This Budget is About Political Choices Based on the Priorities of Class
As we are forced to look at the budget over two days, a particular unnecessary cruelty, it’s worth emphasising, as those in the ULA and Sinn Fein have done, that this is a budget based on political choices. It is depressing to watch seasoned politicans like Pat Rabbitte claim pathetically that if they didn’t make the choices that they made that the EU/IMF would punish us severly. Last night on RTE’s Frontline Rabbitte claimed that if Ireland did not do what France and Germany wanted that they would forced to do it anyway, citing the treatment of George Papandreou, the former PASOK Greek prime minister as evidence. Mary Lou McDonald then made the point that Sinn Fein met the Troika and ‘set out their stall’ which included a wealth tax and the closing of various tax loopholes, as well as a dedicated fiscal stimulus based on state led investment in infrastructure, education and health. She claimed that the Troika said that it doesn’t matter how you do it, as long as the numbers, in terms of deficit reduction, remains the same. The finer details of Sinn Fein’s proposal can be argued out, but its far far saner than the route being taken by the present government. It’s costed, it’s reasonable and it would work.
So the political choices being made by Fine Gael/Labour are based on two simple questions:
- Will it allow us to cover all bank losses by placing the full responsibility for the debt on public finances?
- In doing so will it still be possible to protect corporate profits and the income of higher earners?
This political decision reflects the philosophical point of view of those who run the two largest economies in the Eurozone, but it is not imposed by them. It is not surprising that the solution that France and Germany have come up with involves a copper-fastening of neoliberal austerity into the political structure of the European Union. It is not surprising either that a central part of the announcements made by Merkozy yesterday include a protection of banks so that they would not be required to share sovereign debt burdens that they ultimately created.
According to the Financial Times:
“In an apparent concession, Ms Merkel agreed that private sector bondholders would not be asked to bear some of the losses in any future sovereign debt restructuring, as she had insisted this year in the case of Greece’s second bail-out.”
To which Richard Murphy correctly responded:
“So we know now that this deal is for the benefit of banks and their owners.”
France for its part continues to apply pressure on Ireland to increase its Corporation Tax rate. Ignoring all the absolute nonsense around this (France is forcing this on Ireland, even though effective tax rates are lower in France than in Ireland blah blah blah), it’s worth noting how Eamonn Gilmore is so willing to stand up to France on this issue (”The position of the Irish Government is absolutely clear. We are retaining our rate of corporation tax”), but his Labour colleague Pat Rabbitte is saying that we have to cut child benefit and disability allowance, increase VAT which will impact on lower earners more, reduce the health budget to boost private health care and rip the education budget to shreds or else…
A little history provides us with the perspective to get beyond the shallow political rhetoric that gets so readily churned around budget time. Today Manus O’Riordan tells us about a time when he heard Eamon Gilmore boast at the Desmond Greaves Summer School in August 2007 that “we’re the Party that gave you the 12.5 per cent corporate tax!”. Manus continues:
“As the “Irish Independent” rather uncharitably reported: “Labour leader hopeful has his comrades up in arms… Down the back, a delegate interjected with a ‘Point of Order’ that Mr Gilmore should have given a different speech to one he would ‘give to the American Chamber of Commerce boasting about reducing corporation tax’.”
I could be even more uncharitable and say that Gilmore considered that if he was to become Labour leader he had better ensure that he let everyone know that he is firmly behind supporting foreign financial capital and those in Ireland who benefit from administrating it.
As a forthcoming article in a lefty magazine will no doubt explain in more detail the 12.5% corporation tax rate was originally proposed by Fine/Labour/Democratic Left in 1997, but it wasn’t until the announcement in the 1998 budget by Minister for Finance, Charlie McCreevey that he would introduce the legislation for a phased introduction of a new regime of corporation tax that it eventually was put in place.
Before that a broad 10% tax rate existed for manufacturing, including for the IFSC, while a 32% corporation tax rate remained for other sectors. The reason for changing it, we were told, was to make the rates more in line with EU competition guidelines which disagreed with one sector being given more favourable terms than another. But it might seem odd that in order to rectify the differences between 10% and 32% that they brought the higher rate down so low and barely increased the lower rate. It’s not only odd from our perspective now, it was considered rather odd at the time too. Not by radical critics of the Irish government, but the fusty old Dept of Finance.
