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News : Irish Economy Last Updated: Apr 29, 2015 - 7:51 AM


Spring Statement: Coalition visionless on Irish economy's long-term challenges
By Michael Hennigan, Finfacts founder and editor
Apr 26, 2015 - 10:38 AM

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Alexis Tsipras, prime minister of Greece, listens to Enda Kenny, Irish taoiseach, prior to an EU summit, Brussels, Feb 2015.

Spring Statement: A time of economic recovery should be used to address long-term challenges facing the Irish economy but there is little evidence that the Coalition has either a vision or serious focus on the years beyond the next general election — which is due to be held by March 2016.

The export performance remains poor; Ireland today is as reliant on investment from American firms as it was in the 1990s; the key food sector is operating below par as the price of agricultural land is among the highest in the world and in 2014 the once large food and drinks trade surplus with the UK evaporated; the official 2006 goal that Ireland would become a world-class knowledge economy remains almost as distant as it was when it was set while the dysfunctional land and property development system endures in a country with one of the lowest population densities in the European Union — Dublin topped global commercial property returns in 2014 at 45% while only 10,000 housing units will be completed in the country in 2015.

Being the owner of land with development potential near a significant Irish urban centre, not entrepreneurship, remains the dependable path to wealth.

Successive governments have succeeded in making Ireland an attractive location for business but they have failed to change the enduring underperformance of the indigenous international trading sector. Taoiseach Enda Kenny's goal for Ireland by 2016 to be "the best small country in the world in which to do business," will not be met based on leading international benchmarking studies including the World Bank's Doing Business index. The related target for Ireland to be the "Digital Capital of Europe" lacks realism when the digital sector is dominated by foreign firms, mainly engaged in administration functions rather than invention and innovation.

A striking illustration of the lack of interest in reforming for the future was provided by a study published by the World Wide Web Foundation last January. The organisation which was founded by Sir Tim Berners-Lee, the inventor of the World Wide Web, ranked the UK government as the most open and transparent in the world. Ireland and Greece with a shared 31st ranking were among the lowest in Europe with Hungary the worst at 33rd.

Spring Economic Statement

Michael Noonan has up to €1.4bn for tax cuts and spending — Irish Times says Monday: "Noonan is...expected to indicate a broad plan for cuts to personal taxation, including changes to income tax rates and the Universal Social Charge. One option in play is to increase the income threshold at which workers start paying the USC. Final work on the statement comes ahead of the planned completion tomorrow of a €525 million fundraising drive by Permanent TSB. In light of this development, it is anticipated that Mr Noonan will in his statement tomorrow say that preparations can now be made for the State to start selling down its interest in the nationalised Allied Irish Banks. He is likely to call the main banks in to meetings next month to express the Government’s expectation that their standard variable mortgage rates will be cut. Mr Noonan and Mr Howlin have agreed on the parameters of a talks process in relation to public pay."

Public sector set for 2% pay rise — Sunday Independent said Sunday: "Senior Cabinet sources this weekend confirmed that the controversial pay increases are just the first in a round of planned pay rises for State employees, whose pay has dropped by an average of 14pc since the height of the boom."

On Tuesday (April 28) the Government will use the innovation of the Spring Economic Statement to set out budget priorities and new economic forecasts that are also required in an annual report for the European Commission. In addition the Taoiseach has previously announced that a five-year plan for the period to 2020 will be published.

These developments may seem promising but in December 2013 to coincide with the departure of the bailout troika, the Government published a report, "A Strategy for Growth: Medium-Term Economic Strategy 2014-2020" and it was essentially a promotional brochure rather than a serious assessment of future challenges — in the post Whitaker era, public reports have rarely included SWOT analysis evaluating strengths, weaknesses, opportunities and threats.

The Government appeared to have forgotten about its six-year strategy until last January when it was announced that a full employment target would be brought forward from 2020 to 2018.

Jobs

Enda Kenny said at the announcement: "Our goal is that all of the 250,000 jobs that were lost during the recession will be able to be restored." However, he had said in a speech in the US in March 2014 that the number was 330,000 jobs while the CSO's main measure of employment shows that 305,000 jobs had been lost in the three years from March 2008.

The Coalition admitted to Finfacts that it had fiddled the figures.

