9/2/20: Ireland: More of a [reformed] Tax Haven than Ever Before?..

With the demise of the last Government and the uncertain waters of Irish politics stirred by the latest election results, let me take a quick glance at the Government's tenure in terms of perhaps the most important international trend that truly threatens to shake the core foundations of the Irish economy: the global drive to severely restrict corporate tax havens.

In Ireland, thanks to the CSO's hard labours, there is an explicit measure of the role played by the international tax avoiding corporations in the country economy. It is a very imperfect measure, in so far as it significantly underestimates the true extent of the tax arbitrage that Ireland is facilitating. But it is a robust measure, nonetheless, because it accounts for the lore egregious schemes run in capital investment segments of the corporate tax strategies.

The measure is the gap between the official Irish GDP and the CSO-computed modified Gross National Income, or GNI*. The larger the gap, the greater is the role of the tax shifting multinationals in the Irish national accounts. The larger the gap, the more bogus is the GDP as a measure of the true economic activity in Ireland. The larger the gap, the poorer is Ireland in real economic terms as opposed to the internationally-used GDP terms. You get the notion.

So here are some numbers, using CSO data:

When Fine Gael came to power in 2011, Irish GNI* (the more real measure of the economy) was 26.03 percent lower than the Irish GDP, in nominal terms. This, effectively, meant that tax shenanigans of the multinational corporations were de facto running at at least 26% of the total Irish economic activity.

Fine Gael proceeded to unleash and/or promise major tax reforms aimed at reducing these activities that (as 2014 Budget, released in October 2013 claimed, were harmful to Ireland's reputation internationally. The Government 'closed' the most notorious tax avoidance scheme, the Double Irish, in 2014, and introduced a major new 'innovation', known as the Knowledge Development Box (aka, replacement for the egregious Double Irish) in 2016. In September 2018, the Government published an ambitious Roadmap on Corporation Tax Reform (an aspirational document aiming to appease US and European critics of Ireland's tax avoidance platform).

So one would expect that the gap between Irish GNI* and GDP should fall in size, as Ireland was cautiously being brought into the 21st century by the FG government. Well, by the time the clocks chimed the end of 2018, Irish GNI* was 39.06 percent below the Irish GDP. The gap did not close, but instead blew up.

Over the tenure of FG in office, the gap rose more than 50 percent! Based on 2018 data (the latest we have so far), for every EUR1 in GDP that Irish national accounts claim to be our officially-declared income, whooping EUR0.391 is a mis-statement that only exists in the imaginary world of fake corporate accounts, engineered to squirrel that money from other countries tax authorities. Remember the caveat - this is an underestimate of the true extent of corporate tax shifting that flows through Ireland. But you have an idea. In 2011, the number was EUR0.260, in 2007, on the cusp of the Celtic Garfield's Demise, it was EUR0.1605 and in 2000-2003, the years of the Celtic Garfield's birth when Charlie McCreevy hiked public expenditure by a whooping 48 percent, it was averaging EUR0.1509.

Think about this, folks: McCreevy never waged a battle to get Irish tax system's reputation up in the eyes of the critically-minded foreigners and yet, his tenure's end was associated with the tax optimisation intensity in the Irish economy being whooping 24 percentage points below that of the 'reformist' Fine Gael.

This is mind-bending.

9/9/19: Ireland and OECD: Income Tax Rates Comparatives

Based on the OECD data for 2018, Ireland is the second worst OECD country to earn income from work at the upper margin of earnings (167% of the average annual gross wage earnings of adult, full-time manual and non manual workers in the industry), compared to lower earners (67% of the average wage earnings). And although this story is not new (we were in the same position back in 2014), the gap in effective marginal taxes charged on the higher earners relative to lower earners is getting worse.

Here is the chart for 2014 data:

And a comparative 2018 data:

Back in 2014, nine of the OECD countries had zero or negative upper marginal tax rate penalty on higher wage earners. In 2018, the number rose to ten. In 2014, seven countries, including Ireland, had a tax rate penalty on higher wage earners in excess of 10 percentage points. In 2018, that number rose to eight. Ireland ranked second in terms of tax penalty on higher labour income tax burden relative to lower income in both 2014 and 2018. In 2014, our relative penalty stood at 18.961 percentage points, 2.753 percentage points below Sweden. In 2018, our relative penalty was 20.974 percent, 3.04 percentage points below Sweden. The OECD average penalty was 5.31 percentage points in 2018, down from 5.57 percentage points in 2014.

It is worth noting that in Ireland, voluntary spending on healthcare (indirect tax) is roughly 50 percent higher than it is in Sweden (https://data.oecd.org/healthres/health-spending.htm). Ireland spends less than half what Sweden does on early childhood education per pupil, and about 60 percent of what Sweden spends on tertiary education per pupil (https://data.oecd.org/eduresource/education-spending.htm). In other words, higher taxes on higher earners in Sweden seem to be purchasing substantially more services for taxpayers than they do in Ireland. Sweden also has older demographics and a somewhat functional military. Ireland has younger (lower health spending) demographics and not much in terms of a military expenditure. Of course, Swedish parliamentarians earned EUR 6,269 per month salary in 2918, when their Irish counterparts were paid EUR 7,878, but that hardly explains the gaps in spending and taxation systems.

So where all this tax penalty or surcharge on the higher earners levied on Irish residents is being spent? Clearly not on better financed education or health services, and not on military.

Another interesting way of looking at the figures is by comparing the actual tax rates. For those on 67% of average labour income, Ireland's rate of taxation in 2014 was 37.7 percent or 3.92 percentage points below the OECD average,. This fell in Ireland to 35.72 percent in 2018, while the gap with OECD average rose to 6.29 percentage points. If you consider OECD average to be a realistic metric for tax burden on lower earners, Irish lower earners were more substantially undertaxed in 2018 than they were in 2014. For higher earners, disregarding the fact that Irish upper marginal tax rates kick in at an absurdly low level, for wage earners of 167% of the average wage, Irish tax rates were 56.66% and 56.70 percent in 2014 and 2018, respectively. This means that in 2014, Irish higher earners tax rates were 9.34 percentage points above the OECD average and in 2018 these were 9.38 percentage points above the OECD average. In both cases, higher earners were taxed more severely in Ireland when compared to the OECD average. The matters are similar if we were to run a comparative between Ireland and OECD median tax rates, so there is no point of arguing that OECD data includes 'outlier' countries.

