IBEC’s pre-budget submission is a tour de force. In the name of ending austerity it calls for . . . more austerity; namely, reducing public expenditure in real terms. This is done to pay for tax cuts that will primarily benefit higher income groups. And in calling for real cuts in investment it then proposes to use fiscally inefficient public-private-partnerships which will drive up the cost of investment in order to create new channels of profits. And in all this it manages to avoid the elephant in the room – the long-term chronic under-investment of Irish business in the economy.
Irish business has gotten all the breaks. Historically, it has been the beneficiary of ultra-low corporate tax rates and social insurance while paying below-average employee compensation (compared to most other EU-15 countries). And, yet, it is a chronic under-investor. The following data is taken from the EU Ameco database.
In 2012, Irish corporate investment is at the bottom of the table. Even when adjusted for multi-national accounting practices (which is what the Irish Fiscal Advisory Council’s hybrid-GDP effectively does), we come in marginally ahead of battered Greece. Our corporate sector invests 38 percent less than the EU-28 average – or nearly €6 billion less. It invests less than half the level that pertains in other small open economics (SOE) – or nearly €9 billion less. This is pretty bleak.
But it is not unusual. It is not just a blip due to our severe recession. Irish corporate investment has been an historical under-achiever.
Even during the bubble period when profits were booming and credit flowing, Irish corporate investment never reached EU levels, never mind the levels of our peer group – other small open economies. These are big numbers. Over the last decade:
- The Irish corporate sector under-invested by nearly €50 billion when compared to the EU-28
- When compared to other small open economies, the under-investment was €75 billion.
There is a caveat here: we don’t know to what extent corporate investment went into construction. The data doesn’t breakdown this information. However, it seems reasonable that Irish corporate investment disproportionately relied on construction activities during the boom period. If so, then Irish corporate investment in productive activity would fall even further in comparison to other EU countries.
We should take time out to deal with another measurement – foreign direct investment, or FDI. These numbers show a flood of money coming into Ireland from abroad. FDI into Ireland makes up 18 percent of GDP in contrast to the EU average of 2.5 percent. When criticism of corporate investment is aired, the FDI numbers are thrown about.
However, the FDI numbers measure ‘flows’; they are not an indicator of investment that actually ‘sticks’ in the economy.
The CSO classifies ‘reinvested earnings’ as investment for the purposes of determining foreign investment flows. However, the CSO defines this as ‘the direct investor’s share of the undistributed earnings of its branches, subsidiaries and associates.’ In effect, this is not so much ‘reinvested’ as ‘undistributed’.
Further, there are indications that the IFSC plays a prominent part in FDI flows, much of which has to do with (re)financing companies unrelated to the domestic economy.
A recent paper by the Central Bank observed:
‘FDI data in isolation do not give a good indication of the impact of foreign owned companies on the Irish economy. It is necessary to consider FDI statistics along with ‘real’ economic indicators such as employment, sales growth and value added to the economy.’
One of the ‘real’ economic indicators is actual investment – as recorded in national accounts by the CSO and Eurostat. This investment, which creates real activity in the economy comprises:
- Dwellings & other buildings and structures (roads, bridges, airfields, dams, etc.)
- Transport equipment (ships, railway, aircraft, etc.)
- Other machinery and equipment (office machinery and hardware, etc.)
- Cultivated assets (managed forests, livestock raised for milk production etc.)
- Intellectual property-type fixed assets (mineral exploration, software and databases, and literary and artistic originals, etc.)
So when we discuss corporate investment, let’s keep an eye on real investment, not the ephemeral flows of money that do not make a significant contribution to growth.
So we return to the question: why? Why is corporate investment so low given all the incentives, tax breaks and ultra-low rates? This is not about bashing business or employer organisations. We need a strong, dynamic corporate sector that makes a real contribution to the Irish economy.
But we need an honest dialogue about what is wrong. There is a fundamental flaw at the heart of Ireland’s market economy. If we don’t ask the hard questions we won’t get the right answers. We won’t get a recovery – just a lot of statistics that cover up a dismal reality.