The Irish (economic) problem

Friday, 14th November 2008

The numbers in this article on the damage an Obama clamp-down on tax havens could do to Ireland ought to be badly frighten anyone exposed to the Irish economy.

My initial reaction to reading this was this was nothing new. Obama wants to clamp down on tax havens and Ireland (and the UK, to a lesser extent) do function as such (if this news to you, I suggest reading Richard Murphy's blog.

What is shocking is the sheer scale of Ireland's direct dependence on this business, and how vulnerable it could be to stricter US taxation (never mind the what the rest of the world might do).

The Irish Voice article says up to €3bn in governments revenues and €47bn in GDP could be lost. A look at the statistics shows that these represent 30% of GDP and 6% of government revenues.

Of course it would be misleading to say that Ireland could lose 30% of its GDP. GDP is currently being overstated by profits transferred to Ireland for tax reasons, and most of what would disappear would be this. In addition, some operations are located in Ireland for reasons other than tax, and these would remain. However, there is still clearly a huge dependence on persuading companies to locate in Ireland (and transfer profits there) for tax reasons.

The impact on government revenues (and the budget deficit) is going to be a lot worse. Not what is needed when higher government spending is needed in the face of a global slowdown and likely recession.

Of course, other tax havens would be affected two, but most are very small countries (Jersey, the BVI, etc.), and most are known to be tax havens. Ireland has spun a reputation as a miracle economy, based on its own merits (its workforce, etc.), and that illusion is in great danger of being shattered.

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