Budget 2024: Ireland’s Sovereign Wealth Fund Announcement Aims to Capitalise on “Leprechaun Economics”
By News Reporter David Twomey
Ireland’s magical economic growth over the last decade has been dubbed “Leprechaun economics”; the nation’s apparent success is highly inflated by its use as a corporate “tax haven” by large multinational companies. But now, there are plans to use this pot of gold to massively strengthen Ireland’s future in pillars of sovereign success: healthcare, pension and climate issue prevention. In the 2024 budget, it was announced that Ireland would establish two sovereign wealth funds (SWFs), investing a large stake of the corporate tax windfall to develop future-proofing funds, one of which is projected to potentially be worth €100 billion by 2035.
Ireland’s History and Present Influence of Corporation Tax
In 1997, Ireland implemented a corporate tax rate of 12.5 per cent. In a highly educated, English speaking European nation, American multinationals (who must pay a 21 per cent corporation tax on profits in the US) flocked to the country, and this has remained as a cornerstone of Irish economic policy. This has been a contentious issue domestically and abroad, yet despite continuous complaints from the EU Ireland has firmly held this tax rate. In the past, many multinationals used Ireland as a technical European headquarters but filtered profits to be booked in offshore tax havens. However, after the OECD tax reform which allowed intellectual property assets (such as copyrights and licenses) to be moved to Ireland, there has been far more profit booked in Ireland. The restructure of multinationals’ accounting led to the term “leprechaun economics” coined by economist Paul Krugman in 2016 after Ireland’s gargantuan GDP growth of 26 per cent was found to be largely due to Apple changing accounting practices. Financial Time’s columnist Adam Tooze described Ireland’s recent figures as “…spectacularly distorted by its role as an offshore tax haven”. International criticism has continued, and the OECD has implemented a minimum rate of 15 per cent worldwide starting next year. With the European OECD average corporation tax being 21.5 per cent, this actually gives Ireland a substantial boost in expected revenue. Multinationals are already invested in Ireland, and with nowhere in the European OECD offering lower rates, it will only add to the Irish coffers’ pot of gold.
A potential risk of this strategy in the long run is that the influence of these corporations’ continued supernormal profits weighs heavily on the success of the current Irish economy. The Department of Finance has stated that the Irish State depends on just 10 large companies for half of all corporate tax revenue: between 2017-2021, it is estimated that a third of all corporation tax came from just three companies. Any fluctuation in performance or legality of bookkeeping for these companies could spell disaster for the budget. It could also spell disaster for the booming labour market; Ireland’s unemployment rate is currently below European average at 4 per cent. One third of the Irish workforce are employed by multinationals and these account for over half of all employment taxes. Savvy alleged loopholes, and perhaps the luck of the Irish, has led Ireland to not have to change this economic policy for years. But with the state so dependent of foreign companies’ influence, a change in their fortunes would be an economic issue which the State could offer no solution.
Yet it is undeniable that this “leprechaun economics”, despite tax haven criticism, corporate dependency and misleading data, has offered Ireland unprecedented wealth. Last year, corporation tax receipts totalled €22.6 billion, making it Ireland’s second largest source of tax revenue. Ireland has a surplus budget of €10 billion this year, a scarce asset in Europe, and this is expected to grow 60 per cent next year; the unique role of corporations in the nation is abundantly important. A quandary for the Government is that is facing near-constants complaints to greatly increase public spending, backed by the fact that last year’s Government spending as a percentage of GDP was at an all-time low. However, due to Irish inflation being at 6.3 per cent (the EU target is 2 per cent), splurging this tax revenue on spending now risks this already worrying rate to rapidly climb. On the other hand, setting it aside as a “rainy-day” fund lies far below potential security and growth. The implementation of the proposed sovereign wealth funds offers Ireland a chance to capitalise on this supernormal revenue while ensuring long-term protection against multinational issues.
What is a Sovereign Wealth Fund?
Sovereign wealth funds (SWF) are “government-owned investment funds charged with managing and, ultimately, investing a country’s accumulated wealth in private financial markets” (Dixon, 2011). Rather than just sitting on a rainy-day fund, savvy investing in a SWF can rapidly grow a nation’s wealth. A notable European example is Norway’s Government Pension Fund: after finding oil, Norway decided to nationalise the profits and starting in 1996 began investing into their SWF, with a target of funding the Norwegian pension system. This fund has far surpassed that goal, and now owns on average 1.5 per cent of all listed stocks worldwide, funds 20 per cent of Norway’s budget, and is currently valued at over $1.3 trillion. Although Ireland’s SWFs will not reach such an astronomical level, treating corporate tax like Norwegian oil, a lucrative but finite resource, can give Ireland security against its dependency on this revenue stream.
Ireland’s SWFs
Corporate tax receipts are not indefinite, and Finance Minister Michael McGrath has confirmed that “We have a window of opportunity we must grasp”.
McGrath has planned to grasp on this by announcing the planned establishment of two funds in the 2024 budget: the “Future Ireland Fund” and the “Infrastructure, Climate and Nature Fund”. The latter, amongst other areas, is focused on supporting climate-related initiatives in the medium and long term to assist with Ireland’s goal of climate neutrality and the effects of climate change. Annual investments of €2 billion from corporate tax receipts for the next seven years is planned to maintain development in the case of an economic shock. The Future Ireland Fund, funded by corporate tax windfall, proposes to be a colossal long-term asset for the state to pay for growing healthcare and pension costs, similar to Norway’s SWF. The Government will pay 0.8 per cent of annual GDP, currently around €4.3 billion, into the fund for every year from 2024 to 2035. This would also be boosted by an injection of €4.1 billion next year from an existing fund which is being wound up. This fund will not be accessible until 2040; by that time, from the annual payments and predicted growth, it is expected to be worth well over €100 billion.
This “war chest” for healthcare and pensions could be a lifeline for the success of the Irish economy. Projected demographics gives Ireland an ageing population, and healthcare has already been systemically underfunded. The fact that this will not be able to be touched until 2040 ensures fund protection regardless of short-term policy or government change (which by polls’ account is expected soon). The Government must ensure they learn from the erstwhile attempt of establishing such a fund in the heyday of the Celtic Tiger: the National Pension Reserve Fund (NPRF) saw €4 billion pulled out of the fund to help prop up financial institutions in 2009. Strict and prudent gatekeeping of a fund predicted to be worth 10 per cent of Ireland’s annual GDP must be defined and implemented before the foxes inevitably return to the fence.
Although the risk of market changes means this fund is dependent on the world economy for growth, sustainable, (the NPRF saw its value drop by 30 per cent in 2008) low risk investing offers a strong chance of relatively continuous progress. The Government is yet to announce their investment strategy, but successful SWFs such as in Norway hold a portfolio of highly diversified assets, mainly targeting stock, real estate, and sustainability projects to mitigate risk of a sector’s collapse.
Ireland’s SWF strategy can be a sound financial method of futureproofing some of the country’s most important budget sectors. Although details of its development and investment strategy are yet to be announced, long term planning is vitally needed; the Irish economy is heavily dependent on international success, and post Celtic-Tiger it is clear that a lack of preparation when revenue is rocketing can lead to dire consequences for the entire country. “Leprechaun Economics” has been dependent on the rainbow of multinationals to not dry up, but using the foreseeable future’s abundant corporation tax for a sovereign wealth fund may ensure that Ireland may not have to have a rainy day.