On a personal note, I do not think comparatives between Sweden and Ireland paint the latter in any better terms than the former. However, if one were to look at the OECD figures as some objective measures of tax burdens, Irish lower and higher earners (labour income) are overtaxed by the OECD 'norms' (average and median). When one takes into the account a relatively scarce supply of services to the taxpayers as well as a relatively higher out-of-pocket costs of the services supplied, things appear to be even worse. This is not a value judgement. It simply down to the plain numbers.

12/8/19: OECD Tax Plans: Some Bad News

My column for the Cayman Financial Review covering OECD latest tax reforms proposals: https://www.caymanfinancialreview.com/2019/08/02/oecd-led-tax-reforms-a-prescription-for-a-less-competitive-economy/

5/1/16: What Aggregate R&D Spends Tell Us? Actually... little

In a recent comment on R&D Expenditure across the OECD countries, WEF has referenced Irish data on R&D spending as % of GDP at 1.58% which refers to 2012 full year results.

Which is surprising, given that we now have 2014 data available per Eurostat (http://ec.europa.eu/eurostat/documents/2995521/7092226/9-30112015-AP-EN.pdf/29eeaa3d-29c8-496d-9302-77056be6d586) which puts our R&D spending at 1.55% of GDP in 2014.

Irish GDP in 2014 in current prices terms was 16.07% above Irish GNP. The same gap in 2004 was 17.26%. Which means that adjusting for this gap, Irish R&D expenditure as a share of GNP was 1.38% of GNP in 2004, rising to 1.80% in 2014.

Thus, in 2004, Ireland ranked as 12th country in the EU in terms of R&D expenditure ‘intensity’ by GDP metric, and 11th by GNP metric, both metrics were at exactly the same ranking places in 2014.

Here is a chart showing longer evolution of the R&D expenditure series from OECD:

Overall, Irish R&D expenditures remain below the desired levels in absolute terms, both relative to the GDP and the GNP bases.

Eurostar provides a handy breakdown of R&D spending by origin across Private sector, Government sector, Higher education and non-Profit.

Few things stand out for Ireland:

• As a share of R&D spending, business enterprise sector appears to be carrying its weight in Ireland. 
• Government expenditure on R&D is extremely weak in Ireland, though one has to wonder what on earth can Irish Government research, given the quality of our state institutions.
• Higher education sector R&D spending in Ireland is ranked 20th in the EU - a ranking that is heavily influenced by a massive share of business enterprise spending of total R&D expenditure. 
• Apparently, there is no private non-profit spending whatsoever in Ireland.

Key to the above is, however, the nature of business enterprise spending. Per Government own statistics, in 2012, roughly 300 firms accounted for almost 70% of total R&D expenditure in Ireland. Just 107foreign firms spent more than EUR2 million on R&D per annum in Ireland and these account for 88% of the total R&D spent by MNCs in Ireland, or well over 70% of the total business enterprise R&D spend.

Here’s Finfacts take on the hype: http://www.finfacts.ie/irishfinancenews/article_1028789.shtml.

In other words, stripping out MNCs with their R&D activity booked through Ireland mostly reflective of tax optimisation rather than actual research, one wonders just how much exactly does R&D contribute to our GDP or GNP and just how much of the failures of Irish R&D spending are down to quantum of spend as opposed to quality of spend? Problem is: we do not know. All Government research on the matter, including research by the likes of the OECD (based on Irish Government-supplied data), is probably heavily biased by the insiders dominating analysis.

Take the following two charts from OECD latest report on Science and R&D (http://www.oecd-ilibrary.org/science-and-technology/main-science-and-technology-indicators_2304277x)

So in the first chart, Ireland is above EU and OECD averages in terms of researchers employment intensity, but in second chart, Ireland is below EU and OECD averages in terms of R&D output intensity (by one metric).

Which begs a question - is this difference down to quality of researchers or down to type of research (e,g. non-patentable fields of sciences and humanities) or down to classification by, say MNCs, of some business & admin personnel as research personnel for tax purposes and to create a smokescreen of ‘organic’ as opposed to tax channeling activity in Ireland?

Who knows… But in 2011, per OECD data, 71.1% of total R&D expenditure by enterprises in Ireland accrued to foreign affiliates (the MNCs).  Subsequently, we stopped reporting such data. It is worth noting that this does not include companies that redomiciled into Ireland via tax inversions, adding which to the pile would probably shift this number closer to 90 percent.

In simple terms, aggregate spending figures tell us very little as to the nature of Irish R&D activities or their effectiveness. The real data is being hidden from our view by commercial secrecy that conveniently obscures just what exactly is happening in the economy and in our research sectors. May be, the knowledge economy of Ireland is a de facto a convenient deus ex machina for the severe skews in the economy arising from the MNCs presence here. Or may be, it is all just fine and a crop of Nobel Prizes and research accolades for the country are only a matter of few more quid pushed into R&D line of private and public expenditure.

20/11/15: The Inversion Debate Isn’t Over: Credit Suisse

A brief Credit Suisse note on corporate inversions, with an honourable mentioning for Ireland: https://www.thefinancialist.com/spark/the-inversion-debate-isnt-over/ over the story covered on this blog earlier (see background here including further links).

I especially like that little twist on tax optimisation that are inter-company loans: whilst the original inversion leads to a direct negative impact on tax revenues for our trading and investment partners, it adds a cherry on the proverbial cake by reducing companies' tax liabilities even further through lending to U.S.-based business.

OECD compliant, it all is...

30/10/15: None of Them 'Harmful' Tax Inversions, Dupes...

