RIP Ireland’s economic miracle. A combination of tax cuts and increased public spending — coupled with the credit crunch — has left Ireland with a budget deficit of 32 per cent of its GDP this year. The credit-inflated bubble has now well and truly popped, the draconian austerity measures have failed — as many predicted they would — and the Irish government appears close to being bailed out by the EU.
Along with Greece, the Irish experience from the nineties into the noughties seems to be a perfect example of how not to do things. But in 2006 — at the very apex of the Irish bubble — one economic sage decided that Ireland was actually a fine example of how to run an econmy. His name?
Writing in the Times (pre-paywall, folks), the then shadow chancellor declared:
Ireland stands as a shining example of the art of the possible in long-term economic policymaking.
Long-term, eh, George?
There was little “long-term” about the artificial housing and banking boom that Ireland underwent in the late 1990s and early 2000s.
Despite Osborne’s claims, Ireland did not surge ahead because of its highly regarded education system or increased research and development at universities.
Ireland boomed instead on a toxic mix of cheap credit, lax banking regulation and by becoming a borderline tax haven.
Slashing corporation tax — a move continually hailed by Osborne as the way forward — simply weakened Ireland’s tax base even further, making the recovery that bit more difficult.
We should learn from Ireland’s mistakes. Unfortunately, however, Osborne wants to copy them — at least judging by Osborne’s cuts to universities, the 3.4 per cent reduction in the education budget and his continued obsession with reducing corporation tax — to the point where companies could end up paying less tax than their cleaners.
The case of Ireland is a cautionary tale, not an instruction manual.
UPDATE: Alphaville over at the FT points out another cautionary tale from the Irish experiment.
“Sovereign bailouts involve a certain quid pro quo.
For a start, there’s been talk that Germany is pushing for the country’s low, low 12.5 per cent corporate tax rate to be hiked.
Awkward. And perhaps not least for a certain tax-avoiding search engine.”
Which tax-avoiding search engine could that be? Why, the one that George Osborne bragged about speaking to in his Times op-ed: “I will be asking Google executives today why they set up in Dublin, not London.” Alphaville explains exactly why Google set up in Dublin:
“Google Ireland sends the earnings on a tax-lite journey to the Netherlands, whence a shell subsidiary passes it on practically untouched to a Bermudan holding, basically. They call it a ‘Double Irish’.
Jammy stuff. Until your tax haven files for a bailout from some very angry Germans, that is. And 26 per cent of your earnings is a lot to put at risk…”