Data from the Fiscal Advisory Council (FAC) show that 2.5% of the 5.8% rise in Irish GDP (gross domestic product) in H1 2014, or 43%, came from contract manufacturing overseas, that has no material impact on jobs in the economy. Dell, the PC company, books its Polish output in Ireland for tax avoidance purposes.
The chart above shows that the Department of Finance's forecasts partly rely on tax avoidance activities.
The independent body that reports to Michael Noonan, finance minister, who usually politely rejects its recommendations, says in its latest Fiscal Assessment Report [pdf] that while Ireland is continuing to make progress following the crisis and the Government will likely accomplish the important milestone of reducing the deficit to below the 3% ceiling in 2015, "nevertheless, Budget 2015 reflects a missed opportunity to move the public finances more decisively into a zone of safety by following through on previous plans. The deficit is projected to be more than one percentage point higher in 2015 than could have been achieved if previous plans had been implemented. All else being equal, the larger deficits result in the debt level being roughly €10bn higher in 2018 than if previous plans had been adopted."
The Council says that if operated effectively, Ireland’s new budgetary framework can guard against pro-cyclicality in fiscal policy making that has contributed to damaging boom-bust cycles in the past. Credible medium-term plans for the public finances are an important part of the framework and are crucial to
avoiding the mistakes of the past."
It adds that "Budget 2015 was marked by an absence of a well-specified plan for the public finances beyond 2015. Published tax revenue projections assume no change in policy despite Budget commitments to lower taxes in the coming years. Moreover, the Budget spending profiles assume unchanged expenditure after 2015, despite higher figures being set out in the Comprehensive Review of Expenditure 2015-2017 (CER 2015-2017). Expenditure ceilings have been raised again, however, the CER 2015-2017 does not adequately address how well-known expenditure pressures will be
accommodated in the coming years."
Finfacts reported in 2012 that Dell remained one of Ireland's biggest manufacturers for tax avoidances purposes despite transferring PC production to Poland in 2009.
Pharmaceutical companies are likely also using contract manufacturing overseas as their Irish payrolls have been stagnant for years.
The Central Statistics Office (CSO) told Finfacts last month that the main change to goods and services arising from the implementation of new European System of Accounts (ESA) standards is the reclassification of merchanting from services to goods. A detailed note on the changes is available here [pdf].
The CSO added: "Goods for processing had been recognised under the old standards as well. In the past the processing had been predominantly in Ireland leading to a reduction to the monthly foreign trade statistics. More recently such processing has been taking place abroad, where the economic owner of the product is resident in Ireland."
The FAC says that "the recent sharp acceleration in real GDP growth may be flattered by contract manufacturing activities. This activity is unlikely to be associated with any significant domestic employment and its contribution to the tax base is unclear. Its impact also increases the degree of uncertainty around projections for net exports."
Today's reports says contract manufacturing can occur when an Irish-resident firm (not necessarily Irish-owned) contracts a manufacturer abroad to produce a good for supply to an end-client abroad. The sale of the good is recorded as an Irish export of goods, while the contracted production is considered a service import.
The "impact is shown to contribute in the region of 2½ percentage points to real GDP growth in the first half of 2014, which – if it were to unwind – would imply a sizeable impact on forecast assumptions."
The FAC adds that as "contract manufacturing appears to be related to only a small number of firms, sector- and product-specific developments may well have a disproportionate impact on subsequent GDP outturns. Given the unusual uncertainties related to this activity, forecasts of the outturns for 2014 and 2015 are subject to potentially greater margins of error.
Tax inversions where usually American companies become "Irish" for tax purposes, and Double Irish transactions, also mess up the national accounts.
Finfacts: The idiot/ eejit's guide to distorted Irish national economic data