'Ireland's eggs are invested in the foreign multinational basket - and problems lie ahead'

The country is overly dependent on FDI-fuelled taxes – which is why there needs to be a new focus on SMEs.

By Neil McDonnell CEO, ISME

IT IS A common misconception that Ireland’s independence stopped the precipitous fall in the population which followed the famine. It didn’t. It just slowed it down.

Nor can partition be blamed for the continued fall. Northern Ireland’s population hit a low of 1.23 million for its six counties in 1891 and grew slowly from there. The Republic’s population has yet to reach its 1841 level; Northern Ireland’s did so in 2011.

The Control of Manufactures Act 1932 is more commonly and reliably cited as the cause for the Republic’s decline; it kicked off the Anglo-Irish Trade War and two generations of poverty and emigration.

Between those two lines in the figure above is a population fall of 153,600 people, a 5% reduction between the 1926 and 1961 censuses. A human tragedy.

Nor was it Ireland’s entry into the EEC in 1973 that reversed the decline. It was government adoption of the 1958′s First Programme for Economic Expansion.

This programme moved Ireland away from a closed, anti-trade, protectionist, economic policy to a more open, competitive, export-oriented one.

It invited in foreign multinationals. It emphasised the need to remove restrictive practices, tariffs and protections.

It directed capital investment towards expanding productivity; it sought spending on telecommunications, industrial credit, research, efficiency, productivity and technical training. Most importantly, it worked.

The population fall was turned for good. Economic policy matters.

It’s easy to think the programme’s adoption was a given. Far from it. Protectionism was national holy writ. Challenging it threatened vested industrial, professional and trade union interests. But the economy had shrunk to the point that action was imperative.

Sure, isn’t it grand?

Well no, actually, it isn’t. There is significant consensus among the adults in the room that real problems lie ahead.

The NTMA is advising us that Ireland is highly dependent on a very small number of US companies. The National Competitiveness Council is also warning about this excessive concentration, reminding us that just 10 companies pay 39% of our corporation tax.

The Central Bank’s latest quarterly bulletin explicitly identifies domestic overheating, high government debt, Brexit, changes to the international tax regime and US trade tariffs as material threats.

The ESRI has voiced similar concerns, while the Irish Fiscal Advisory Council has warned that negative shocks are inevitable and the government “needs a credible plan for the medium term”.

Meanwhile, the OECD warns us that productivity in our domestic businesses is static or declining and that national productivity figures are inflated by foreign multinationals.

We could pick out more examples. The point is this: this consensus of macroeconomic warnings wasn’t there a decade ago, pre-crash.

While we cannot reliably predict when the next downturn will occur, we can confidently predict that it will occur, in the short- to medium-term.

Yet Ireland’s industrial policy eggs are almost all invested in the foreign multinational basket; this is the sector most threatened by the current macroeconomic situation.

Our politicians seem concerned only with how much ‘fiscal space’ they can spend, worsening our debt. Meanwhile the SME sector, the engine of employment for half of Ireland’s working population, is ignored.

September 2008

Remember the news in September 2008? Looking back from the vantage point of the present, it’s easy to think we saw it coming. We didn’t.

The ESRI’s commentary in the summer of 2008 summarised: “A return to positive growth in 2009 and 2010 … can be expected with a reasonable degree of confidence.”

In the wider media, the economic fundamentals were sound and the landing would be soft. Lehman Brothers filed for bankruptcy protection on September 15, 2008, triggering the greatest financial crash since 1929. By the end of 2010, Ireland needed a bailout.

In 2008, Ireland had a perfect storm: a property market collapse, a banking collapse and a collapse in government revenues all kicked off by a remote, unforeseen event.

Two of those failures have been substantially repaired, however government revenues again look vulnerable.

Where 10 years ago we were overly dependent on property-related transaction taxes, now the vulnerability is corporation taxes from potentially itinerant foreign multinationals and income taxes from a very narrow subset of taxpayers.

What could the next Lehman Brothers look like? There are so many candidates… A Turkish economic collapse? A Saudi-Iranian war? A no-deal Brexit? A collapse of the Italian banks? A major repatriation of US multinational profits following a US tax amnesty? An all-out global trade war? Something different to all of the above?

A Mittlestand for Ireland

We believes we must dramatically reorient indigenous industrial policy towards domestic business.

For those unfamiliar with them, German SMEs – commonly referred to as the Mittlestand – are the backbone of the economy and are commonly characterised as having mainly family ownership, inter-generational continuity, long-term focus, independence, investment in the workforce, flexibility, flat hierarchies, innovation, customer focus, social responsibility and strong regional ties.

Meanwhile, Germany’s federal ministry for economic affairs and energy defines its SME action programme with 10 simple fields, including promoting entrepreneurship and strengthening innovation and access to corporate finance.

Why reinvent the wheel? We think the German Mittlestand model would serve Ireland well as a template for our ‘programme for economic expansion 2.0′.

Neil McDonnell is CEO of the Irish Small and Medium Enterprises Association (ISME).

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