Taoiseach Leo Varadkar made strong commitments in relation to social and economic issues that will involve extra Government expenditure. Picture: Gareth Chaney/Collins Photos
Over the Christmas period, newly-instated Taoiseach Leo Varadkar made strong commitments in relation to social and economic issues in areas such as child poverty, housing, and health.
The one thing these commitments have in common is that the solutions will have to involve extra Government expenditure.
For the Department of Finance and the Department of Public Expenditure and Reform, such political commitments most probably give cause for deep concern.
They are unlikely to subscribe to the concept of the money tree and Modern Monetary Theory (MMT), which argues that expenditure and borrowing do not matter.
In an environment where Government borrowing costs and general interest rates are rising, borrowing does matter. The UK’s mini budget in October is a key example.
The Department of Finance recently published its end-year Exchequer returns, and on the surface at least, they made for pleasant viewing.
The Exchequer delivered a surplus of €5bn in 2022, which translates into a General Government Surplus of €5.2bn. This is the preferred EU measure of the public finances.
Central to this excellent performance was an incredibly strong corporation tax performance.
The Exchequer collected €22.6bn under this tax heading, which is €7.3bn more compared with 2021 figures.
Throughout 2022, the monthly corporation tax take set new records but Government officials sought to downplay its significance.
Their fear is that much of this tax take could be transitory and are fearful of history repeating itself. The history I refer to is the excessive Government spending that accompanied the surge in property-related taxes in the first half of the noughties. When this tax-take collapsed, the fiscal results were disastrous.
Last week, the department adjusted the Exchequer figures for its assessment of the transitory element of corporation tax receipts. It concluded that the underlying General Government Balance is estimated to have been in deficit to the tune of €5.25bn.
In other words, around €10bn of the corporation tax take is categorised as vulnerable. Any sensible person would recognise that the department is right to be cautious.
The growth in corporation tax receipts reflects the profitability of the multi-national companies who pay tax in Ireland. The risk now is that as those profits deteriorate, the tax paid is also likely to deteriorate. The omens for the global technology sector are not looking promising in that regard.
More recently, Amazon announced that it is going to lay off 18,000 employees from its global workforce, up from an initial announcement of 10,000 in November. Salesforce announced plans to lay off 10% of its global workforce, including business closures, by the end of 2024.
During the pandemic, online business boomed and technology companies expanded their workforces accordingly.
Now that online business has started to normalise, and more pertinently, now that the global economic environment has deteriorated markedly, many of those companies quite simply have too many employees and with revenues under pressure, a labour force adjustment is inevitable.
Nothing strange here as it is typically what happens during the business cycle, but the cycle is currently more pronounced for technology companies, broadly defined.
It seems certain that the global tech sector will experience a decline in profits over the coming year. This is likely to undermine corporation tax paid in Ireland but could also have implications for employment in the sector.
Demand for labour
Jobs will inevitably be lost, but it is reassuring that outside of the big names, there would still appear to be demand for labour in this space.
Of even more consolation for Ireland is the significant role played by the chemical and pharmaceutical sector. Companies supported by the IDA employ an estimated 105,000 people and in the first 10 months of last year, accounted for just under 65% of total merchandise exports.
This sector is characterised by heavy investment, not least in concrete, and as such it has deeper roots in the economy than technology companies, who typically tend to have a much more volatile existence.
We will need to observe global technology woes carefully, but the current difficulties in the sector are not unprecedented after a period of such rapid expansion. Ireland just needs to remain focused on preserving its favoured status as a location for mobile investment.
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