Why has Ireland got so much surplus cash?
By News Desk
August 9, 2023 12:34 PM
What would you do with tens of billions of pounds to spare?
Even for governments, that question might feel like a fantasy. But for the Republic of Ireland – a country of just over five million people – it is realistic.
Huge corporation tax revenue, mainly generated by global technology and pharmaceutical firms, is spectacularly swelling the public purse.
The national budget surplus – essentially the difference between the amount of money coming in and going out in day-to-day expenditure – is forecast to add up to €65.2 billion (£56.3bn) over the next four years.
Given the pandemic squeezed public finances hard in many countries, plenty of other governments may look at Dublin with envy. However, the bounty does bring with it a degree of political challenge, as a rising pile of cash inevitably leads to increasing public expectations.
The symbolic epicentre of Ireland’s wealth is the part of the capital known as Silicon Docks.
Alongside quays and canals on the southern side of the River Liffey, glistening glass offices house key European bases for some of the richest companies on earth.
Prof Alan Barrett told the BBC that the “real presence” of global tech companies meant Ireland had benefited from recent international reforms to corporation tax regimes, which linked taxes to “real activities” in a country.
“Sometimes people looking in on this think it’s all an accounting bubble and there’s nothing real going on," he said. "But if you look at the data, and the amount of actual activity, you see the Irish economy is in a very strong position.”
Historically, a relatively low corporation tax rate – 12.5% - has been a major draw for multinationals.
This has made Ireland an “outlier”, according to Prof Barrett, who pointed out more than 25% of tax revenue in the Republic of Ireland comes from corporation tax – compared an average figure of less than 10% across Europe.
Statistics from the Irish Department of Finance show it is set to reap a budget surplus of €10bn (£8.6bn) this year – that is 3.5% of national income.
The annual figure is forecast to grow – reaching €20.8bn (£17.9bn) in 2026.
'Massive' wealth gap
A mile north of Silicon Docks – the riches of the tech sector can feel a world away.
The north inner city is one of the most deprived areas in one of Europe’s wealthiest capitals.
Belinda Nugent, from the ICON community network, described the issues which people were asking for help with – addictions, evictions and poor-quality housing.
“We have an increasing number of children with autism and additional needs, but they’ve nowhere to go,” she said. “Turning this into a centre for those families would be an ideal investment.”
In relation to the billions flowing into the state coffers, she said: “It’s not in our pockets.
“We feel the cost of living, the rise in energy bills and high rents.
“There’s a massive gap between rich and poor.”
Dublin's housing crisis
Nationwide, the touchstone social and political issue is housing.
Homelessness in Ireland is at a record high – with the most recent figures showing 12,600 people were in emergency accommodation in June. But the housing shortage is having wider effects.
That places it third amongst major cities in Europe, just behind Geneva and London, in a study of more than 40 locations carried out by the EU statistics agency Eurostat.
Laura Murphy has a doctoral degree and works in the finance industry, but is one of a generation of young professionals who feel locked out of the property market.
“I can’t remember the last time I met with friends and we didn’t talk about the housing crisis,” she said.
She recalled looking for a place to live – and finding huge queues outside apartments which were advertised at a comparatively low rental price. She counts herself lucky to have found a one-bedroom property at just below the average rate, but feels that owning a home is “unrealistic in the short term”.
You get to the point where you think, 'Am I going to scrimp every penny I have for five to 10 years, to save for a deposit, or am I going to let myself have a holiday?'
“In Ireland, owning a home is something we aspire to – our parents did it, our grandparents did it, but for us it’s out of reach.
“It’s more than disappointing – there’s anger about it.”
When asked what she thought the government should do with the budget surplus, she said she wanted “more long-term thinking” to deal with the housing shortage.
“When they have the money to do something about it, they should invest in the future.”
Prof Barrett said there were “capacity constraints” in the economy which meant there could be difficulties with spending the surplus on a rapid increase in the house-building programme.
He said that “a big increase in demand for workers would probably lead to wage inflation, as there simply aren’t the workers available".
The government is considering a “sovereign wealth fund” – basically, setting aside a large lump sum so it will grow.
The best-known international example of the strategy is in Norway, where the government has used oil revenues in this way.
The leader of the Irish government, Taoiseach (Prime Minister) Leo Varadkar, recently visited the Irish base of one of the companies which has driven the country’s remarkable tax take.
Apple set up operations in Cork in 1981, and is currently carrying out its latest expansion project at the site.
The BBC asked Mr Varadkar if the huge budget surplus was bringing tricky political choices because voters would have heightened expectations.
He pointed to his early experiences in government, just over a decade ago, when Ireland went into economic meltdown during the global financial crisis. “I’ve been part of budgets where we’ve had to cut billions of euros – and that was politically difficult," he said.
“We’re now in a position where we have billions – though of course thedemands are always going to be greater than the amount we can spend. “But it’s a problem I’d much rather have than the problem we had 12 years ago.”
He said it was important Ireland didn’t “engage in any hubris”, because “a small open economy can quickly be affected by the wrong policy choices and international events".
“That’s why we’re taking the decision to set aside about 10 billion from the surplus next year to pay down the debt, to pay future infrastructure costs, for future pension costs," he added.
“I don’t want any future government, whether it’s my party or not, to face those decisions we had to face in the past.”
Ministers are stressing they’re already investing significant amounts to tackle the housing crisis.
Mr Varadkar’s party, Fine Gael, is in a coalition with Fianna Fáil, another party broadly of the political centre.
The Green Party is also in the administration.
The next general election is due by early 2025 at the latest.
Sinn Féin, which is on the left of the political spectrum, is currently ahead in the polls.
The arguments around how the billions should be handled will be central in the race to run Ireland.