Some of the measures in last week’s Irish Budget highlight the spectacular improvement in Ireland’s economic and fiscal position in only a couple of years. In particular, the setting up of not one, but two wealth funds suggests that their cup runneth over. What are the lessons, if any, for Scotland in this transformation?

First some context. It was only 13 years ago, in 2010, that the EU and the International Monetary Fund landed in Dublin to help sort out the mess that had swept through the Irish economy after the banking crash. The resultant €67.5 billion bailout was conditional on drastic budget cuts.

Since then the Irish economy has recovered well, in part due to the behaviour of large multinational companies like Pfizer, Google, Amazon and Apple, which were originally attracted by the low level of corporation tax. In its latest quarterly bulletin, the Irish Economic and Social Research Institute has highlighted the importance of the inwards transfer of foreign-owned, intangible assets since 2000, including the substantial distortions that these impose on GDP, productivity, investment levels and the like.

So great have been these distortions that the Irish government has had to invent a new measure of economic growth, ‘modified’ gross national income to replace the more traditional GDP. Without this modification, the Irish economy grew by 25 per cent in 2015, which, while technically correct, in reality is a nonsense. In that particular instance, most of the growth was due to foreign multinationals transferring their intellectual property products to Ireland, thereby raising GDP-related investment figures by 57 per cent in that year alone.

Hence, while much of the growth in the Irish economy is a mirage – with most of the related profits from the multinationals’ worldwide activity ultimately ending up outside of Ireland – and even with a very low corporation tax rate, the end result can be that the Treasury is, as now, flooded with revenues. This, in turn, has allowed the Irish government to start up these new ‘wealth funds’.

It has chosen this route not because everything is hunky dory in terms of infrastructure and health services but because to spend it now would exacerbate inflation and risks leading to another bout of the ‘spend, spend, spend’ mania that overtook the government prior to the crash. There is also the risk that such internationally fluid funds might disappear as fast as they arrived, compounded by the negotiated agreement to raise the Irish corporation tax rate from 12.5 per cent to 15 per cent from January.

All of this future investment will be needed, as the Irish economy has significant infrastructure issues to address, especially with regards to housing and transport. Such is the legacy of Irish government expenditure – per head of the working age population – being the same level, in cash terms, in 2019 as it was in 2010, a much more severe bout of austerity than was experienced in the UK over the same period. This again highlights the volatile nature of the Irish economy, with its higher than normal dependency on multinationals’ income, and so the urgent need for such wealth, or emergency, funds to be set up.

How exportable is this source of success? By definition, not very. First, there are only so many such large multinational companies around and, to highlight how few make the difference, the Irish Fiscal Advisory Council estimated that a third of all corporation tax paid between 2017 and 2019 came from three companies. So success needs to be poached from other countries, who are well aware of this.

Second, there is the inability to replicate the conditions of success. There would be huge international and EU pressure not to allow any other country to introduce such a low rate of corporation tax. The US, France, Germany and others do not want to see their own tax revenues fall any further just so some plucky little newcomer becomes rich overnight. Third, it’s pretty unprincipled policymaking in political and social terms, as it amounts to depriving other countries – whose citizens may enjoy a similar, or lower, level of wealth – of transferred, taxable, activity.

So Ireland is Ireland, with a unique, largely un-replicable, economic model. Where else might lessons be learnt? At the same time as Ireland is setting up a wealth fund – or two – so has Portugal turned to similar thoughts. However, this comes about through very different circumstances.

Under the governing Socialist party, Portugal has put in place fiscal discipline measures that have led to a fiscal surplus that is both reducing debt levels and allowing for ‘structural investments’. In its latest budget, the Portuguese government looked ahead to a time, post-2026, when EU funds may be less generous, in part due to the possible accession of Ukraine into the EU. So it is planning well in advance for such a transition.

In the context of Scottish independence, the Irish example is largely irrelevant, while the latter illustrates a purportedly left-wing government that is making realistic plans for change. There are similarities here to the SNP’s Sustainable Growth Commission report, with the alternative being that an Irish, or an Icelandic, or a Singaporean miracle will somehow emerge.

That way lies some form of Trussian fantasy and we have seen how the markets deal with such pie-in-the-sky nonsense. A useful warning from a useless fiscal episode. Vain hopes over sober reality, take your pick.

John McLaren is a political economist who has worked in the Treasury, the Scottish Office and for a variety of economic think tanks

Why Ireland is not an economic model for an independent Scotland to copy – John McLaren

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