Remember how in recent months, on foot of an uproar in the U.S. and across the EU, Irish Government has told us that there will be no ‘harmful’ corporate inversions? In other words, there will be no redomiciling of the U.S. companies into Ireland purely for tax purposes?

Well, the mother of all inversions is currently underway, and it is brand new. Behold, Allergan (Irish-based previously inverted U.S. company making Botox) is in talks with Pfizer (U.S.-based global pharma giant) on a merger that will lead to, well, in the words of BusinessInsider: “In this case it would have Pfizer moving its tax domicile - not necessarily its management headquarters - to Ireland, where Allergan is based.”

Read more on this here: http://uk.businessinsider.com/pfizer-allergan-tax-inversion-2015-10?r=US&IR=T

So about none of that business with ‘harmful’ inversions thus?..  staying all OECD-compliant...

7/10/15: Two Reports, One Ireland, Hundreds of Billions in MNCs' Profits

Two interesting headlines in recent days brought back the memories of recent hot-flash splashes of news regarding Ireland's position as a corporate tax haven. These are:

1. Irish response to the completion of the OECD review of the options for addressing the imbalances in the global corporate taxation systems: http://www.independent.ie/business/world/new-oecd-global-tax-proposals-target-corporation-tax-avoidance-31583371.html, and
2. A less publicised in Ireland study from the U.S. estimating to volumes of corporate tax optimisation/avoidance with honourable place reserved for Ireland in it: http://www.reuters.com/article/2015/10/06/us-usa-tax-offshore-idUSKCN0S008U20151006

Have fun tying them together... but here are some choice quotes from the Citizens for tax Justice study referenced in the Reuters article:

"The Congressional Research Service found that in 2008, American multinational companies collectively reported 43 percent of their foreign earnings in five small tax haven countries: Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland. Yet these countries accounted for only 4 percent of the companies’ foreign workforces and just 7 percent of their foreign investments."

"For example, a 2013 Senate investigation of Apple found that the tech giant primarily uses two Irish subsidiaries — which own the rights to some of Apple’s intellectual property — to hold $102 billion in offshore cash. Manipulating tax loopholes in the U.S. and other countries, Apple has structured these subsidiaries so that they are not tax residents of either the U.S. or Ireland, ensuring that they pay no taxes to any government on the lion’s share of the money. One of the subsidiaries has no employees."

"Google uses accounting techniques nicknamed the “double Irish” and the “Dutch sandwich,” according to a Bloomberg investigation. Using two Irish subsidiaries, one of which is headquartered in Bermuda, Google shifts profits through Ireland and the Netherlands to Bermuda, shrinking its tax bill by approximately $2 billion a year"

A handy graph:

And another one:

Do note that per above table, Ireland is a conduit for the U.S. corporates' tax activities that amount to 42% of our GDP, while Switzerland (the country we so keenly like to tell the world is a 'real' tax haven) facilitates activities amounting to 'only' 9% of its GDP. 

You can read the entire report and see associated data here: http://ctj.org/pdf/offshoreshell2015.pdf

And while you are at it, here is a little Bloomberg piece from back 2014 on another whirlwind of activities: corporate inversions. http://www.bloomberg.com/news/articles/2014-05-04/u-s-firms-with-irish-addresses-criticized-for-the-moves What is notable in this article is that we are now having inversions of inverted companies, whereby new re-domiciling firms buy into previously re-domiciled companies to land themselves a PO Box presence in Ireland.

So back to that OECD reform proposal, therefore, that involves addressing the issue of the Base Erosion and Profit Shifting (BEPS) and is apparently of no threat to us in Ireland... You can try reading all the legalese here http://www.oecd.org/tax/beps-2015-final-reports.htm, or just give it a thought - tax optimisation by U.S. (only U.S.) MNCs via Ireland amounts to up to 42% of our GDP and likely less than 1-2% of the companies workforce is present here. How much of that 42% booked via Ireland is 'base erosion & profit shifting'? Ah, yes... let's not ask questions we don't want answered. Let's just have a breakfast at Tiffany's while repeating that "Ireland has a low rate transparent system and IDA insist on substance for any companies that it supports and I think those are the three pillars that supports our offering and I think Beps is about moving all international systems to a more transparent, clear system."

Don't laugh...

2/8/15: Credit and Growth: A Marriage Not Made in Haven

My recent post for @LearnSignal on the OECD report on the role of banks-intermediated credit in economic growth: http://blog.learnsignal.com/economics/oecd-credit-is-bad-for-your-economy.

17/9/2014: Letting Go Ireland's Tax Arbitrage Model Will be a Painful Process

OECD has put forward their proposals for new international tax rules that, in theory, could eliminate tax-optimisation structures that have allowed many multinational companies (such as Google, Apple, Pfizer, Amazon, Yahoo and numerous others) to cut billions of dollars off their tax bills. The proposals were prompted by the G20 request issued last year and the measures announced this week have already been agreed with the OECD’s Committee on Fiscal Affairs (44 countries).

The proposals form just a part of the overall international tax reforms package called “Action Plan on Base Erosion and Profit Shifting” that will be unveiled in 2015 and is commonly known as BEPS.

There are two pillars in the current announcement.

The first pillar addresses only some of the abuses of dual-taxation treaties that generally aim to prevent double taxation of companies trading across the borders. The OECD is proposing to make amendments to its model treaty package that would prevent cross-border transactions from availing of tax treaty reliefs whenever the principal reason for the transaction is to avoid tax liability. This is a principles-based change, recognising the spirit or the principle of the dual-taxation treaties. De facto, the aim is to prevent the situation where preventing dual taxation leads to the scenario of dual non-taxation.

As with all principles-based reforms, the devil will be in the fine print of the actual regulations and economist's mind is not the best guide for sorting through these. From the top, were the measures to succeed, profits shifting via the likes of Ireland to tax havens will be if not fully stopped, at least significantly impaired. The result will be putting at risk tens of billions of economic activity booked via Ireland. In some cases, practically, this will mean that activity will be re-domiciled to other jurisdictions, where it really does take place. In other, however, it will become subject to tax in the country that stands just ahead of the tax haven in the pecking order of revenues flows. Ireland might actually benefit here, since our tax regime is still more benign than that offered in other countries.