A lower number of jobs lost in the recession than the reality was needed to make the additional projected jobs look plausible at about 160,000 in the four year period 2015-2018. Irish full employment assumes a jobless rate of up to 6% while Germany's current rate is 4.8%. It's also not known if the back-of-an-envelope calculations provide for new entrants to the workforce including returning emigrants.

Overall jobs in the economy at the end of last year were down 207,000 compared with early 2008 and over 100,000 part-time workers wished to have full-time positions.

The standard rate of unemployment is expected to fall below 10% by the end of April and this is based on the International Labour Organisation definition of employment as paid work of at least one hour per week.

According to the latest official data, there are 437,000 people on the Live Register and in publicly funded activation schemes, which amounts to 20% of the workforce — in the US this would be termed the broad unemployment rate. What is striking about the 29,000 jobs added in 2014 was that only 2,000 jobs were in the categories industry and information & communication. The latter includes firms such as Apple, Microsoft and Google.

Exports

The Taoiseach in a speech last month said in respect of 2014 that "export growth at 12.6% was the strongest since 2001". However, overall jobs in exporting firms were only slightly up on the level in 2000 while jobs in foreign-owned exporting firms remained lower than fourteen years before.

Kenny did not clarify that over €40bn worth of services exports are fake and result from the Double Irish Dutch Sandwich tax dodge. On the goods side, in addition to inflated prices by the foreign-owned sector for tax purposes, in recent times so-called overseas "contract manufacturing" has become another means of avoiding tax and artificially boosting the exports data.

We estimate that about forty American firms account for two-thirds of the value of headline annual exports while the indigenous sector has about 3,000 exporters. Denmark has 30,000 exporters compared with a total of 4,000 in Ireland and the population ratio per exporting firm (including foreign firms) is 187 in Denmark; 236 in Germany; 550 in France and 1,150 in Ireland.

The English-speaking world remains the main focus of Irish exporting and without the foreign-owned sector, Ireland along with Greece would be among Europe's worst exporters.

Science and enterprise policy

A 2004 report for the Government, “Ahead of the Curve: Ireland in the Global Economy,” recommended that public support for applied/commercial research should be increased.

Data in the 2004 report and recent data published by the Government (see link footnote No. 1) show that there has been no material change in the small number of firms that spend reasonable amounts on research and development (R&D).

In 2012 just over 100 firms (13%) accounted for 88% of R&D spending by foreign firms while the indigenous sector accounted for one-third of business R&D. Most R&D spending in Irish-owned firms (72%) is carried out in sectors that are not significant exporters.

The patenting level is not suggestive of a knowledge economy and in both the UK and Ireland, the poor innovation performance in business is related to the high dependence on foreign-owned firms in both countries.

Business support for academic scientific research remains poor and after public spending of over €20bn on science policy in a decade,  journal citations have risen but the official goal is absolutely unrealistic: "in which Ireland in 2020 is the best country in the world for scientific research excellence and impact."

In 2013 an international study ranked Ireland last of 30 countries for business support of academic research while publicly announced research collaborations invariably involve the taxpayer picking up most of the tab.

The commercialisation record is also grim with no significant scaleup (development stage of a start-up firm) in Irish high tech and life sciences in a decade while leading home-grown firms, Elan and IONA Technologies, were absorbed by US firms.

Toxic spin

Of course there are opportunities such as the recent ending of EU milk production quotas but at policy level the addiction to spin often results in the downsides being either downplayed or ignored.

The export performance is masked by the dominance of foreign firms but these exports generally do not involve selling and marketing functions in Ireland. Developing new markets is not easy and when small and medium size French firms export, they export to just one or two countries while 30% fail to hold onto their market for more than a year.

National accounts data suggest that Ireland is a wealthy country, but relying on American firms that generally do not produce inventions and innovations in Ireland, does not hugely benefit the two-thirds of the private sector workforce in non-exporting firms where there is both low pension coverage and low pay. Besides, unbalanced growth means workers in Dublin will continue to have a burden of high housing costs — on a per capita consumption basis, which is a proxy for standard of living, we rank with the Spanish and below the Italians in the Eurozone.

The expected changes in international corporate tax rules will have an impact on investment choices in the long-term.  While currently Chinese investment into Europe is at record levels, Ireland is getting little of it.

Conventional wisdom was wrong a decade ago: we were right — check here for a timeline.

Finally, when the conservative mindset was unmoved to embrace significant reforms during a severe economic crisis, it is likely that policies for sustainable growth will have to wait for a new generation of political leaders.

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