All Your Eggs In One Basket
Ireland likes to be different. Just look at how it has kept faith with its 12.5 percent corporate tax rate when it could have easily caved in to international (but mainly Franco-German) pressure to hike it – effectively keeping its head when all about were losing theirs. This low-corporate tax policy was one of the catalysts for the pre-crash Celtic Tiger economy, and now it is partly responsible for Ireland standing out from other euro area economies, with its remarkable economic recovery. Even Ireland’s crash was different to a certain extent, having been precipitated largely by the over-exposure of its banks to a property bubble that the Government largely ignored, rather than dodgy derivatives that few understood. I just hope that lessons have been learned, and that in future, investors will be encouraged to diversify their egg placement, rather than being encouraged to throw them en masse into one basket. Encouragingly, Ireland’s recovery is largely export driven and foreign investment, especially from the United States, is flowing as smoothly as it ever was.
The Irish Budget, announced by Finance Minister Michael Noonan on October 13, is certainly a measure of the Government’s confidence, with it gradually loosening the fiscal reins. As requested by business representatives on a regular basis in the weeks prior to the budget statement, Noonan cut Ireland’s high marginal personal income tax rate, reduced the scope of the Universal Social Charge, and addressed the tax disadvantages that self-employed individuals experience relative to their salaried peers. Having said all this, Ireland remains vulnerable. A slow-down in the US could reduce that flow of foreign investment, and the country has a large debt overhang, to the tune of 120 percent of GDP, as a consequence of the crash and the bailout by the IMF and the EU. What’s more, the conclusion of the BEPS project – within which Ireland was demonized, unfairly, as an arch base eroder – has the potential now to stymie investment flows over the next few years. Given these uncertainties, all the Government can really do is stick with what is working.