To support the first pillar, however, the OECD also wants to restrict the amount of profits that a company can report in its intra-company accounts when these are based offshore. In effect this will put a cap on how much of their activity companies can attribute to the intra-company transactions or to force companies to redistribute profits generated by intra-company divisions across the entire group.

This is likely to undermine our ability to gain from re-allocation of revenues mentioned above. For example, suppose a company has a division based in Ireland that holds the company IP. The division is highly profitable, despite being very small: revenues it earns from other parts of the company operating around the world are covering the alleged cost of IP. If these profits were capped and/or required to be redistributed around the world to other divisions of the same company, the incentive for the company to retain its IP in tax optimising location, such as Ireland, will be gone no matter what our tax rate is.


The second pillar relates to the rules on tax residency. In particular, the OECD said that the existent rules that allow companies to operate facilities in a country without registering tax residency there should be abolished. The result, if adopted, will be to force companies like Google, Apple and Amazon to pay taxes on activities carried out in larger European states in these states by removing the channel for profit shifting to Ireland and other countries. The OECD is explicit about this by insisting that companies with 'significant digital presence' in the market should be forced to declare tax residence in that country.

Ireland's official response to this threat is that majority of MNCs trading from here do have significant presence here in form of large offices and big employment numbers. This is a weak argument for two reasons. One: Irish operations are relatively small for the majority of MNCs, compared to their global workforce. Two: majority of Irish operations of MNCs are sales, sales-support, marketing and back office. In other words, these support larger markets workforce.


The first pillar of the proposal is likely to impact sectors such as phrama and tech, where significant profits are generated by IP, trademarks and patents and these are often held off-shore in what are de facto shell subsidiaries not registered for tax purposes in the countries where actual activities of the company are based.

The second pillar is even more damaging to smaller open economies such as Ireland, because it mirrors the old EU proposal for CCCTB basis of corporate taxation. This pillar will likely push activities that are registered in countries like Ireland back into the countries where actual transactions take place, favouring larger economies over smaller ones.

For example, take a US company running sales support centre in Ireland servicing Spain. This activity is supplied by Spanish-speaking, largely non-Irish staff that has been imported into Ireland not because they are more productive here or have better human capital or face lower costs of employing, but because their presence in Ireland allows the company to book sales in Spain into Ireland. In fact, absent tax arbitrage, it would probably be cheaper for the company to employ these workers in Spain.

Back in 2013, Reuters reported that 3/4 of the largest US MNCs in tech sector channeled their revenues from sales across the EU into Ireland and Switzerland, avoiding reporting these activities in the countries where actual customers resided.

If OECD proposals are implemented to reflect the spirit of the reforms, the tax arbitrage bit of the abnormal return on locating labour-intensive activities in Ireland will be gone. This, by itself, may or may not be enough to put those jobs on the airplanes back to Spain, Italy, Germany, France and elsewhere. But if other countries start making themselves more competitive in labour costs, tax and regulatory regimes, defending Ireland's competitive proposition will be harder and harder.

This process - of erosion of Irish competitive advantage - will be further accelerated by the OECD proposals on tax data sharing and clearance which envisages massive increase in the data reporting burdens on the multinational companies. The cost of compliance and audits this entails will be large and increasing in complexity of companies' structures, leading to more incentives for them to rationalise and streamline their operations worldwide. A tiny market, like Ireland, much more efficiently serviceable via the larger economy like the UK, is unlikely to win in this race.


OECD proposals can have a pronounced effect on economic growth, employment and financial health of a number of countries, including Ireland, Luxembourg, Switzerland, and the Netherlands because the proposals will force MNCs to change their global operations structures and move jobs out of tax optimisation states toward the states where real activity takes place.

From Ireland's point of view, closing off of the loopholes can have a dramatic effect on the ground if it is accompanied by other trends, such as renewed corporate tax rate competition that can challenge our attractive headline rate of 12.5%, erosion of Irish regulatory and supervisory regimes competitiveness, increase in cost inflation and other inefficiencies. Instead of competing on being a tax arbitrage conduit, Ireland will have to start competing on the basis of real economic fundamentals, such as skills, public policy, public goods and services, private markets efficiencies, etc.

Ironically, the threat of the elimination of tax arbitrage opportunities can result in Ireland becoming more competitive and more successful over time, assuming the Governments - current and subsequent - play it smart.

15/9/2014: OECD Economic Outlook: It's Worse than the Cover Says...

Keeping in mind that the OECD is a cooperative international body (aka not known for taking strong positions on anything, save lunch menu), here's Paris-based boffins' latest outlook for the global economy in 2014:

Everyone is downgraded, save India. Poor Italy got blasted - forecast for 2014 growth is now 0.9 percentage points lower than back in May and the 'powerhouse' of the euro area, Germany, is expected to grow by just 1.5% this year despite booming current account.

2015 is not going to be much better either:

OECD expects euro area to grow at 1.1% in 2015, which is slower than its forecast for the common currency area for 2014 produced back in May 2014. In other words, the expected 'new' recovery is worse than expected 'old' current outlook.

And world trade slowdown is now pretty much structural:

Domestic demand is likely to stagnate just as external demand, especially in the euro area as jobs creation remains anaemic and wages growth is nowhere to be seen, even at low inflation rates:

What the OECD has to say on the euro area reads like a description of a full-blow Japanization:
"The recovery in the euro area has remained disappointing, notably in the largest countries:  Germany, France and Italy. Confidence is again weakening, and the anaemic state of demand is reflected in the decline in inflation, which is near zero in the zone as a whole and negative in several countries. While the resumption in growth in some periphery economies is encouraging, a number of these countries still face significant structural and fiscal challenges, together with a legacy of high debt. "

Meanwhile, door knobs of European policymaking are calling for raising domestic demand to combat debt overhang. Now, definition of Domestic Demand is: Personal Consumption of Goods & Services + Net Expenditure by Local & Central Government on Current Goods & Services + Gross Domestic Fixed Capital Formation = Final Demand. Add to Final Demand Value of Physical Changes in Stocks and you have Total Domestic Demand.

