Wednesday 14 November 2018

The price of success: the attendant costs of being a tech hub

The fact that technology has outstripped ­ag­riculture in ­importance to the Irish ­economy ­mostly tells a success story. However, as Dan O'Brien warns, there are downsides in the shape of surging housing costs and ­multinationals' use of tax loopholes

New way: A microkitchen at Google in Dublin. Photo: Peter Wurmli
New way: A microkitchen at Google in Dublin. Photo: Peter Wurmli
Dan O'Brien
Dan O'Brien

Dan O'Brien

Fifteen months ago, a milestone was reached in the history of the Irish economy. In the final months of 2016, the number of jobs in the technology sector overtook employment in agriculture for the first time.

For an industry that was of limited significance two decades ago to become, in terms of employment and many other measures, more important than the sector that for so long dominated Irish economic activity illustrates how much the structure of the economy has changed.

As the accompanying graphic shows, the number of jobs in fishing, farming and forestry is trending downwards (if anything, what is surprising about that trend is how gradual it has been, given the scope for consolidation and labour-saving efficiencies in the sector). By contrast, the numbers employed in the tech sector are not just growing rapidly, that growth has been accelerating. Since job numbers passed the 100,000 threshold three years ago, employment has jumped by around 20pc, double the rate of economy-wide employment growth over that period.

This is, first and foremost, a huge success story. Ireland has become a hub in the transatlantic economy in what is an industry of the future, if not the industry of the future. The sector is outward-facing and export orientated. Because it is firmly located in the "weightless economy" and its products do not require costly shipping, Ireland's age-old disadvantage of being geographically on the periphery has been rendered ever less relevant.

The scale of the success is to be seen most clearly in the quite astounding fact that Ireland is now the biggest exporter of computer services on the planet, according to the World Trade Organisation. In the first nine months of last year, computer services exports exceeded all other categories - of either goods or other services - and were worth a staggering €53bn. To put that in some context, that was more than six times greater than export earnings from all food and drink products over the same period.

If the sector is generating massive earnings for Ireland Inc, it is doing something similar for those who work in the sector. Technology jobs are among the best paying in the economy and it is one of only a few sectors in which average weekly earnings exceed €1,000.

If most people with skills suited to the sector do well financially, they also do well in the job satisfaction stakes. Though the evidence here is anecdotal, one rarely hears tech types complaining about their work, often because it is also their passion. They tend to be fascinated by the seemingly endless opportunities to create new products and better ways of doing things. While that aspect of the sector is good for the individuals concerned, it is also has a wider benefit.

Because many business opportunities in the sector require little more than a laptop and phone, the barriers to entry for start-up companies are low. While it is still very much the case that foreign multinationals dominate the sector in Ireland, there are a growing number of Irish-owned businesses, and the ecosystem of homegrown companies is increasingly rich and diverse.

Despite what we like to tell ourselves, we have not traditionally been a nation of successful entrepreneurs. The younger generation in the tech sector could be helping to change that, something that should diversify the economy and make it more flexible and resilient.

The benefits discussed heretofore have been almost unambiguously good for Ireland, and any overall cost/benefit analysis of the role the sector plays can only be, in my view, overwhelmingly positive. But that does not mean that the costs, as well as the risks that come with hosting the sector, do not need discussion and analysis.

One aspect of the sector in Ireland that raises concerns is its concentrated nature. Although Dublin does not dominate quite as much as one might think from the chatter - the capital has accounted for around half the jobs in the sector in recent decades - it has accounted for almost all the growth in employment over the past five years.

That raises a number of questions, including whether the sector is driving up the costs of doing business in the capital to the detriment of other sectors - it is often noted that Google and Facebook alone account for four percent of all Dublin's office space.

Another aspect of this issue is who is being employed. Over the past five years, non-nationals have accounted for well over half of the additional employment in the sector. Having people arrive to create wealth and pay taxes from other countries that have reared and educated them is a windfall for the Irish economy and is clearly of benefit to the companies who hire them. But it is not without a downside. Most obvious is the impact on the housing market. With a large undersupply of homes, the arrival of new, well-paid people pushes up rents and property prices for those already here.

And then there is the corporation tax dimension. The most recent detailed figures from the Revenue Commissioners - for 2016 - show that the tech sector handed over €1.2bn in profit taxes in that year, accounting for around one in six euro of corporation tax paid (financial and manufacturing companies collectively paid considerably more).

This is quite a sum. But it is not of the magnitude that would cause a return to austerity if it were, say, to be cut in half. That brings us to the reasons it could conceivably fall dramatically.

There has been a backlash against the tech giants from a whole range of angles recently. Their sheer size, the power they have over their customers and suppliers, the political clout they wield, the role they play in the dissemination of fake news and propaganda, their deliberately addictive design of social media platforms, and the manner in which they use loopholes to avoid tax are raising fundamental questions globally.

But it is how these concerns have manifested in Europe that gets most attention here in Ireland. Because the tens of billion of euro Ireland Inc earns in computer services exports, as discussed above, come from purchases made online, some other countries in Europe believe that they are missing out on a slice of the pie. Late last summer, the four biggest continental EU countries - France, Germany, Italy and Spain - launched a proposal for an online sales tax that would be levied where the services are purchased, not where they are provided. The European Commission has agreed to draw up legislation to that effect.

In the firing line

This turnover tax, it should be noted, is entirely separated from the recently revived proposal to change the way company profits are taxed across the bloc. In both cases, Ireland is very much in the firing line.

The position of the Government is that it will veto both proposals coming down the legislative pipeline in Brussels in their present form. The official position is that Ireland is fully in compliance with international best tax practice. As other countries will also exercise their vetoes on the Commission's proposals, there may appear to be little imminent threat. But the backlash against big tech is so strong that if it gathers further momentum, something, somewhere will have to give.

The main objective must be to protect the real economic activity that takes place here, including by maintaining the 12.5pc rate of corporation tax which has been committed to so strongly.

But if concessions have to be made, which ones would do least damage? What, for instance, would be the cost of agreeing to an EU-wide online sales tax? It would certainly dent those €1bn+ of corporation tax revenues paid by the tech sector. But it is not obvious that tech companies would relocate to other EU countries if such a tax was levied uniformly across the bloc.

More work needs to be done on weighing up the pros and cons. But always saying no to every measure designed to reduce tax avoidance by some of the world's biggest companies may not be sustainable. Consideration of a tactical retreat, in order to protect what is really important, needs careful consideration.

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