The more US tax money we get, the more dysfunctional the Irish economy becomes

The Irish State spends over a third of every euro spent in the country.

From plutocrat to bureaucrat, everyone seems to have an opinion on Dublin’s proposed MetroLink. Some argue it’s too expensive to build, others that it’s too expensive not to build.

One opinion that appears to have more purchase in Government circles was articulated recently in this newspaper – and it is the view of corporate United States.

The intervention of the multinationals will be critical because the State is captured by them. Being hostage to the concerns of large taxpayers and employers has its pros and cons. The impact on Ireland of boardroom US and its local handler, the Industrial Development Agency (IDA), is important.

Most of the time we see only the impressive and unambiguously positive top-line tax and employment numbers. However, there is also a potentially harmful impact of Ireland’s foreign investment policy, which explains some of the anomalies from the relative absence of local industrial champions and the attitude of the State bureaucracy, to the price of houses, rates of immigration and the high costs of doing business here.

The central fact that one sector is favoured over others is also a helpful framework in understanding how the Irish economic policy works, and for whom.

In a nutshell, Ireland suffers from what economists term “Dutch Disease”.

In the late-1960s, the Netherlands found large quantities of natural gas in the North Sea. This was largely hailed as a fortuitous windfall, particularly in the 1970s as various Middle Eastern wars and crises sent the price of energy skywards. With its own source of power, the Netherlands didn’t need to import energy and was benefiting when many European energy importers were suffering. So far so rosy.

However, over time the Dutch noticed that other industries in the Netherlands started to suffer. Wages in the booming and high-productivity gas sector began to drag up the wages in other areas of the economy, because workers were getting higher wages in the gas sector and moving or were demanding equivalent wages to their neighbour who was newly employed in the gasworks.

Rents and house prices also started to rise, pushed up by the recently enriched workers in the gas sector who could pay more.

The Dutch currency, the guilder, appreciated, making it more difficult for every industry not associated with gas, to export. Finally, as the gas industry was the sexy new industry, it lobbied the government for preferential treatment in terms of taxes and benefits, and these were granted.

Over time not only were other industries and sectors squeezed out by the behemothic natural gas sector but the State itself fell in love with natural gas, to the detriment of the rest of the economy.

By the mid-1980s what had been seen as a one-off, fortuitous, everyone’s-a-winner, windfall came to be seen as something more complicated. Large parts of the Dutch economy suffered and the society paid for the gas bonanza in a variety of unforeseen ways. This more nuanced analysis, where the dominant new industry elbows out the more plodding but profitable old industries was termed “Dutch Disease”.

In poorer countries, the same dynamic is regularly known as the “curse of resources”, where a developing country finds oil, and the oil industry ends up dominating everything and ultimately lobbies to dictate and bend policy to its whims. All the money of the country is sucked up by the resources industry, and the fruits of the dividend are rarely evenly shared.

Ireland is experiencing a form of Dutch Disease. The multinationals are akin to a resource find, a spigot that churns out tax revenue, resulting in other parts of the State bureaucracy trying to get their hands on this cash and divvy it up accordingly. Precisely because there is so much money gushing out of the multinationals and going directly into the public sector, that public sector spending increases dramatically and various lobby groups petition to grab some of the bonanza.

The Department of Public Expenditure moves from being the guardian of hard-earned tax money, to the spender of what appears to be free money from the multinationals.

In time, the entire public economy mutates into being a reckless spender of American money. There is no budget constraint, just a spend now, worry later mania. This has the effect of pushing up the price of everything, because the State spends over a third of every euro spent in the country. When the economy is already rocking along, prices and wages simply ratchet up.

Because they are small, small private businesses can’t match multinational wages and public sector wages, which themselves are paid for by the multinationals’ tax deluge. Small businesses lose workers or have to pay even more to keep their workers from moving.

Rents are pushed up by the higher-paid employees of the high-productivity multinational sector, squeezing the incomes of the rest, pushing down their quality of life in an ever more expensive economy. As long as the tax money keeps flowing, this process reinforces itself at every turn. At the same time, as long as the tax torrent keeps cascading, the entire State apparatus becomes entirely dependent on the whims of corporate United States, and the State becomes captured.

The numbers are startling.

Apart from the infamous Apple tax money, we collected a total of €28.1bn in corporation tax receipts last year, with a whopping 88 per cent of that revenue paid in by foreign-owned multinationals – despite these companies accounting for only 11 per cent of all companies.

But looking just at one side of the balance sheet doesn’t give us the whole picture. The bigger picture is one of an excessively dominant and favoured sector bending the economy and the society to its whim. Ironically, the more tax money we get from the US, the more dysfunctional the general Irish economy becomes.

Some might say this isn’t a bad problem to have, and that is absolutely fair enough, but the question remains: where does this end?

Most of my economics colleagues are worried about the quantitative aspect. Like brothel keepers in Saigon, they fret about the day all the business disappears if the Yankies go home with their cash. I am more concerned about the qualitative aspect of the multinational dominance, what it is doing to the economy in general, innovation and start-up culture, house prices and immigration, as well as the broader society and the way we make public decisions that are supposedly for the greater good. Maybe more importantly, the way the exchequer has become hostage to various lobby groups who have only become more emboldened as the coffers fill up, means Government judgment has become impaired by abundance.

“Dutch Disease” might not be the worst economic malady, but it’s a dangerous one and Ireland doesn’t seem to have figured out a vaccine.