Take a look at the above components:

• Personal Consumption of Goods & Services is subject to significant downward pressures due to tax increases, cost of government-supplied / controlled goods & services increases and household debt overhang. To increase this without increasing debt overhang for households requires shifting some of the Government burden off shoulders of the households. Which will only add to Government debt pile.
• Net Expenditure by Local & Central Government on Current Goods & Services is held back by Government debt overhang and large deficits. To stimulate this will require heavier debt overhang or more taxation of households, which will only increase their debt overhang and depress their demand. 
• Gross Domestic Fixed Capital Formation is held back by corporate debt overhang and broken credit system (down to banks debt overhang). Stimulating investment - aka fixed capital formation - will either require companies to increase their debt overhang (more credit issuance) or increase Government spending (see above) or dilute equity in companies.

In short, there is not such thing as a debt-neutral 'stimulus' when debt overhang is present across all sectors of the economy, as in euro area periphery, and in a number of other euro area states.

Boffins from the OECD have this to say on euro area's alleged malaise Numero Uno: low inflation. "Inflation has been falling steadily in the euro area for nearly three years. As demand strengthens, inflation is expected to turn back up and gradually converge on the EBC’s target range. But the succession of downward surprises has increased the risk that inflation remains far below the ECB’s target for a more extended period or declines further. Excessively low inflation makes it more difficult to achieve the relative price adjustments that remain necessary to rebalance euro area demand without having to endure a prolonged period of slow growth and high unemployment. Inflation near zero also clearly raises the risk of slipping into deflation, which could perpetuate stagnation and aggravate debt burdens."

In my view, this is just plain bollocks, pardon my language. Why? 

Because low inflation only exacerbates debt burden in ratios to GDP, not in real terms and even then  only for the Governments. Low inflation means low interest rates, which reduce cost of debt servicing for all actors in the economy: households, governments and corporates. Higher inflation equals higher interest rates, which means that you are killing households and companies in order to drive that debt/GDP ratio down for the Government. Meanwhile, economy's cost of servicing the debt levels, not ratios, is rising. This is why deflation with low growth are unpleasant but bearable in debt overhang scenarios (see Japan) while stagflation (low growth and high inflation) is a disaster. 

Need more convincing? Suppose inflation reaches ECB target of 2%. Suppose we post real growth of 3% pa. Which makes our nominal growth in the economy around 5% (simplifying things, but only marginally). What happens to interest rates? Why, they go toward historical averages. Say benign 2.5%. What happens to legacy mortgages rates? They more than double for trackers and rise by at least 2.5 percentage points for ARMs. What happens to mortgages arrears? What happens to household consumption? What happens to household investment? If growth of 5% is driven, as currently, predominantly by external sectors (exports and foreign investment, including in property markets), what happens to earnings and wages that are supposed to pay for the household debts and purchase domestic companies' goods and services? And what happens to Government yields and with them debt-servicing costs?.. 

OECD rather cheerfully presents the following outlook for inflation:

Which suggests we are heading for mean reversion (increases) in interest rates on 5-10 year horizon. Fingers crossed by then foreign investors will be snapping homes in Ireland at prices close to 2005-2006 peak so we can at least foreclose on them without much of negative equity overhang...

15/5/2014: Jobs & Employment: Lot Done, More to Do, Still

The is an unedited version of my Sunday Times article from April 27.



As cooperative organisations go, Paris-based OECD is one of the more effective ones. Its regular assessments of member states economic policies and performance drill into various sectors and often flash light into the darker corners of policy formation and implementation that are often untouched by the likes of the IMF, the central banks and the EU Commission.

Good example is the OECD’s third annual review of Ireland's Action Plan for Jobs, published this week.

The review starts by highlighting the positive achievements to-date set against the Action Plan targets and the realities of the unemployment crisis we face.

After hitting the bottom of the Great Recession, Irish labour markets have recorded a rebound in 2013. As the result of the robust jobs creation in the economy, Irish employment levels rose by around 60,000 in 12 months through Q4 2013. New jobs additions were broadly based across various sectors and predominantly concentrated in full-time employment segment. All of which is the good news.

Being a diplomatic, politically correct body, the OECD does not question the aggregate numbers of new jobs recorded. As this column noted on numerous occasions before, the 60,000 figure includes a large number of jobs in agriculture – a number that generates more questions than answers. But from the point of view of the OECD and indeed the Irish Governments 2012 Action Plan for Jobs, quality is a distant goal, while quantity is the primary objective. By this metric, as OECD notes, Ireland is now well on track to deliver on the interim target of 100,000 new jobs by 2016.

Still, accolades aside, Irish non-agricultural employment is lingering at 39 percent of total population – implying a dependency ratio that is comparable with that seen in the late 1990s. Official unemployment counts are around 253,000 and factoring in those in State training programmes the number rises to over 330,000. 16 percent of our total Potential Labour Force is currently not in employment. A things get even scarier when we add all people searching for jobs, underemployed, unemployed that have been discouraged from looking for work, those in State training programmes and the net emigration of working age adults. By this metric, the broadest joblessness rate in the country stands at around 32 percent.

Unlike the Government, faced with the above numbers, the OECD recognises that the Action Plan target of 100,000 new jobs by 2016 is a reflection of our public culture of low aspirations. "While Irish policymakers can take some satisfaction in the economy’s return to growth and recent robust job growth, significant challenges lie ahead if the country is to rapidly bring down the unemployment rate," said report authors. Anodyne a statement for you and me this screams a serious warning to the Government in OECD’s language.

There are legitimate concerns and uncertainties about the pace of the labour market recovery. At peak of employment in Q3 2007, there were 2.17 million people working in our economy. At the bottom of the Great Recession, in Q1 2012 that number fell to 1.825 million. In Q4 2013 the number employed was 1.91 million or 76,000 above the trough, but almost 260,000 below the peak. Meanwhile, Irish working age population has grown by some 93,700 despite large net outflows due to emigration. In other words, jobs creation to date has not been enough to fully compensate for demographic changes in working age population.

