JANUARY’S CHANGING OF the guard in the White House is likely to have a “significant impact” on the Irish economy over the coming years, both positive and negative.

That’s according to the latest Quarterly Economic Commentary, published by the Economic and Social Research Institute (ESRI) this morning.

Remarkably, despite declines in employment and domestic consumption that were unprecedented in their scale and speed, the ESRI forecasts the Irish economy to expand by 3.4% this year.

That could be followed by further growth in 2021 of between 1.5% and 4.9%, depending on whether a post-Brexit trade deal is reached in the coming days and weeks.

In both of these scenarios, ESRI researchers also factored in a six-week national lockdown in January.

But Brexit and Covid aren’t the only potential risks to the economy.

During the last six years, Irish corporation tax revenues have been a major source of exchequer funds, outstripping forecasts by over €7 billion, according to the report.

In the past three years, this has been fuelled by the Trump administration’s 2017 overhaul of corporate tax, moving the country to “territorial based” system.

Effectively, this means that the US government stopped taxing the profits of American companies earned in a foreign country.

Simultaneously, US Republicans introduced a new system called the Global Intangible Low-Taxed Income (GILTI).

Aimed at saving American jobs and disincentivising corporations from off-shoring business to low tax countries like Ireland or Switzerland, it means that income earned over a certain threshold by an American company’s foreign subsidiaries is taxed at 10.5%.

There is evidence, the ESRI says, to suggest that this 10.5% rate was too low and that US companies continued to offshore business during the Trump administration.

“Amongst the evidence presented for this is the continued increase in the level of trade in pharmaceutical products between Ireland the United States in recent years,” the report argues.

Consequently, Irish corporation tax receipts have ballooned since 2017.

Graph showing how Irish corporation tax receipts have outstripped forecasts since 2014.

But the ESRI highlights that “any changes to this legislation which sees a movement away from the territorial approach or witnesses an increase in the GILTI tax rate may result in lower domestic corporation tax increases for the Irish Exchequer in the future”. 

US President-elect Joe Biden has pledged to more than double the effective rate of GILTI during his term of office.

This, the report, argues, “underscores the potential vulnerability of future corporation tax receipts” and why the government can’t rely on them to fund current expenditure.

On the upside, the report highlights the “likelihood of re-engagement” by the US on international efforts related to climate change and Brexit as “clear positives for the Irish economy”.

A remarkable year 

In its final quarterly commentary year, the ESRI paints as full a picture as it can of the impact of the pandemic year on the Irish economy.

With GDP expected to grow by 3.8% for the full year, the outlook might seem relatively rosy.

Irish exports are still leading the charge.

Buoyed by booming pharma and computer services/tech sales — two sectors dominated by foreign companies based in Ireland — exports have actually increased year-on-year by 4.6%.

But the 2020 crisis has also laid bare the duality of the Irish economy.

While multinational-dominated sectors with a higher incidence of high-paid jobs have boomed, sectors of the domestic economy that produce lower-paid jobs (hospitality, retail, construction etc.) have suffered greatly.

Stripping out businesses that export altogether, domestic private consumption has collapsed by 9% and investment by a whopping 13.6% although there has been some recovery over the course of the year.

Ireland’s labour market has also been devastated. 

Overall, the ESRI expects the Covid-adjusted unemployment rate to hit 18.4% of the total labour force for the full year. This is an upward revision from October when it was forecast to be just 16.8% and a stark increase on last year when unemployment was as low as 5%.

It’s too early to speculate about scarring effects — persistent, permanent negative impacts — on the labour market, however.

As public health restrictions have tightened and loosened, the unemployment rate has shifted down and up and back again over the course of the year.

That will be the case next year as well but economists will be watching these motions closely.

“Obviously, if we see [the unemployment rate] consistently fail to drop as low each time there’s a loosening of restrictions, then that’s kind of an indication that there’s some scarring,” explains Conor O’Toole, a senior research officer with the ESRI.

If we see unemployment rates, “get more stubborn on the downside”, it’s evidence that jobs are being lost on a more permanent basis.

The ESRI also expects consumer expenditure to increase by around 11% next year, as households unwind excess savings built up over the course of the pandemic year.