They Squandered the Boom

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HOW AND WHY FIANNA FAIL AND ITS ALLIES HAVE BROUGHT THE IRISH ECONOMY TO ITS KNEES

Introduction

The day after Ireland was officially declared to be in recession (Thursday 25th September, 2008) Taoiseach Brian Cowen was quick to reiterate his oft-repeated claim that global factors were behind Ireland’s current economic woes. “What is clearly recorded are global developments over the last number of months, particularly, which have brought about a totally new economic situation, not only in Ireland but in the entire European Union, and subsequently downsized economic growth prospects.”  [1] In what follows the Workers’ Party analyses the reality of this claim and finds it only partly true. Of course, Ireland is a part of the global capitalist system and the credit crunch with its origins in the USA has spread throughout the globe. In other words, the problems the Irish economy have their roots in the chronic instability of the capitalist system. However, the general economic crisis has been made much worse in Ireland by the unwillingness on the part of governments since 1998 to use the massive surpluses which came into their hands in the interests of the broad mass of the Irish people and by the government’s reliance on property development as the indigenous engine of growth in the early years of this decade.

“Dublin North West Workers’ Party spokesman John Dunne said that the government could not hide behind the international downturn in the economy as the sole cause of unemployment since the decline in this country has been much more rapid and steep than comparable countries. “This is not about lack of competitiveness which the Taoiseach has highlighted along with his claim that the crisis is outside his control.  This is about the failure of the government to foresee the downturn and to put in place employment strategies and jobs that will not disappear at the first signs of jitters on Wall Street”[2].

Instead of developing the economy for the benefit of the majority, the government continued to develop policies which helped its friends in the upper reaches of construction, property and finance sectors while continuing to provide a soft tax regime to foreign-owned multinationals, whose products form the vast majority of “Irish” exports. On top of this, the Irish government facilitated tax avoidance to the extent that Ireland has become known as “a semi-tax haven”. As journalist Fintan O’Toole puts it, since the mid-90s, “Fianna Fáil-led governments … have quite deliberately allowed the elite to do legally what they previously did illegally – make vast amounts of money and pay very little tax.”

“There was absolutely nothing in the [recent] Budget that would have given a moment’s anxiety to any of the super-rich, to the clever tax avoiders, to the so-called tax exiles who are our new bogus non-residents, to the 5 per cent that has 40 per cent of the wealth. When push came to shove, Fianna Fáil’s populist mask slipped and it emerged quite nakedly as the party whose number one priority is to protect the haves against the have-nots. In that context, the people who are being hurt have a perfect right to fight back. The fiscal crisis is all too real and serious pain is unavoidable. But when it comes to taking our patriotic punishment, those who have avoided pain for so long should be first in the queue.”[3]

The Workers’ Party calls on people not to be taken in by government calls for cutbacks and  belt-tightening. What the international crisis and its Irish variant show is the need for a new financial and political landscape in which the narrow interests of a small class of super-rich people will no longer be allowed to dictate the lives lived by the great majority.  In the immediate term, we call on this government to implement policies which will serve the interests of the majority rather than those of a corrupt elite. Instead of a cash bailout, the state should now nationalise the banks and should prioritise its spending in areas of greatest need, especially health, education and other social services.

We don’t expect the ruling class to listen to us. However, we hope that workers who read this will see clearly where their interests lie. The Workers’ Party believes that history and the current crises show that the interests of workers lie beyond the system that has got us into this situation.