As Paul Sweeney says in this article from 2003, the new 12.5% rate:
“…. was of immense benefit to owners of companies in the non-traded domestic sector, transferring around IR£300-400m from the Exchequer to them in terms of revenue foregone according to 1997 estimates. The much maligned Department of Finance is believed to have been against the rate because it believed 12.5 per cent was too low. It is believed that the government decided on the low rate of 12.5 per cent on the strong advice of private consultants, a firm of accountants retained by Forfás, over that of the Department of Finance.
Ironically, this same firm in the US was at the heart of the Enron scandal.”
This little quote contains three gems of information. Firstly, the rarely acknowledged boost in profits that the Irish non-trade sector got from the change in corporation tax, which went straight into property speculation. Secondly, the fact that the Dept of Finance felt that 12.5% was too low, and that we were losing lots of revenue unnecessarily and thirdly, that the government chose the advice of a firm of accountants that now have an international reputation for acting simultaneously as auditors and consultants for major corporations. In the case of Ireland and its corporation tax rate (as well as the very tax haven friendly tax on dividends, lack of rules around inter-group loans and other notorious features of our super light tax regime) the consultants worked for their corporate clients and the Irish government simultaneously.
Has anyone tried to calculate precisely how much tax revenue was lost from the decision not to follow the Dept of Finances opinion? I imagine it would amount to a hefty amount since 2003.
Why they went with the advice of consultants over the Dept of Finance is quite simply because it best suited the class that have always benefitted from the selling off of whatever Ireland has to offer for a song. This is the class to whom the Eamonn Gilmore and the Irish Labour party are wedded. Again this is not too surprising, but we should be aware of it when going through the budget today.
There is another point made by Manus in his post about Jacques Delors. He says that Delors still viewed Ireland as somewhat of an Anglo-Saxon Trojan horse in the euro area. It is absolutely right, and as our history of the IFSC itself shows and our corporation tax rate, Ireland is little more than an off shore extension of the City of London to those with money and the design of the budget today and yesterday illustrates that perfectly.
Photo courtesy of Irish Election Literature.
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Comment by: Jonathan
Dec 6th 2011 at 16:12
I’m a bit confused about our whole corporation tax thing. We are told over and over again that the whole basis of our economy is a 12.5% corpo tax, which we need to attract investment. Yet, according to Conor McCabe in his excellent Sins of the Fathers, in 2008, IDA-supported companies only employed 7% of our workforce and paid only €2.8 billion in tax. This year, corporation tax receipts are €4 billion out of €34 billion, but as some of that must be made up of indigenous businesses it’s fair to say that the figure might be even lower now. But even if it’s the same, that’s only 8% of our total tax take. Now I know that these companies and their employees are probably paying other taxes, but why, aside from allowing us to pretend that we have an industrial policy and that the exports of US multinationals are somehow Irish exports, are we so obsessed with multinationals?
Comment by: Donagh Brennan
Dec 6th 2011 at 17:12
Like you, I’m sure, I’ve been looking at it for a while now and I still can’t figure it out. The more you look at it the more it seems the various tax reliefs are designed not to try and get some of the tax revenue from MNCs profits but simply to get MNCs here so that they can employ Irish tax consultants. It appears as if the only revenue they are interested in is the revenue for those who are directly employed by the MNCs. Add to that the potential revenue that is gained for those who help MNCs set up here (developers, those involved in real estate and solicitors) and we have a bunch of people who would be in a position to make a strong argument for why its so important that we attract MNCs to Ireland.
Conor, in Sins of the Father has an interesting section of his chapter on property about the creation of a property boom on the back of the first wave of FDI into Ireland in the 60s. This created a surplus of office space, generated by speculation on the back of tax reliefs. The surplus was absorbed by the government, who became tenants in the offices that were built although there was no need for them.
Specifically, though, to get back to you’re main point. Jim Stewart in his recent discussion paper made a very interesting point that I feel should be quoted in full.
However, we need to look no further than John Bruton really. The chairman of the IFSC is one of the main architects of industrial policy in Ireland.