Beyond headline unemployment numbers, Ireland is facing a huge crisis of long-term joblessness, the crisis that was recently covered in depth by this column. With it, there is a significant risk that improved jobs creation in the future is not going to provide employment for those out of work for more than a year.

While reversing emigration and accommodating for growing population will require much higher rate of new employment growth than we currently deliver, the Government’s Medium Term Economic Strategy published this year is aiming to bring employment levels to 2.1 million in by 2020. This means thirteen years after the on-set of the crisis our employment is expected to still fall short of the pre-crisis peak.


Which begs a question: who will be the unemployed of tomorrow?

OECD is rather serious on this subject. "Tackling unemployment and ensuring that high cyclical unemployment does not become structural and persistent are important challenges. A relentless focus on activating those most vulnerable to alienation from the labour market will be even more important than aggregate job creation targets in this regard."

In other words, according to the OECD, long-term unemployed, youth out of jobs and out of education, as well as those with low skills and of advanced working age are at a risk of becoming structurally (re: permanently) unemployed, even if the Government targets under all existent strategies are met.

Much of this stems from the sectoral breakdown of jobs being created and types of jobs that are growing in demand in modern workplace.

For example, the OECD praises the Government for focusing Action Plan "on private sector-led, export-oriented job creation by getting framework conditions right and continually upgrading the business environment". But export-led growth is not going to do much for our high levels of long-term unemployment. Jobs creation in exporting sectors is directly linked to modern skills sets and high quality of human capital. Long-term unemployment is linked to lower skills and/or past skills in specific sectors, such as construction. To make a dent in an army of long-term jobless we need domestic growth. To make this growth sustainable, we need productivity enhancements in domestic sectors and SMEs that require employment of higher skills in these sectors. There is a basic contradiction inherent in these two drivers of recovery: skills in supply within the pool of long-term unemployed are not matched to skills in demand within the modernising economy.

Something has to be done to address this dichotomy.

Under various policy reforms enacted during the crisis, Ireland witnessed introduction of significant changes to the benefits system, employment programmes, as well as reduced levels and duration of unemployment insurance cover. In addition, the Government used restructuring of training programmes to introduce a new concept of one-stop support centres, Intreo, which are being rolled out across the country. All of this is in line with previous OECD and Troika recommendations and much of it is needed.

But, as OECD notes, six years into the crisis, more remains to be done.

The OECD identifies Government's flagship activation programme, JobBridge as "large and expensive" and insufficiently targeted to help the most disadvantaged groups. In other words, JobBridge has became a synonym for unpaid apprenticeship for recent graduates instead of being a stepping stone from unemployment to a job requiring moderate re-skilling. OECD also highlights the risk of State training programmes effectively delaying job searches by the unemployed or reducing their job search efforts.

Beyond the above, the OECD points to the risk that the longer-term and lower-skilled unemployed may fall outside the resources and remit cover of the new agencies - the SOLAS and the Intreo.

With all reforms to-date, the OECD highlights the lack of willingness on behalf of the Government to rationalise some of the labour market programmes, even where there is clear and available evidence of their low effectiveness.

One example is the long-established Community Employment Programme (CEP), which accounts for a full one third of all spending on activation programmes. Data available to the Government strongly shows that CEP is not cost-effective and has a spotted track record in terms of securing the participants return to regular employment. Instead of the CEP, the Irish state should focus resources on developing a modern apprenticeship programme that can replace existent ineffective schemes. This focus on market skills-based training available under the apprenticeship system, supported by the OECD report, is in line with policy suggestions presented in this column in the recent past and with the Entrepreneurship Forum report published last year.


The OECD report also provides a detailed analysis of the institutional reforms that are needed to deliver sustainable jobs creation in Ireland in line with the Government agenda. There is a need to mobilise employers to engage with the Government programmes to develop employment and skills systems that can address future demands in the real economy. Instead of craft-focused and manual professions-oriented training, Ireland needs more MNCs and SMEs-driven skills acquisition and upgrading programmes.

The OECD also stresses the need for stimulating productivity growth by developing more skills-intensive domestic sectors. Unlike the Irish authorities, the OECD is painfully aware that aggregate productivity growth, jobs creation and skills development must be anchored to indigenous sectors and enterprise, including the SMEs, and not be relegated to the domain of the SMEs and exports-oriented producers alone.


In all of this, the report highlights a major bottleneck in the Irish human capital development systems – dire lack of training and up-skilling programmes available to SMEs and early stage companies that are capable of supplying skills that are in actual demand in the markets and that can simultaneously drive forward productivity growth and innovation in Irish enterprises.

Slightly paraphrasing Fianna Fail’s GE2002 posters: in the case of Government delivery on jobs and unemployment, “A lot done. Even more to do.”

Note: PLS1 indicator is unemployed persons plus discouraged workers as a percentage of the Labour Force plus discouraged workers.  

PLS3 indicator is unemployed persons plus Potential Additional Labour Force plus others who want a job, who are not available and not seeking for reasons other than being in education or training 



Box-out:

Since the early days of the EU, one of the most compelling arguments in support of the common European currency was the alleged need for eliminating the volatility in the exchange rates. It remains the same today. High uncertainty in the currency markets, the argument goes, acts to depress international trade and distorts incentives to transact across borders. Alas, theory aside, the modern history puts into doubt the validity of this argument. During the 1990s, prior to the creation of the euro, Irish current account surpluses averaged 1.9 percent of GDP just as the economy was going through a period of rapid accumulation of capital - a process that tends to put pressure on current account balance. Still, in the decade before the euro introduction, Ireland's external balance ranked fifth in the European Economic Area. During the first decade of the euro, owing to the massive credit bubble, Irish current account balance collapsed to an annual average of -2.3 percent of GDP. Since hitting the bottom of the crisis, our performance rebound saw current account swinging to an average annual surplus of 7 percent. Alas, this reversal of fortunes ranks us only 7th in the EEA. In fact, since 2000 through today, non-euro area economies of Denmark, Sweden, Switzerland have consistently outperformed Ireland in terms of current account surpluses. Cumulatively Swiss economy generated external balances of 135 percent of GDP between 2001 and 2013, Swedish economy 88 percent and Danish economy 51 percent of GDP. Irish cumulated current account balance over that period is a deficit of 9 percent of GDP. Let's put the matters into perspective: between 1990 and 1999 Irish economy generated a total surplus of USD12.5 billion. Since the introduction of the euro, our cumulated current account deficit stands at USD23.5 billion. At current blistering rates of current account surpluses, it will take us another five years to achieve a current account balance across the entire period of 30 years. Meanwhile, deprived of the alleged benefits of currency stabilisation, Denmark accumulated curret account surpluses of USD149 billion between 2001 and the end of 2013, Sweden USD378 billion and Switzerland USD645 billion. The euro might be a good idea for a political union or for PR and advertising agencies spinning its alleged benefits to European voters, but it has not been all too kind to our own trade balances.






17/11/2013: Irish Government Score Card 2013: OECD

Well-summarised insights from the OECD on Irish Government performance based on 2011-2012 data: http://www.oecd.org/gov/GAAG2013_CFS_IRE.pdf

Latest Government at a Glance page for all countries: http://www.oecd.org/gov/government-at-a-glance-information-by-country.htm

Note, to adjust for GDP/GNP gap in the case of Ireland, use roughly 20% gap (longer-term average).

12/11/2013: OECD Leading Indicators: September 2013

The poverty of non-recovery recovery...

OECD Leading indicators numbers are out and we have... 100.7 current (barely any growth) against 100.6 prior (barely any growth)... In other words, things are going nowhere fast:

• Japan beats OECD trend at 101.1 but a weak expansion on prior 101.0
• Euro area 100.7 same as OECD average, on 100.6 prior (weak expansion) and ditto for Germany which is now under-performing regional at 100.5 up on 100.4 prior. France - the 'laggard' before - is still a drag: 100.1 current on 99.8 prior.
• US 100.8 against 100.9 prior (so slower, but still slightly ahead of OECD average)
• UK 101.3 (ahead of OECD average) compared to 101.1 prior
• In contrast, two BRICs: China 99.4 on 99.2 prior - anaemic, and India 96.7 on 96.9 prior - weak.

So all in - tough conditions remain, but at least OECD is above 100...

Euro area set:

1/7/2013: Summary of education systems stats for Ireland, 2013

Interesting numbers on education system in Ireland, compared to OECD and EU21: http://ec.europa.eu/ireland/press_office/news_of_the_day/pdf_files/2013/ireland_eag2013-country-note.pdf

Summary tables are very informative.

The full OECD publication is available here: http://www.oecd-ilibrary.org/education/education-at-a-glance_19991487

Here's an interesting chart from the publication (click to enlarge):

Basic point - once we exclude international students, Ireland is basically indistinguishable from the OECD average on terms of tertiary education attainment.

Furthermore, with international students counted in, 1.9% is the Irish graduation rate for Advanced Research Degrees (PhDs) which ranks us 12th in the OECD. Removing international students, the rate is 1.6% or 9th.

Another note: Ireland does not report on the proportion of students who enter the third level education and graduate, so we cannot tell how bad is the propensity of Irish system to graduate students once they are into the system. Ireland also does not report completion rates in third and higher levels of education.

In 2011, Ireland had the fifth highest unemployment rate for those with at least tertiary education completion, the third highest rate for those with Upper secondary or post-secondary non-tertiary education and the sixth highest for those below upper secondary education in the OECD.

Employment rate in Ireland for those with Type A and advanced research programmes tertiary education completion stood at 83%, which ranked as 22nd in the OECD. Put differently, that 'best educated' workforce in Ireland was, apparently, one of the least employed.

A caveat to all reading both documents: there are no corrections in the data for foreign workers employed in the country of residence. Which, of course, means that high salaries in ICT services and International Finance, earned by foreign employees working in Ireland are potentially skewing the data on returns to education

20/6/2013: Some facts about income inequality in Ireland and across OECD

Here's an interesting chart from the OECD's latest analysis of income inequality changes during the crisis:

Chart: Market income inequality rose considerably (Percentage point changes in the Gini coefficient of household market and disposable incomes between 2007 and 2010)

While Ireland ranks 1st in terms of overall gross income inequality increases during the crisis (primarily driven by the changes in the employment composition by tenure during the recession and the asymmetric recovery/price dynamics in assets markets between property and equities), we rank 9th in terms of after-tax disposable income inequality. Put differently, tax hikes did impact disproportionately those better off, so much so, they offset asymmetric income changes (including for income from assets).

This effect is partially reflected in the chart below:

Chart: Taxes and social transfers mitigated falls in market income in most OECD countries (Annual percentage changes in household disposable income between 2007 and 2010, by income component)

As things stood in 2010 (major caveats apply here), Ireland's levels of income inequality are actually below the OECD average:

Chart: There are large differences in levels of income inequality across OECD countries (Gini coefficient of household disposable income and gap between richest and poorest 10%, 2010)

Although our income inequality is above that for all EU countries, save Italy, Estonia, Greece, Spain, UK, and Portugal. In comparative across the English-speaking OECD states, we are ranked in the 1st place in terms of having the lowest levels of income inequality.

