What price does a developed economy pay for posting 26.3 per cent growth in a single year? Global ridicule, a renewed focus on its tax system and about €400 million a year.
At least, that's the fate Ireland suffered after its statistics office said in Dublin on Tuesday that the economy in 2015 grew at the fastest pace on record for any country in the rich-nation club known as the Organisation for Economic Cooperation and Development.
In Dublin on Wednesday, Irish opposition leader Micheal Martin, urged the government to set up an inquiry into the figures, after Nobel prize winner Paul Krugman dubbed the numbers “leprechaun economics.” Economists warned that Ireland will have to pay additional funds to the EU budget, while the figures will turn more attention on the nation’s tax system.
“The growth reported for 2015 is clearly an aberration, mainly caused by inversions during the period, but it does have some tangible consequences for the country,” said Dermot O’Leary, an economist at Goodbody Stockbrokers in Dublin. “In a highly charged US political climate where the issue is likely to be prominent, it brings unwanted attention on Ireland as a location for large inversions.”
Ireland’s Central Statistics Office issued the new expansion figure Tuesday, revising an earlier estimate of 7.8 per cent. The Paris-based OECD said the next-highest annual growth rate wasn’t immediately available, though by comparison China’s growth rate peaked at 14.2 per cent in 2007 and India’s peaked at 9.8 per cent that same year, according to the organization’s estimates. Neither China nor India is a member of the OECD.
The Irish surge is mostly explained by the open nature of Ireland’s economy and its attraction to U.S. companies seeking access to a 12.5 per cent tax rate. Among firms that have inverted to Ireland, mostly through acquisitions, are Perrigo Co. and Jazz Pharmaceuticals Plc. Corporations with assets overseas of €523 billion were headquartered in Ireland in 2014, up from 391 billion euros in 2013, according to the statistics office.
“Clearly, the standard European national accounting methodology is not fit for purpose as an indicator of economic growth in an economy like Ireland,” said David McNamara, an economist at Davy, Ireland’s largest securities firm.
Tax inversions artificially inflate the size of Ireland’s economy. When the headquarters of a group of companies becomes resident in Ireland, all of its global profits may be counted as part of the nation’s gross national income, according to the nation’s finance ministry.
Since 2008, that gauge has been boosted by about €7 billion thanks to corporate relocations, without accompanying substance or employment, the ministry has said. This in turn drives up the country’s contribution to the EU budget, which is based on the size of the economy. Ireland will have to pay as much as €400 million a year extra to the EU, O’Leary said.
“We can expect that there will be an increase on the circa 2.1 billion euros contribution we had expected to pay in 2017,” the ministry said in response to questions on Wednesday. “The final impact on our EU Budget contributions will depend on a number of variables including the size of the overall EU Budget for 2017 which is not due to be agreed until November.”
News by Bloomberg, edited by Hospitality Ireland