They Squandered the Boom

During boom years of the1990s and early 2000s the Irish economy grew at an unprecedented rate. Manufacturing industry production more than doubled between 1995 and 2002 and the output of the distribution, transport and communications sectors expanded by almost as much during this period.[4]

But not everyone gained from this booming economy. Research shows that while the Celtic Tiger was roaring, the incomes of those at the top of society increased strongly and those at the bottom were left behind. Average wages increased, but they did so from a low starting point compared to other European countries. For many people stress levels increased during this period, as did alcohol intake, rates of depression and hours worked. And throughout this period, as now, large minorities faced lives of chronic poverty.[5]

From the late 90s until recently huge tax surpluses on the current account poured into the government coffers. Between 1998 and 2007 the Irish Exchequer amassed €58 billion It should be noted that the tax take has mostly increased due to VAT, which is, as Shelia Killian and Martin Mullins of Limerick University note, “a form of sales tax not ultimately borne by exporting multinational firms, and so, socially regressive in nature. Inequality has grown along with wealth in Ireland, with a relatively small group reaping the benefits of inward investment, and those at the margins … remaining outside of the boom.” [6]Nonetheless, given the healthy state of government finances during this period, the Coalition could have improved public services, developed indigenous industry and put aside some of the huge budget surpluses it enjoyed. Given its short-term perspective and its predisposition to serve the wealthy at home and abroad, it is no surprise that Fianna Fail embarked on policies aimed at increasing the share of the wealth owned by the small group reaping the benefits. These policies proved disastrous for the majority.

The Great R&D Swindle

When its Exchequer was in surplus, the government might have given some serious consideration to research and development. On the surface the Irish economy appeared to be innovative and well-equipped for change during the boom years. But the true picture was less rosy. According to a report in the Irish Times, economists with the German Institute for Economic Research (DIW) have long noticed “a core contradiction in Irish economic data”. In a comparative study of 17 countries the data consistently showed Ireland in the lead in relation to value of goods created per head of population and yet Ireland spent the least on education, and fared badly in comparison on research. The economists at DIW have reached the conclusion that Ireland is taking credit for others’ innovation.According to the DIW’s Dr Heike Belitz,

“…future indicators suggest that, without a huge education spend, things will get difficult in 10 years. But it appears that Ireland missed the opportunity to invest money when there was money around.”[7]

How might Irish-based firms be taking credit for R&D which they haven’t actually done? And, perhaps more to the point, why?  Although, Ireland lags behind other western European countries in terms of wages, it is nonetheless a high-wage economy in comparison with poor countries in the global “North”. As a result, Ireland has begun losing manufacturing jobs to places such as Eastern Europe and Morocco and politicians of all stripes have been seeking to find ways to “embed the multinationals within Ireland for a longer period, despite the increased costs of operating here.” [8] Specifically, in the Finance Act of 2004, the government introduced tax credits for R&D expenditure in Ireland and a complete exemption on income tax for patent income from other countries where the associated R&D work has taken place in Ireland. These instruments – tax credits on R&D and no tax on income derived abroad from Irish-based patents- combined with the network of bilateral Tax Treaties between Ireland and countries around the world, enable money designated as deriving from Research and Development to flow from the subsidiaries of Multinational Corporations in poor countries to their headquarters in the USA via Ireland with little or no tax being paid in any country. No wonder that multinationals find it in their interest to “designate as much of their activity as possible as the creation and exploitation of intellectual property, rather than the simple sale of goods.[9] The opportunities for creative accounting in this set-up are legion. As Sheila Killian and Martin Mullins note, “[w]here the conditions are satisfied, R&D activity carried on in Ireland will effectively shelter other profits in the firm[10]:

…the system suits the multinational firms at every turn. As long as their activities are couched in terms of intellectual property rather than the simple production of saleable goods, their taxes are minimised, their transfer pricing is rendered opaque, their high selling prices are facilitated, and they are provided with an ideological defence when they do not respond, for example, to a moral imperative to sell life-saving drugs to dying people [in poor countries] at affordable prices.[11]

The “Knowledge Economy”

The power of the multinationals in Ireland extends well beyond their ability to procure a favourable tax system. As Killian and Mullins note, “[i]n Ireland, most aspects of government policy are now co-ordinated to cater for the multinationals” (p.18) [12]and the recent emphasis in education on the “Knowledge Economy” derives from the needs of multinationals. However, recent Irish governments have been less than wholehearted in their expenditure on education.The OECD’s Education at a Glance 2008 shows that the proportion of Ireland’s GDP invested in education fell from 5.2% in 1995 to 4.6% in 2005 while the current OECD average for the proportion of GDP invested in education is 5.8%.