Comment by: Jonathan
Dec 6th 2011 at 19:12
Thanks for the link to Stewart’s piece. I’m trying to educate myself on what’s going on in the economic world both here and abroad; somewhat difficult considering I’m doing it off my own bat, in my spare time, and living in rural Ireland. But many people in Ireland (myself included) are often so clueless about the underlying factors that influence our lives, and are therefore at a loss when faced with a smooth-talking patrician type like (gag, spit) Colm McCarthy, claiming to be the voice of reasonable pragmatism when they’re actually a rabid ideologue wedded to the same vested interests that caused the crisis we’re in in the first place…
Comment by: LeftAtTheCross
Dec 7th 2011 at 11:12
I have a brother-in-law who works as a senior manager in an FDI firm. He’s also heavily involved in an sectoral lobby group which co-ordinates research activities with universities and Enterprise Ireland. Point being he’s on the inside track to some extent. Anyhow, his position is that FDI has two advantages for Ireland, 1) it streams corporate profits through the corporation tax system which creams off some if that for the state, money that could just as easily be routed elsewhere if MNCs decided otherwise, so a “be thankful for what we get” type of position, and 2) FDI creates employment and pays salaries into the local economy which then feeds back to the Revenue through PAYE and VAT. And that’s it. FDI is lazy prostitution of the citizens and institutions of the state to the MNCs. Of course the pinping state throws in other freebies for the MNCs in terms of R&D tax credits, subsidised research in state funded universities under the (helpful) direction of MNCs’ own R&D programmes, state-funded third-level education (training) which is increasingly targeted at producing employment-friendly units of human resource etc. To re-iterate Conor McCabe’s Godfather analogy, the state is Frodo, ensuring that MNCs (global capital) has a good time here at any expense.
Comment by: Donagh Brennan
Dec 7th 2011 at 11:12
Thanks Jonathan and Left at the Cross for the comments. @Jonathan, I think we’re all trying to educate ourselves in this stuff and one of the strongest motivations for doing so is because we are inundated with the wisdom of people like Colm McCarthy all the time. So its a good thing that we are forced to trust our instincts and go find this stuff out for ourselves.
Thanks for that LeftattheCross. It’s clear your brother-in-law has onside. Nothing about somewhere in the future Ireland having companies that are themselves MNCs. Nothing about using them to develop Irish industry. It’s all about small amount of tax revenue, when compared to the billions that are booked here and which we allow them to keep away from their own countries tax collectors and good wages for a section of the well-educated middle class. It’s right too that the amount collected in tax from MNCs is not measured against the amount that is given to them. While the Tax Revenue Commissioners assess what MNCs bring into Ireland in tax, they include the tax take from the wages of employees. Most countries don’t do that.
Yesterday there was a report in the Financial Times about George Osborne changing their Controlled Foreign Corporation rules. At the moment the UK demands that MNCs based in the UK, but who use tax havans like the Caymen Island to book profits treats the Cayman Island income as if it is resident in the UK for tax purposes.
http://www.ft.com/intl/cms/s/0/08d49bd2-1f6c-11e1-9916-00144feabdc0.html#axzz1fqFPAgz4
In Ireland we have no CFC rules - never have. So companies set up holding companies here and use tax havens like the Cayman Islands to book profits (usually by the CI company holding the Intellectual property or registered trademark which the holding company leases off them).
In the UK these rules were introduced in 1984. Now they are being changed in order to keep global corporations from moving to jurisdictions were there are no rules.
You would imagine that if Ireland was looking to benefit from the tax income of MNCs that they would follow the UK’s lead on this once the tax breaks for the IFSC were in place and Ireland’s entry under Maastrict into the single currency lead to a rapid influx of FDI. It’s as you say LatC, Frado doesn’t make decisions like this. He’s only there to top up the drinks and make sure the money has a good time while its here.
Comment by: Jonathan
Dec 7th 2011 at 12:12
One question that would be interesting to ask is how much we spend on getting multinationals to come here through trade missions, the cost of running the IDA, and so forth. It would be quite amusing if the MNC corporation tax vs State annual spend cancelled each other out…
Comment by: LeftAtTheCross
Dec 7th 2011 at 12:12
I was mixing up my hobbits and pimps there wasn’t I, it’s Fredo Corleone rather than Frodo.
On developing indigenous companies to become MNCs, the process promoted by the state, through Enterprise Ireland directly, but also indirectly through state injections of capital into private venture capital firms for use of those funds in the interest of the state, all fly in the face of building provate companies of sufficient critical mass to become MNCs. The typical trajectory for any indigenous firm receiving direct or indirect state support through early investment rounds is that the emphasis is on a quick return for the investors, tarting up the company on the back of a first product prototype, on over-valued intellectual property, on vastly inflated future revenue projections, all with the goal of flogging the company to an existing MNC (a so called “trade sale”) or a market floatation (an IPO or Initial Public Offering), either of which cashes out the state’s involvement and provides a short-term return on investment to Enterprise Ireland and the venture capitalists, and the founders and senior management of the company of course. But nothing in it for the long run for the state, other than the possibility that the company will survive and perhaps grow and contribute something to the state via those same minimalist criteria of jobs, salaries, PAYE and VAT, the bulk of which are actually a return to the state by the employees of the company rather than by the company itself.
