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Look and learn from across the Irish Sea
In an article in The Times in 2006, Mr Osborne gushed:
Ireland stands as a shining example of the art of the possible in long-term economic policymaking...
Ireland is no longer on the edge of Europe but is instead an Atlantic bridge. High-tech companies such as Intel, Oracle and Apple have chosen to base their European operations there. I will be asking Google executives today why they set up in Dublin, not London. It is the kind of question I wish the Chancellor of the Exchequer was asking.
The answer given by the Google executives when he asked them why they relocated their HQ to Dublin was not subsequently revealed by Mr Osborne.
For the future British Chancellor, one of the Irish Republic's most striking achievements was that, in his view, it had managed the remarkable feat of 'sustainably' reducing taxes and 'shrinking the state' while improving public services:
If, over time, you reduce the share of national income taken by the State, then you can share the proceeds of growth between investment in public services and sustainably lower taxes. In Britain, the Left have us stuck debating a false choice. They suggest you have to choose between lower taxes and public services. Yet in Ireland they have doubled spending on public services in the past decade while reducing taxes and shrinking the State’s share of national income.
Describing these achievements as the 'Irish Miracle', George Osborne also praised the rising prosperity of the USA under its regime of financial deregulation, contrasting it with the supposedly over-regulated economy of the UK at that time:
It is not the only advanced economy to have achieved this uplift. Last week in Washington the new Chairman of the Federal Reserve, Ben Bernanke, told me about the impact that the sustained increase in productivity growth had made in generating prosperity in the US. By contrast, in Britain productivity growth has fallen in recent years and is far behind the likes of the US and Ireland. Indeed, it is one fifth the rate it was when Gordon Brown walked into the Treasury. Poor skill levels, rising taxes, bureaucratic planning controls and chronic overregulation are high on the list of culprits. Britain is being left behind.
Those, of course, were the words of a politician, exaggerating the facts in order to promote his party's position as the voice of the pro-'free market' agenda in the UK. In reality, Britain under New Labour, following in the footsteps of Margaret Thatcher, had also further de-regulated its financial system and reduced taxes on corporations and rich people- though not quite to the extent that George Osborne was proposing.
Unremarked by Mr Osborne, at that time the Irish banks were borrowing many billions of euros, pounds and dollars from international financiers, including in the UK, who aspired to cash in from the 'uplift' provided by Ireland's shining example of steeply rising property prices and speculation in the construction industry.
Osborne's article, which was headlined 'Look and learn from across the Irish Sea', concluded:
The new global economy poses real long-term challenges to Britain, but also real opportunities for us to prosper and succeed. In Ireland they understand this. They have freed their markets, developed the skills of their workforce, encouraged enterprise and innovation and created a dynamic economy. They have much to teach us, if only we are willing to learn.
IMF seal of approval
George Osborne was far from being alone, among the parties negotiating the bailout, in his recently-held enthusiasm for the Irish economic model. Even after the US-centred financial crisis began to spead its effects globally, the Executive Directors of the International Monetary Fund (IMF), in their report on the economic performance of the Republic of Ireland, issued on 25th September 2007, stated as follows:
Economic performance remains very strong, supported by sound policies. The growth rate of real GNP per capita continues to be one of the highest among advanced economies and the unemployment rate one of the lowest... Following a decade of close-to-balance-or-surplus fiscal positions, the general government surplus rose to almost 3 percent of GDP in 2006 and net debt fell to 12 percent of GDP...
This performance has been underpinned by outward-oriented policies, prudent fiscal policy, low taxes, and labor market flexibility.
Although the report noted some 'vulnerabilities', including:
...a deterioration in global financial market conditions and the growth outlook of the United States, and the adjustment to a cooling of the housing market...
And that, in the Republic of Ireland:
...bank lending to construction and real estate firms amounts to 47 percent of GDP. Most lending to households is at variable rates and household debt amounts to 160 percent of household disposable income.