According to the report:

  • Overall, Ireland ranks 30th out of 34 countries in terms of education expenditure as a percentage of GDP.
  • Only six out of 30 OECD countries have a worse pupil-teacher ratio at secondary level than Ireland.
  • Only two countries, Greece and the Slovak Republic, invest less as a percentage of GDP in education than Ireland.[13]

Far from investing money in sectors that might have benefited broad sectors of Irish society, in the early years of this decade Fianna Fail and its coalition partners sought to aid their friends in the construction, banking and property sectors. The government hoped to sustain the growth levels of the earlier boom years by pursuing polices of business subsidies and inflating the property bubble at a time of very low interest rates. For example, tax breaks to property investors in 2007 cost over €3,000m in lost taxes, [14]while total tax reliefs for 2008 reached €8.4 billion.[15] Needless to say, for most of us this policy has proved a catastrophic failure.  And budget surpluses have now been replaced by budget deficits which are predicted to last at least until 2010. According to the Department of Finance (in December 2008) the overall exchequer deficit for 2008 was set to exceed €11.5 billion

Tax the Rich

Now that the housing bubble has burst and the economy is in recession, the government has asked workers to “patriotically” tighten their belts while, by contrast, nothing is asked of the corporations and their wealthy backers.[16] Irish workers, we are told, had it good during the boom but now excessive pay demands on their part will threaten Ireland’s competitiveness and will prolong the recession. Speaking on CNBC TV on November 4th 2008, Ryanair’s Michael  O’Leary made clear his belief in the upside of the recession; “We had an amazing boom for 10 years. What Europe now needs is a recession. It’s the only way to get wages down.”

From this perspective Irish workers have been having it good for too long but the facts are somewhat different.

  • The cost of employing a worker in Ireland is 22nd lowest of the 30 richest countries in the world.
  • In the fourth quarter of 2007, Irish hourly labour costs ranked tenth out of 12 of the EU 15 countries for which data were available. Ireland’s hourly labour costs were only 69 per cent of Sweden’s, 78 per cent of France’s, 80 per cent of Germany’s and 81 per cent of the UK’s. [17]
  • According to the US Bureau of Labor Statistics Irish manufacturing wages are more than 17% below the EU-15 average (and 42% below Norway’s average manufacturing wage). [18]
  • By contrast, while the average EU employer pays approximately 20% social security levy, Irish employers pay half that amount -10.2%.

Moreover, in most sectors real wages have, as O’Leary wishes, hardly kept pace with inflation. However, as the table below shows, managers in industry and the financial sector have clearly been enjoying higher wage increases than other employees.

Source: SIPTU, Don’t Bank on Squeeze, Squeeze the Bankers, December 2008

The Workers’ Party calls on workers and unions not to be put off making equitable pay demands by scaremongering propagandists. We agree with the general secretary of the union Mandate when he says: “Those who have gorged themselves at the table of the Celtic Tiger can tighten their belts!” [19] Rather than workers paying for this crisis in capitalism, there is a crying need for the top rate of tax to be increased. The Workers’ Party agrees with SIPTU in its call for the restoration of the top rate of tax to 42%.

The Wealth Pyramid

In 2006, 1.5 million people in the country -71% of total employees – earned less than €38,000 and 50% earned less than €28,000. In 2007, nearly one in five people (18.5 per cent) were living on incomes less than €11,000 for a single adult or less than €25,500 for two adults and two children. [20]

Wealth of the Nation, a report produced by Bank of Ireland Private Banking Limited in 2007, clearly outlines the wealth gap in Ireland. According to the report, the top 1 per cent of the population holds 20 per cent of the wealth, the top 2 per cent hold 30 per cent of the wealth, and the top 5 per cent hold 40 per cent of the wealth. The remaining 60 per cent of the wealth is shared among 95 per cent of the population. But if the value of housing is left out, then the top 1 per cent holds over a third of all wealth (34 per cent). According to Wealth of the Nation, in 2007 nearly 3,000 people in the state had wealth of between €5 million and €30 million and 330 had wealth in excess of €30 million.