Incidentally, Jack O’Connor’s recent speech at the SIPTU Manufacturing Conference touched on this to some extent, from the perspective of the German industrial development model, the Mittelstand, and the necessity of creating and nurturing manufacturing (real world) economic activity as a foundation for a sustainable economy.
Comment by: David O\'Donnell
Dec 7th 2011 at 13:12
Class and Power - The Great UnSpoken …
http://www.irisheconomy.ie/index.php/2011/12/06/budget-2012/#comment-205805
Comment by: William Wall
Dec 7th 2011 at 14:12
I must say I find the whole FDI/MNC thing baffling in the extreme. We’re constantly told about the ‘downstream’ effects, and yet, as Conor pointed out, these amount to very little. It’s as if the country has somehow developed an unmentionable disease and everybody is doing their best to talk about something else.
Comment by: Heckle
Dec 7th 2011 at 16:12
I agree with LatC and Donagh. These MNCs here (as I understand it) set up a central finance dept. of all their other countries’ production factories; these branches’ profits are declared here in this country and so they pay far less tax overall. ? This is why Sarkozy is mad at us. His country’s rightful taxes are not paid in France; but here; and in effect they really go straight back to the MNC ?
Apart from all that, we are an island and have been far too much in thrall to these two big banks, AIB and BOI.
We really need a new citizen’s bank.
Comment by: Donagh Brennan
Dec 7th 2011 at 16:12
Well, as we know various governments tend not to go into accurate cost benefit analysis when making policy decisions. The new jargon now is ‘evidence-based policy’, as if before policy makers pulled it out of their ass. Now, though we are supposed to believe the data is collected first, then analysed and only then a decision is made. But that’s an excellent point about what happens with indiginous firms that get all that support from the state through Enterprise Ireland and the IDA etc, only to be bought up by an outside MNC – that’s certainly been my experience, and those of others I’ve talked to that have worked for Irish firms in the last number of years. That former World Bank/Central Bank of Ireland economist Michael Casey (spits) lad mentioned that it was part of a pattern of the Irish indiginous sector but did so in as a sense of throwing his hands to heaven.
Sean O’Riain of NUI, Maynooth did a study of the Irish IT sector were he found that Irish companies were beginning to develop on the back of FDI in the 1990s as they had in other countries, but that the support for this had come about behind the back pretty much of those who called the shots. This ended with the Dot.com collapse, but the support network wasn’t resumed within state agencies again – although he does mention that after 2000 the lack of private investment meant that the only investment was provided by the state and that this started to work. Basically state led investment encouraged private investment to come back in, which is why state led investment is so important now.
If this worked on a modest level, on a large scale surely it would have a greater benefit. That said, the idea that the economy will be turned around by building up the IT sector is wrong. This is a low employment but high productivity sector and we have very high unemployment.
Thanks for putting that link in David – ultimately that is what is all about. It’s about power and class, but the nuances of class have to be explored in a more sophisticated way. It clearly serves the class in power in Ireland better to have a limping economy that can provide jobs and opportunity for accountants, lawyers and developers the benefits of which would then be ploughed in to speculation rather than working to develop the economy in such a way that the long term benefits would accrue to the majority through improved services, infrastructure, schools, hospitals etc.
And yes, I got it wrong too – it’s Fredo, not Frado.
Comment by: Heckle
Dec 7th 2011 at 20:12
It’s more sobering than that, now.
This Govt.IS the two ‘universal pillar banks’, and the accountants, lawyers, investors.
M.Noonan, yesterday: “We have set the two pillar banks ambitious SME lending targets of E3 billion each this year, E3.5 billion each next year and E4 billion each in 2013.”
Who will these SMEs be? No doubt by now pals of accountants, lawyers, investors, are drawing up small applications to apply for these loans. And n’aer a word about it in the media. It was sobering to see the very poor yesterday sounding bereft of any community funding. I know it is only banks’ ‘lending’ as opposed to community ‘funding’; but would some v. poor ‘entrepreneur’ be considered by these banks?
Prob. not, as they may not know it is even there.