HOW WORRIED SHOULD WE BE ABOUT TECH WOES?

Article in Irish Examiner 7/11/2022

The contrast between what the then UK Chancellor, Kwasi Kwarteng, did with his mini-budget and the subsequent market reaction, and what the two Irish ministers did with their budget on 27th September, was amply demonstrated by the latest set of Exchequer returns. Tax revenue buoyancy remains incredibly strong, with the overall tax take up by almost Euro 13 billion in the 10 months to the end of October. Income tax continues to perform very strongly, up by 15.5 per cent on the same period last year. This is reflecting the ongoing strong labour market; the high quality of employment that is being created in the economy; and the very progressive nature of the income tax system. Of most interest however, is the ongoing remarkable buoyancy of corporation tax receipts. Euro 16.2 billion was collected in the year to October and it has now overtaken VAT as the second largest tax heading.

The overall Exchequer has a surplus to the tune of Euro 7.3 billion, compared to a deficit of Euro 7.4 billion in the equivalent period in 2021. This is a very strong surplus and is being driven primarily by the amazing level of tax revenues being generated. The Department of Finance and the Minister were quick to point out that the exceptional receipts from corporation tax are putting an overly positive gloss on the public finances and that it would be dangerous to base future spending on what could be a transitory tax base. Indeed, the concentration risk on the corporation tax front should be of concern and should be watched closely. However, if corporation tax receipts are excluded, tax revenues in the first 10 months were still 15.4 per cent or Euro 6.4 billion ahead of 2021. Of course there are Covid-related distortions, but still the tax performance is indicative of a still strong level of economic activity.

The bottom line is that this tax revenue buoyancy facilitated the funding required to delivery the very expansionary budget at the end of September without having to resort to borrowing. This stands in marked contrast to the recent UK experience.

Here in Ireland, there is of course cause for caution and concern. Global interest rates are still rising aggressively and it struck me as incredibly stark when the Bank of England governor this week stated that the UK economy is now in recession, but still delivered an increase of 0.75 per cent in interest rates. Likewise, the US Federal Reserve delivered a similar increase and we can be pretty certain that the ECB is not yet finished. All of this adds up to what is likely to be a very challenging year ahead for the global economy, and of course all of this will be compounded by the ongoing crisis in Ukraine and the lack of any apparent exit strategy for the evil Putin.

This intensely uncertain global outlook will obviously impact on Ireland and its future ability to generate taxation at the same rate as in recent years. There is another emerging trend that should be watched carefully, and that is the growing pressures on the global tech sector, broadly defined. Twitter is about to lay off 3,700 workers at least; Strip announced at least 1,000 job layoffs, or 14 per cent of its global workforce, citing ‘over-hiring’ and too much optimism about the growth of the internet economy this year and next; and a number of other companies such as Amazon and Meta are reporting  weaker results and in some cases a freeze on hiring. The tech bubble is under pressure.

Given that many of those companies provide lots of employment and tax revenues in Ireland, these trends should be a cause for concern. However, the strength of the Chemical and Pharmaceutical sector does provide a very solid anchor for Ireland. In the first 8 months of this year, overall merchandise exports expanded by 30.2 per cent. Within this, Chemicals and Related Products, which includes Organic Chemicals and Medical and Pharmaceutical Products, saw export growth of 34.9 per cent. This component accounts for 65 per cent of total merchandise exports. It has to be hoped and expected that many of those firms here in Ireland are largely recession proof to a high degree and that they are deeply embedded in the Irish economy.

I guess the overall conclusion is that while Ireland is still doing very well and has some very important attributes, the global headwinds that are gathering momentum should be watched and manged closely to the greatest extent possible. Intense uncertainty is now the global mantra.