A report from the Central Bank last week said the economy faces risks from our over-reliance on the ICT sector. But is that a risk worth taking?
You could almost sense the fear along the banks of the Liffey in Grand Canal Dock, Dublin – home to many of Ireland’s best international and domestic technology companies.
Last week, Bloomberg reported that Facebook and Instagram parent company Meta was set to slash thousands more jobs, having already announced 11,000 staff would be laid off in November.
Back then, the Dublin headquarters – a key hub of Meta’s European business – lost around 350 of its 30,000 Irish-based staff.
Last week’s news heightened fears that more Irish technology jobs could go in a new round of international tech job cuts.
The latest sign of a continuing tech crunch came alongside a fairly positive quarterly economic update from the Central Bank of Ireland, which once again highlighted the substantial contribution of the multinationals to Ireland’s growth story.
However, a detailed paper from the bank linked to the quarterly update seemed prophetic.
The Central Bank published a report investigating Ireland’s reliance on international technology companies. It warned that the State’s dependence on the industry – which made up 6.4pc of employment, around 12pc of all income tax revenue and 21.3pc of corporation tax in 2021 – poses risks to growth, jobs and tax revenues if there were to be a severe or prolonged downturn in the industry.
With domestic tech firms only accounting for less than 10pc of the sector’s overall output, the Central Bank warned about the ability of the Irish sector to absorb any loss of activity. The report further underlined how a small number of foreign-owned giants account for so much tax revenue.
“More generally, the developments over recent months provide a clear example of the overall structural vulnerability of the Irish economy, labour market and public finances to negative, sector-specific shocks,” read the report.
Corporation tax receipts of €22.6bn in 2022 were up almost 50pc from a year earlier
“This vulnerability arises due to the large proportion of overall output and tax revenue that is concentrated in a small number of foreign-dominated sectors. This implies that a downturn affecting a specific sector, or a handful of large firms in a sector, has the potential to adversely affect overall economic activity, employment – and, in particular, corporation tax revenue.”
The Central Bank report recommended the creation and implementation of policies that improve the economy’s resilience and lessen the harmful effects of any future sectoral downturn.
These included increasing investment and productivity in indigenous firms, and saving unexpected corporation tax revenues in the National Reserve Fund – the ‘rainy day fund’.
Corporation tax receipts of €22.6bn in 2022 were up almost 50pc from a year earlier. However, the receipts are largely concentrated amongst a small number of large companies.
In 2021, over half of Ireland’s corporation tax take came from just 10 highly profitable companies.
The large tech and pharma multinationals significantly contributed to this figure, with the €5bn Exchequer surplus largely dependent on transitory corporate tax receipts, according to the Department of Finance.
So, if the worst was to happen – and the tech sector’s current troubles were to turn into a prolonged downturn – what could it mean for the Irish economy? Could other sectors plug the gap, or will the country’s labour market and tax receipts be in significant trouble?
Conor O’Toole, an associate research professor at the Economic and Social Research Institute (ESRI), said there are multiple channels through which a downturn in the technology sector could hit the Irish economy.
O’Toole said it is tricky to measure the risks the Irish economy faces from vulnerabilities in the ICT sector. However, he says the contribution to the two biggest channels it affects – output and corporation tax – are heavily influenced by just a handful of large companies.
“There are much greater, idiosyncratic, company-specific risks,” he said. “Regardless of what happens to the broader sector, if one of the big companies goes bad or has a shock – and it is the one really contributing in an Irish context – we would be disproportionately affected."
‘Will the tech sector be here in three, four, five years? I suspect it probably will’
Some international economists, including Nobel-prize winner Paul Krugman, have criticised how Irish economic growth is measured. Some believe Ireland’s GDP is distorted by the accounting manoeuvres of large US multinationals capitalising on low tax rates here.
Brad Setser, an economist at the US-based Council on Foreign Relations, is among them.
Setser believes there is a “long-run” risk to the taxes that Ireland gets from some of these multinational firms in technology and pharmaceuticals, as they “are not really Irish businesses”.
“In the long run, there is a risk that the United States will develop a more sensible tax structure – and that, as a result of that, it will be much more difficult... to shift intellectual property created in the US out of the US for tax purposes.”
Setser recognises Ireland has a strong tech and pharma manufacturing skill base, and that it no longer relies solely on its low corporation tax rate of 12.5pc. That has helped the Irish market become a hub for technology companies and pharma groups, with the sectors now significant employers.
The Central Bank of Ireland report estimated there had been 2,307 layoffs in the ICT sector in Ireland in the year to February 2023 – just 1.4pc of overall tech employment.
Conall Mac Coille, chief economist at Davy, says Ireland is “obviously exposed” to a potential prolonged technology slowdown, due to the sector’s position as a substantial driver of growth and employment. However, he highlighted the estimated job cuts were still a “very small number compared to overall employment growth”.
‘You want to build a rainy day fund’
While Mac Coille recognises fears for the overall sector, he also believes it is a “firm-level issue”. He uses the example of how social media giant TikTok recently reaffirmed it would continue hiring here, with the Chinese-owned firm winning market share at the expense of Meta.
“It is not just a generalised tech slowdown,” he said. “There are winners and losers as well.
“We are exposed, but it is not just the tech firms. Over half of the job growth in 2022 was outside tech – in pharma, medtech, and business services. All our eggs are not in one basket.”
Last November, Mac Coille wrote a note for Davy on Ireland’s exposure to a slowdown in the ICT sector. Part of it highlighted consensus market forecasts from that time for group revenues and adjusted earnings per share at a selection of some large technology employers in Ireland.
While some “diffuse fortunes across the sector” existed, positive revenue and earnings per share growth were still expected at the majority of firms during 2023.
“On balance, markets still expect them to grow,” he said, “just not at the breakneck pace we saw between 2020 and 2022.
“Will the tech sector be here in three, four, five years? I suspect it probably will. It is going through a slowdown after the pandemic, which is probably where we are.”
The ESRI’s O’Toole says it would be a good idea to take some of the “windfall receipts” expected over the coming years and use some to invest in domestic firms, such as Irish technology companies, food businesses, or those in life sciences.
“You want to build a rainy day fund,” he said. “But because of the size of the receipts that we are getting, targeting some of those funds at supports for domestic enterprises in sectors where there might be equity gaps would be... an appropriate use of those funds.”
However, O’Toole recognises that these firms would not immediately be able to cover any tax loss from a “shock” to one or more of the big tech firms in Ireland.
“Certainly, diversifying your indigenous profile of companies across sectors would allow you to manage the employment shock and have a more concentration de-risked economy going forward.
“The immediate effect would not be fully mitigated – depending on the scale.”