The Bank of Ireland’s “Wealth Pyramid”

Moreover, it appears that many members of this class of very rich people are not prepared to even pay tax (see below), let alone tighten their belts. In 2007, the banks estimated that more than 3,000 cash-rich millionaires lived in the State, but the Revenue Commissioners have records for only a few hundred.[21] How long can this disgraceful state of affairs be allowed to continue?

These are some of that relatively small class of capitalists (international and home-grown), bankers, property speculators and politicians who have control of disproportionate wealth and power in this country- “the 5% who own 40% of all the wealth”. They will use that power to dictate the media and government agenda in the course of this recession. The latest Budget proposals show that this Coalition Government is prepared to hurt the majority to protect the people whose interests it shares. As the Bank of Ireland put it, “the net effect of the budget … is to reduce household disposable income.” [22]

“Once again the speculators and bankers have been rewarded by their friends in Fianna Fail and its allies. The reduction in stamp duty for commercial building transactions; the changes in the mortgage level which Local Authorities may grant; and the updated and renamed shared ownership scheme are all designed to help builders and speculators – the very people who have caused so much of the current crisis; the people who have forced young couples to commute for hours to the major cities; the people who hoarded building land in order to continually force house prices upwards – these are being rewarded while working people are being taxed at an even higher level.” – Workers Party President, Michael Finnegan

Ireland: an Excellent Low Profile Tax Avoidance Vehicle.

In a report for the US journal Tax Notes, former US Treasury Department international taxation specialist Mr Martin Sullivan, found that US multinationals made $2.01 profit in Ireland in 2001 for every $1 they made in 1999.

According to Sullivan, “In low-tax Ireland … profits of subsidiaries of US multinationals have doubled in four years, from $13.4 billion to $26.8 billion. Profits from operations of US multinationals in no-tax Bermuda have tripled, from $8.5 billion to $25.2 billion. Not surprisingly, those two tax havens rank as the number one and number two locations in terms of profitability for US corporations operating abroad – surpassing long-time leading investment partners like the United Kingdom,” [23]

Unlike Bermuda, where nothing is produced except profit, US firms in Ireland are involved in production and so the country is described as only a “semi tax haven” [24]

In 2004 Mr Sullivan told the Irish Times that  it was clear that US corporations were locking large amounts of profits in Ireland but it was difficult to assess how much of this money was a result of genuine economic activity in the country, and how much was placed there to avoid US tax rates.”I haven’t attached dollar figures to it because nobody knows the normal rate of return. It’s an elusive number,” he said.[25]

Moreover, changes in the Finance Acts of 1993 and 1994 made Ireland an ideal location for non-residents to set up Trusts for purposes of tax-avoidance. According to the accounting firm HLB International, “Ireland, though not a tax haven [is] a most attractive environment for the location of foreign trusts”.[26]

According to advice for tax avoiders from the Baltic Banking Group,

“As Ireland is not an obvious tax haven, an Irish non resident company provides an excellent low profile tax avoidance vehicle. … Currently, Irish non resident companies enjoy huge popularity. …[S]hares may … be held by a discretionary trust so that the only detail required to be revealed to the Irish Revenue authorities is the name and address of the trustee rather than the client’s own details. … [I]t  may … be possible to live in Ireland almost completely tax free. …These basic advantages combined with other domestic tax breaks have resulted in Ireland having a significant and wealthy expatriate community. [27]

Although the Finance Act of 2008 seems to have removed some of the more egregious loopholes, Christian Aid’s David McNair was able to claim as late as May 2008 that “Ireland has transformed itself into a country that facilitates tax-dodging”.[28]