Nevertheless, they emphasised:
Directors [of the IMF] welcomed the indicators confirming the soundness of the Irish banking system, including the stress tests suggesting that cushions are adequate to cover a range of shocks even in the face of large exposures to the property market...
The Executive Directors commended Ireland's continued impressive economic performance... This performance has been underpinned by outward-oriented policies, prudent fiscal policy, low taxes, and labor market flexibility.
Given the Irish economy's strong fundamentals and the authorities' commitment to sound policies, Directors expected economic growth to remain robust over the medium term.
The economic policies of the Irish Republic also received, and still receive, top marks from the Wall Street Journal and the USA's premier right wing economic think tank, the Heritage Foundation. The Index of Economic Freedom, published annually by the WSJ and Heritage, lists Ireland as the most 'economically free' nation in Europe, remarking that:
The country has one of the world’s most business-friendly environments, especially for investment... In January 2003, the government lowered the corporate tax rate to 12.5 percent—far below the EU average. Because of its pro-business government policies, Ireland receives a substantial portion of US investment directed at the EU.
Small state, big scams
Though gushingly expressed, George Osborne's exposition of the Irish 'small state' and its economic 'dynamism' had a basis in reality. Between 2004 and 2007, Ireland spent a mere 34.2% of its GDP on welfare and the public sector, the lowest in the EU and also the second lowest of the developed OECD countries (only South Korea had a lower level of state expenditure). By comparison, the public component of GDP in France was 52.9%, in Denmark 52.5%, in Germany 45.8%, and in Britain 43.9%.
In 2007, the Irish Republic's government debt was also among the lowest in the EU, at 25% of GDP; and the Irish state was running a balanced budget, with slightly more being raised in taxes than was expended on benefits and services.
But this gave the people in the Irish Republic no protection from the emerging crisis. Other countries which had state spending below the OECD average, but nevertheless have been severely battered by the recession, include the USA, Japan and Spain.
The Republic of Ireland's high GDP growth until recently was also no 'miracle'. It was achieved firstly by massive inward investment by transnational companies, secondly by the huge rise in Irish property prices caused by that international rush to transfer commercial operations to Ireland, and thirdly by the speculative boom in real estate and construction which followed.
Why did so many transnational companies re-locate to Ireland? Not only because of the advantages of an English-speaking workforce and melieu, with trade access to both the USA and the EU; but also and most significantly because of the Irish tax regime- not only the very low official rate of corporation tax, undercutting nearly all competitors, but a laxity of regulation which allows firms with international operations to evade even the 12.5% tax rate which is nominally charged in the Irish Republic.
Google, the main example touted by George Osborne in 2006, has reduced the corporation tax on its overseas operations to a mere 2.4% by exploiting the opportunities offered by having a base in Ireland. As Bloomberg News reported on 21st October:
Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda.
Google’s income shifting -- involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” -- helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries.
“It’s remarkable that Google’s effective rate is that low,” said Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Department. “We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent.”
The U.S. corporate income-tax rate is 35 percent. In the U.K., Google’s second-biggest market by revenue, it’s 28 percent.
Google, the owner of the world’s most popular search engine, uses a strategy that has gained favor among such companies as Facebook Inc. and Microsoft Corp. The method takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax.
The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad as the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros.
Facebook, the world’s biggest social network, is preparing a structure similar to Google’s that will send earnings from Ireland to the Cayman Islands, according to the company’s filings in Ireland and the Caymans and to a person familiar with its plans. A spokesman for the Palo Alto, California-based company declined to comment.
The Bloomberg article added:
As a strategy for limiting taxes, the Double Irish method is “very common at the moment, particularly with companies with intellectual property,” said Richard Murphy, director of U.K.- based Tax Research LLP. Murphy, who has worked on similar transactions, estimates that hundreds of multinationals use some version of the method.