Loads of fascinating analysis on the topic here: www.oecd.org/els/soc/OECD2013-Inequality-and-Poverty-8p.pdf

18/2/2013: OECD on Corpo Tax Havens for G20

Just as G20 was starting to make noises about corporate tax havens at their meeting in Moscow (here) the OECD produced a convenient paper on the topic of tax avoidance. The paper is rather 'neutered' when it comes to language, but nonetheless offers couple fascinating insights, especially when it comes to Ireland. The report is titled "Addressing Base Erosion and Profit Shifting"

Per OECD: looking "specifically at the effects of income-shifting practices of United States based MNEs [Clausing, 2011],  …finds large discrepancies between the physical operations of affiliates abroad and the locations in which they report their profits for tax purposes: the top ten locations for affiliate employment (in order: the United Kingdom, Canada, Mexico, China, Germany, France, Brazil, India, Japan, Australia) barely match with the top ten locations for gross profits reporting (in order: the Netherlands, Luxembourg, Ireland, Canada, Bermuda, Switzerland, Singapore, Germany, Norway and Australia)."

And then:

"A report of the United States Congressional Research Service (Gravelle, 2010) concludes that there is ample and clear evidence that profits appear in countries inconsistent with an economic motivation. The report analysed the profits of United States controlled foreign corporations as a percentage of the GDP of the countries in which they are located. It finds that for the G-7 countries the ratio ranges from 0.2% to 2.6% (in the case of Canada). The ratio is equal to 4.6% for the Netherlands, 7.6% for Ireland, 9.8% for Cyprus, 18.2% for Luxembourg. Finally, the study notes that the ratio increases dramatically for no-tax jurisdictions with for example, 35.3% for Jersey, 43.3% for Bahamas, 61.1% for Liberia, 354.6% for British Virgin Islands, 546.7% for the Cayman Islands and 645.7% for Bermuda."

Now, of course, Ireland is a conduit via which profits of MNCs are off shored to zero tax jurisdictions, so one wonders, how much of Cayman's and BVI or Bahamas' 'profits' are really coming via Ireland.

The whole report addresses the issue of 'base erosion' in tax systems - the topic also close to heart to Ireland, as CCCTB proposals at the EU level are attempting to deal exactly with that problem and represent a massive threat to Ireland's tax optimisation industry.

Based on the data in the report, here are some revealing charts:

It is first worth noting that in absolute terms, corporate tax revenues overall are not that spectacular in the case of Ireland, contributing at an OECD average levels to the Exchequer. And these revenues have been falling, not rising, in importance despite a severe decline in GDP during the crisis:

Three interesting aspects per above are:

1. It is pretty clear that Irish Exchequer has opted to transfer lower corporate tax burden onto the shoulders of individual Irish taxpayers, and that this process has started well before the onset of the crisis, but became dramatically pronounced in 2007-2009.
2. It is also pretty clear that overall corporation tax is not an important source of Exchequer funding in recent years despite the Government numerous claims that the Corporation Tax receipts are robust and vital to the Exchequer.
3. Domestic boom period was associated with a massive (relative) uplift in tax revenues from the corporation tax, while the MNCs/exports boom during the crisis did nothing of the sorts, showing clearly that the effect of MNCs activities on Irish economy (as instrumented by the Exchequer) is weak.

However, the trend toward deterioration in revenues importance to the Exchequer during the crisis (driving down the 2000-2011 average) stands in contrast with rising importance of the corporation tax in the decade of the 1990s:

It is illustrative to highlight the change in relative importance of the corporation tax revenues over the last decade:

Ireland stands out as the the country with the third largest decline in corporation tax importance in 2011 compared to 2000-2005 average. In contrast, in Switzerland, the corporation tax contribution in 2011 stood at a premium on 2000-2005 average.

Here are some links on the topic of the Irish corporate tax haven from the blog:

http://trueeconomics.blogspot.ie/2012/11/19112012-links-on-irish-corporate-tax.html

http://trueeconomics.blogspot.ie/2012/10/13102012-irish-corporate-tax-haven-in.html

http://trueeconomics.blogspot.ie/2012/10/30102012-feeble-defense-for-tax.html

http://trueeconomics.blogspot.ie/2012/11/19112012-two-points-on-irish-corporate.html

http://trueeconomics.blogspot.ie/2012/10/13102012-irish-corporate-tax-haven-in.html

Enjoy.

19/1/2013: Euro area banks need EUR400bn in capital: OECD

An interesting article via Euromoney (January 14, 2013) on European banks facing EUR400bn in capital shortfall estimated by the OECD.

A quote:

"A chief gripe is the extent to which European banks have refused to acknowledge their losses and write down bad loans, echoing the comedy of errors that has blighted Japan in recent decades.

... the European Banking Authority’s (EBA) financial stress test in June 2011 – which determined the capital-raising target for the regional banking system for 2012 – was based on an excessively benign treatment of the coverage ratio.

The median coverage ratio of the 90 European banks examined in the test was just 38% to meet the 9% core tier 1 capital ratio target. By contrast, the coverage ratio -  which indicates the amount of reserves banks have set aside relative to a pool of non-performing loans - for US banks equated to 67% in the first quarter of 2011, according to the Federal Deposit Insurance Corporation. ...

In a November report, before the Draghi ‘put’, Deluard noted: “In its mild form, European banks’ refusal to recognize losses could lead to a Japanese ‘lost decade’: banks evergreen their loans [ie, rolling over loans to borrowers who are unable to pay], regulators agree to play the ‘extend and pretend’ game, and the credit creation mechanism is permanently clogged."

And this week "the OECD, headed by Angel Gurria, added to the chorus of criticism – in contrast to the EBA’s upbeat assessments – by stating that the ratio of core tier 1 capital to unweighted assets of eurozone banks falls well short of 5% “in many cases”. On this benchmark, European banks face a €400 billion capital shortfall, or 4.5% of the eurozone’s GDP."

The OECD’s concern echoes that of the IMF, the Bank of England and the Basel Committee: "banks have inflated their asset values, despite the EBA’s self-congratulatory claim in July 2012 that banks in the region had reached a minimum 9% of the best quality core tier 1 capital to risk-weighted assets, in excess of the current international requirements."

And as OECD points out, the problem is much more than just 'peripheral' banks - the problem is Germany and France.

Here are two slides from my recent presentation on banking sector (I was planning to present more on this at the Irish Economy conference on February 1, but the session on banking got canceled, so will be posting the full slide deck here in few days time - stay tuned).