. The decidedly dodgy 'inversion' is also a factor. US multinationals can legally avoid tax in the US if owned by companies domiciled in Ireland.
While the eurozone grew at around 1pc in 2015, Ireland grew at 7pc. In fact, there was also almost a perfect heaven situation.
A weak euro allowed these multinationals to sell more product, so the revenue recognised here for tax purposes was higher because of this euro weakness.
At the risk of being likened to a wet rag, it is very important to ask how sustainable is this modern munificent miracle?
It is particularly important to do so in an election year. It is quite likely that the populists, masquerading as they do as socialists, will be tempted to give away what was hard won during the great recession.
There were some big wins during the recession. We broadened our taxation base, by having a property tax. We at last seriously began to deal with our water loss and shortage situation by setting up Irish Water.
Would it not be brilliant if we could identify every public service area and charge for it in a transparent way, as was planned with Irish Water?
I unequivocally argue that the fundamental issues facing this economy should be addressed, debated and provided for. We are extremely happy that we have been given this manna from heaven in the shape of US multinational relocation.
It is, or rather could be, short-term, while the fundamental megatrends of life in the early part of the 21st century are by their nature long-term. Ireland is fashionable now. Like all fashions, the current wave could go the way of bell-bottomed trousers.
My top 10 fundamental issues are:
• Global warming. We cannot meet our 2020 EU electricity commitments without profound interconnection with the rest of the EU. We most assuredly will be fined post-2020 for not meeting our targets.
• Providing for an ageing population in need of support, having raided the NTMA-run pension provision pot.
• The energy crisis arising from the imperative to decarbonise the energy system.
• The housing crisis arising from the inexorable movement into Dublin and dealing with fossil-intensive ribbon development.
• The threat of the UK leaving Europe, thereby committing economic hari-kari, and the need to prevent the same happening here.
• The need to recognise and accommodate
the inexorable rise of China as the world power.
• The impact of our animal herds on greenhouse gases.
• The need to deal rationally with the failed 'war on drugs' and prevent the criminalisation of a whole class of users and suppliers.
• The need for a rational industrial policy, one that is based on the principle of nurturing entrepreneurship.
• Recognising that major global growth will occur in the southern hemisphere and major growth in trade routes will be between Latin America, sub-saharan Africa and India, SE Asia and China. How can we be part of this new paradigm?
Where will our economic growth go if that last megatrend tempts the multinationals to relocate in order to be nearer the major trade routes?
Every country there speaks good English. All that has to happen is that one of them adopts a taxation policy like Ireland and we could be left to our own devices.
The manna from heaven could disappear and we would be back to square one.
We need a Plan B.
Eddie O'Connor is CEO of Mainstream Renewable Power.
Sunday Indo Business