The high corporate tax rate in the U.S. motivates companies to move activities and related income to lower-tax countries, said Irving H. Plotkin, a senior managing director at PricewaterhouseCoopers LLP’s national tax practice in Boston. He delivered a presentation in Washington, D.C. this year titled “Transfer Pricing is Not a Four Letter Word.”
“A company’s obligation to its shareholders is to try to minimize its taxes and all costs, but to do so legally,” Plotkin said in an interview.
Perhaps inspired by the Irish example, one of George Osborne's first acts as UK Chancellor was to announce the phased reduction of UK corporation tax from 24% to 24%.
Yet, despite this tax-haven policy, which the IMF and the EU have permitted the Irish government to perpetuate, the 'Celtic tiger' is now revealed as a paper tiger, twisting and burning brightly from the sparks of the meltdown which originated in the United States. The privately owned Irish banks, which due to the absence of 'bureaucratic planning controls' invested 47% of the entire GDP of the country in speculative real estate and construction operations, have collapsed and have had to be nationalised. But the private sector speculators have got off scot-free; the enormous debts incurred by their 'investments'- nobody knows with any confidence how huge those debts will prove to be- have been transferred to the public sector.
Of course, those who gained least from the 'Irish miracle' will pay the most, through cuts in public services, wages, benefits, and a rise in VAT and other charges whose main effect will be felt by the poorest members of society.
Disproving the right-wing claim that 'austerity' (applied only, of course, to the public sector, the working class and the poor- not to the rich) is the way to regain economic prosperity, the GDP of the Irish Republic has already shrunk by 14% since the cuts programmes began to be implimented, and from having a balanced budget in 2007, the government now has a deficit of 32% of GDP.
The bailout, officiated by the European Union and the IMF with the participation of the UK government, enforces that the people in Ireland, who have been made to take on the debts of their banks, must pay the money which has accrued to the foriegn bond holders, including the German and British banks which speculated on the 'Irish miracle'. For lending the Irish government those funds, which are to be used to reimburse the coffers and to pay the mega-million bonuses of UK and other international bankers, the Irish people will be charged 5.8% interest. The interest on the loan will amount to up to 20% of the annual tax revenue of the Republic of Ireland.
Ambrose Evans-Pritchard, a right-wing euroskeptic maverick who is the international business editor of the Daily Telegraph, nevertheless summed up the essence of the deal agreed in Brussels, in a blog article entitled 'Ireland's debt servitude':
Stripped to its essentials, the €85bn package imposed on Ireland by the Eurogroup and the European Central Bank is a bail-out for improvident British, German, Dutch, and Belgian bankers and creditors.
The Irish taxpayers carry the full burden, and deplete what remains of their reserve pension fund to cover a quarter of the cost.
This arrangement – I am not going to grace it with the term deal – was announced in Brussels before the elected Taoiseach of Ireland had been able to tell his own people what their fate would be.
And having dealt with Ireland, the speculators in national meltdown are eyeing their next potential targets: Portugal, Spain, and even possibly Belgium. Ambrose Evans-Pritchard describes these financial 'investors' as 'improvident', but they are doing very well for themselves. And, with national or international state bailouts following every economic crash, the bigger the clouds, the bigger the lining of silver that rains down on them.
But there is also another, and quite different, silver lining. On Saturday 27th November, over 100,000 people marched in Dublin to protest against 'austerity' and the bailout. The equivalent, in relative population terms, would be a demonstration of 1.5 million in a country the size of Britain. The day before, the Sinn Féin candidate Pearse Doherty, running on an explicitly anti-cuts programme, won an overwhelming victory in a parlimentary by-election in the Donegal South West constituency. In the general election held in 2007, Sinn Féin came third in that constituency, behind the main establishment party candidates of Fianna Fáil and Fine Gael.
Though the profits of the speculators may for now be guaranteed, there can be no guarantee that the collective struggles against the outcomes of the 'free market' capitalist system will not spread; and it may even transpire that an understanding of the parasitic nature of that system will increasingly inform those struggles.