In today’s Finshots, we discuss the rare economic boom in the Republic of Ireland and whether it’s sustainable in the long run.

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The Story

The Republic of Ireland is currently what any country dreams of — its economy seems to be in an ideal spot.

Unemployment is at 4%, meaning most people who desire a job have one. Inflation is at an ideal 2%, which means prices aren’t rising too quickly. And guess what? The government’s finances are in great shape, too. In the last couple of years, the government ran a budget surplus, which is a fancy way of saying it made more money than it spent. And they expect to keep this streak going in 2024 and 2025, even while spending more and cutting taxes.¹

Impressive, right? You might wonder what the secret to Ireland’s economic success is.

And to understand that, we’ll need to rewind a bit.

See, in the early 1950s, Ireland’s economy was primarily agrarian. Unemployment was sky-high, and growth prospects were bleak. People were emigrating to other countries in search of better career opportunities. And the government realised the only way out was to attract foreign investment and become a hub for global businesses.

So, in the late 1950s, it made a radical move and announced massive tax incentives for companies exporting goods from Ireland. This attracted numerous American giants looking for a cost-effective way to enter the vast European markets. Over time, the tax rate increased to 10%, and later, in the late 1990s, Ireland introduced a flat 12.5% corporate tax rate across the board while other countries went on charging much higher rates.

So obviously, this approach turned Ireland into a magnet for U.S. companies, especially tech and pharmaceutical giants. It brought in the much-needed capital and, importantly, created thousands of decent-paying jobs. And by 2017, foreign multinationals accounted for over 50% of Ireland’s GDP. Yup! And just last year, more than a quarter of the country’s revenue came from corporate taxes.

But it wasn’t just low taxes that drew companies in. Ireland also had very flexible rules about where a company could say it was based for tax purposes.

At the start of the century, Ireland switched to a rule called the ‘Incorporation Test’, which meant that any company registered or incorporated in Ireland was automatically deemed Irish for tax purposes. This allowed companies to avoid paying taxes in other countries where they actually operated or made money.²

This nudged many big companies to exploit a loophole these rules created. They set up operations in Ireland but structured themselves, so they weren’t officially “tax-resident” anywhere. This meant they could avoid paying most, if not all taxes. It’s like setting up a business in two different countries and telling each one, “I’m based in the other place”, so you don’t pay taxes in either. These companies even came to be known as “stateless companies.”

And Ireland didn’t just look the other way, it actively promoted these rules.

The outcome? Well, all this led to the notorious ‘Double Irish’ strategy, where companies like Apple, Google, and Pfizer used this loophole to park their European profits in Ireland, paying minimal taxes.

By the early 2010s, this strategy attracted global scrutiny, and Ireland had to phase out the Double Irish. However, it managed to keep its sweet 12.5% corporate tax rate, which was enough to keep companies from leaving Ireland.

These multinationals brought with them thousands of well-paying jobs, which eventually fuelled economic growth. It also helped Ireland develop a tech-savvy workforce that is trained in high-demand fields like technology, finance, and pharmaceuticals, creating a labour market that’s skilled and competitive. The government invested in infrastructure and urban development to accommodate these companies, especially in cities like Dublin. And these changes benefited local Irish businesses that provide services to multinational employees, from housing to retail.

Despite the low tax rates, the sheer volume of companies meant that the government still collected significant revenue, which it used to fund public services and fuel further growth.

And that’s where the catch is. While the growth we spoke about recently would paint a rosy picture, Ireland’s stellar economic numbers might not be telling us the whole story.

Look at 2015, for instance—when Ireland’s GDP growth hit an eye-popping 26%. But this growth wasn’t because of a sudden boom in local production or a surge in consumer spending in Ireland. Instead, it was mainly due to the accounting manoeuvres carried by multinational companies. Economist Paul Krugman famously coined the term “leprechaun economics” to mock the almost magical spike in GDP that seemed too good to be true.³

Because here’s what was happening: In 2016, Ireland let companies pay lower taxes on profits from patents and intellectual property (IP). So, big companies moved their IP to Ireland to cut their tax bills. They also used ‘contract manufacturing’—booking overseas transactions in Ireland even though the actual production was happening elsewhere. And all of these inflated GDP figures, but not because of any real on-the-ground economic boom.

So yeah, while these strategies have boosted Ireland’s GDP figures and tax revenues, they’ve also made the economy heavily reliant on U.S. giants. The issue is that Ireland’s economic growth is largely driven by accounting practices rather than a real expansion of local businesses or any productivity.

And it could be a risky bet to keep things running like this. Because if global tax regulations tighten or other countries offer similar incentives, the multinational companies might leave, taking their profits and investments with them.

Nevertheless, there’s an overlooked aspect here. Ireland’s unique positioning as an English-speaking gateway to Europe, with a highly educated workforce, might still play in its favour even as tax advantages dwindle.

So yeah, the real test for Ireland will be how well it can pivot from being a tax haven to becoming a true innovation-driven economy. And maybe until then, Ireland’s story is one of balancing short-term gains with long-term resilience.

Until next time…

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Story Sources: The Economist [1]; RTE [2]; The Irish Times [3]

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