Of course, tax avoidance is not only pursued by foreign capitalists. For example, property developers avail of a legal loophole which enables them to pay 1% stamp duty instead of the 9% that the rest of us pay. By working another dodge they can actually pay zero stamp duty. A recent industry survey estimated that 40% of big property deals exploit these loopholes and the Sunday Independent estimates that more than €500 million was lost to the Exchequer in 2006 alone as a result of this legal scam. According to the newspaper, then Tanaiste and Minister for Finance, Brian Cowen was aware of the loophole and could easily have legislated it out of existence but he refused to do this:

Fianna Fail’s close links to some of the country’s biggest developers like Sean Dunne, Mr [Bernard] McNamara, the Bailey brothers and others is being given as the reason why Mr Cowen has chosen not to close the loophole. Mr Cowen met with a number of the big developers before Budget day in December of last year. [29]

A House of Cards

The estate agency body, the IAVI, said last January [2008] that there were 40,000 empty apartments in Dublin while the Census 2006 showed that the number of empty units in the State had risen by 122,000 in the period 2002-2006. finfacts.ie

By 2001 the initial export manufacturing boom which had begun in the early 1990s was on the wane. The Forfás Annual Employment Survey 2007 showed that Irish full-time employment in manufacturing and internationally traded services fell 10,297 from 315,418 in 2000 to 305,121 in 2007.Meanwhile the total workforce expanded by 605,000 in sectors such as construction, public services, distribution, retail and other services.[30]

In the USA, when the dot.com bubble burst in the late 90s the Fed under Alan Greenspan reduced interest rates and ushered in the housing bubble which burst in  2007-8 with global consequences. Workers, whose real wages had stagnated or been in decline since the late 1960s (with the exception of some improvement in the 1990s), raised their standard of living in the early years of this decade by taking on extra jobs, by going into debt and through remortgaging while many who had poor credit ratings managed to get onto the property ladder by through the purchase of sub-prime mortgages.[31]

Similarly in Ireland, beginning in the late 90s, speculators, developers, bankers and politicians hoped to augment an export-led manufacturing boom dominated by foreign Corporations with a home-grown boom in construction and services which was predicated on rising house prices and the easy availability of credit. (There was much talk in the financial pages of the time about how the Irish rich were at last coming into their own.)  For a time they got their wish. In The Finance Act of 1998, Charlie McCreevy cut capital gains tax from 40% to 20% in order to release what he called “pent up investment funds”.[32] And as a result of this, together with property incentives giving income tax reliefs to high earners, it made good investment sense for earners at the top rate of income tax of over 40% to put their money into housing.

Between 1998 and 2006 direct employment in construction more than doubled from 126,000 to 282,000. The Irish Housebuilders Association said in October 2006 that the Government was expected to earn €9.5 billion in taxes from the new homes building industry in that year. While most mainstream economists argued that the inflow of new immigrants would create a massive demand for new housing, Census data in 2006 indicate that most immigrants lived in private rented accommodation. The Irish housing boom was built on speculation rather than on a real need for new housing units.

As a result, by late October 2008 there were 350,000 vacant houses – 17.6% of the overall housing stock. As this is being written, in early December 2008, Ireland has more empty housing units than rented homes of all kinds.

Meanwhile, despite this overcapacity, nearly 44,000 households (approximately 120,000 people) are on the Local Authority Housing waiting lists.[33] And in March 2005 (the latest date for which figures are available) the Homeless Agency reported 361 households (representing 2,015 people) as being homeless in Dublin and 346 households living in transitional programmes. Although this figure represents a decrease on 2002 figures, if we take the equality of human beings at all seriously, then by any rational accounting we must surely question why any person should be homeless in a city which has 40,000 empty apartments.

What the future holds

Fallout from the collapse of the housing boom can also be seen in the spectacular rise in household debt. As noted earlier, because of the increase in the rate of exploitation since the mid 70s, workers in the USA found that their wages were stagnating and so starting in the late 90s they increasingly took on credit card and mortgage related debt in order to achieve a standard of living that their wages alone could not bring them. A similar growth in debt took place in Ireland (and the UK) during this period. According to economist Rossa White, household debt to disposable income in Ireland is now 175%, up from 77% in 2001. As a result, 23% of disposable income will be spent on household debt service costs (secured and unsecured) this year.

As well as continued indebtedness, in the next few years Irish workers will also face lower wage growth, falling employment and a higher tax burden. Economist Rossa White expects unemployment to reach 10% by next year rising to 12% by the end of 2010.[34] As a result of these straightened circumstances workers have less to spend and consumer spending is expected to experience zero growth in 2008 and to decline at least until 2010. Moreover, it is expected that 2009 will see net emigration from Ireland of 30,000.The bad old days of people being forced to leave the country have returned.[35]

The Workers’ Party expects a growth in political militancy as people increasingly realise that the conservative parties do not represent their interests, and indeed never have done.  The massive protests by the elderly, students and the teachers unions are a foretaste of what is to come although the Party expects that these single issue protests may increasingly be joined by mass protests aimed at the political-economic system as a whole.

The economic crises will bring workers in Ireland and around the world closer to the realisation that nothing sort of a new social system can begin to resolve the chronic instabilities which are at the root of so much social misery. The capitalist parties can only offer people the promise of a new boom, which can only give rise, in turn, to yet another busted economy. Fundamental change is the only lasting answer. The future is socialism.

Notes


[1] Irish Examiner, 27th September, 2008

[2] Press release, 30th October 2008

[3] “Rich elite due a dose of patriotic punishment”, The Irish Times, October 28, 2008

[4] Elizabeth Cullen,”Unprecedented growth, but for whose benefit?”             

[5] Cullen Ibid

[6] Shelia Killian and Martin Mullins, “Taxing Thoughts: Ireland, Tax Competition and the Cost of Intellectual Capital” visar.csustan.edu/aaba/KillianNairobi.pdf, p.9

[7] Innovation magazine Irish Times,  2nd December 2008

[8] Killian and Mullins, p10

[9] Killian and Mullins, p.12

[10] Ibid,  p.11. Emphasis mine

[11] Ibid, p.13

[12] Ibid, p.18

[13] OECD Education Report 2008. See also,”Some governments are trying to provide higher

education on the cheap” by Finfacts Team, Sep 10, 2008

[14] ICTU, Review & Recommendations for the Finance Bill - November 2008

[15] CORI Justice, CONTACT magazine, Number 47, October 2008, p.3

[16] ICTU, ibid.

[17] SIPTU “Don’t Turn a Recession Into a Depression” June 2008

[18] UNITE, “The Truth About Irish Wages”, April 2008

[19] Mandate “End Low Pay”. No date

[20] Vincent Browne, Village magazine, Wednesday, 21 March 2007   “Huge disparities of wealth in Irish society not an issue in election.”

[21] Irish Times, Editorial Dec 11, 2008

[22] Bank of Ireland, Outlook, October 2008

[23] Finfacts.ie, “US Multinationals Profit From Taxes

[24]Sullivan quoted in  Asset  Protection Corporation, “The Republic of Ireland -A new tax haven?”

[25]Irish Times, September 17, 2004 and Finfact: US Multinational Profits From Taxes


[26] HLB, “Doing Business in Ireland”  p13. 

[27] http://www.offshore-manual.com/taxhavens/Ireland.html

[28] Christian Aid, May 2008, “Death and taxes: the true toll of tax dodging”

[29] Sunday Independent, May 4th, 2008. “Cowen will keep tax loophole for the super-rich”

[30] Finfacts Team, “Irish full-time employment in manufacturing and internationally traded services fell 10,297 in the period 2000-2007 while the total workforce expanded by 605,000“. April 1, 2008.   Much of the factual information in this section comes from the finfacts.ie website.

[31] For a detailed analysis of this history and its contemporary consequences see John Bellamy Foster and Fred Magdoff’s book, The Great Financial Crisis: Causes and Consequences (Monthly Review Press) 2009

[32] Sunday Tribune, November 14th, 2004

[33] CORI Justice, “Analysis and Critique of Budget 2009″

[34] Rossa White, “Unemployment claimants up the most ever in 2008

[35]Emigration returns as headline news“,

 

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