Transcript Irish unemployment rate, 1961-2004

The Centre for the Study of Small States,
The Source of Wealth in Small States
University of Reykjavik
Small States as Financial Centres
Ireland as a Case Study
Brendan Walsh
University College Dublin
14th September 2007
1
Jan 1988
2
May 1997
3
Oct 2004
4
The Irish Experience
Between the 1980s and the end of the 1990s,
Ireland moved quickly up the
international league tables in terms of
average living standards.
The Irish labour market was also
transformed from one of the worstperforming to one of the best-performing
in Europe.
5
Rising living standards
Despite the opening up to external trade and
investment in the 1960s and entry to the EEC
in 1973, Ireland in the 1980s remained
relatively poor by western European standards.
However, between the late 1980s and the year
2000, very rapid growth in GNP raised Irish
income per person (adjusted for differences in
purchasing power) to or even above the EU
average.
6
GNP/GDP growth rates
Ireland and EU
12
10
8
6
%
4
2
0
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
-2
7
Comparison of living standards in 1986
(EU average = 100)
•
120
100
80
60
40
20
0
Ireland (GNP)
Portugal
Spain
Greece
8
Comparison of living standards in 2004
(EU average = 100)
•
120
100
80
60
40
20
0
Ireland (GNP)
Portugal
Spain
Greece
9
Comparison of standards in 1986 and 2004
(EU average = 100)
•
120
1986
2004
100
80
60
40
20
0
Ireland
(GNP)
Portugal
Spain
Greece
10
Not “just” wealthier . . .
Healthier also Irish life expectancy
had been slowing rising, and
mortality rates slowly declining
But since the late 1990s they have
surged ahead and caught up with the
most advanced nations
Belies the complaints over the poor
delivery of state controlled health
services
11
During the boom
The rich got richer and the poor . ..
Got richer too
Dramatic decline in absolute poverty
The the biggest cause of social exclusion –
unemployment – fell extraordinarily
raidply during the second half of the
1990s
12
The Irish labour market was
completely transformed
Since the early nineteenth century Ireland
had been a prime example of a “labour
surplus economy”
• Overt unemployment kept in check
– By emigration
– By large subsistence agricultural sector
– By low labour force participation rates
Until the 1980s….
13
Irish unemployment rate, 1961-1986
18
16
14
12
10
%
8
6
4
2
0
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
14
Surge in employment in the 1990s
2,200
thousands
2,000
1,800
1,600
1,400
1,200
1,000
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
15
Irish unemployment rate, 1986 - 2004
18
16
14
12
%
10
8
6
4
2
0
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
16
Irish unemployment rate, 1961-2004
18
16
14
12
%
10
8
6
4
2
0
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
20
06
17
Irish and EU unemployment rates, 1961-2005
18
16
14
12
%
10
8
6
4
2
0
19
61
19
64
19
67
19
70
19
73
19
76
19
79
19
82
19
85
19
88
19
91
19
94
19
97
20
00
20
03
18
A renewed population
Net emigration turned into net immigration
so that by the end of the 1990s Ireland had
the fastest growing population and labour
force in the EU
– reversing the long decline in our
population that was the clearest symbol
of our national failure after
Independence
19
Net Migration Rate
20
per 1000 population
15
10
5
0
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
-5
-10
-15
20
Explaining the boom
• No single “magic bullet”
We can classify the key factors into
• Favourable demand side shocks and
• Favourable supply-side responses
21
Demand-side developments
• Fiscal correction and renewed confidence
– Reduced tax burden
– Cross party support for tough policies
• Falling real interest rates
– Run-up to Euro
• Strategic exchange rate weakness
• Global boom
22
Supply-side developments
• Increased inflow of FDI
– Full integration into the EU
– Increased attractiveness of Ireland’s low corporation tax
regime
– Investments by premier US companies in IT and
Pharmaceuticals
• Increased inflows of EU structural funds
23
Supply side developments
• Elastic labour supply
– High initial unemployment
– Return migration
– Low initial participation rates
• Rising educational attainment of
outflow from education system
• Wage moderation
– Role of centralised wage bargains
24
Structural labour market reforms
• Stricter social welfare regime
• Falling unemployment benefit
replacement ratio
• Active labour market policies
25
Changes in social welfare code
• Stricter eligibility criteria
• Reduced replacement ratio
–
(facilitated by cuts in income tax rates)
•
•
Some reclassification of the
unemployment into “inactive”
More spending on active labour market
policies, less on income support
26
The Contribution of Tax Policy
• The rising burden of taxation, and
widening tax wedges, contributed to the
protracted recession of the 1980s
• The reversal of these trends contributed
to the rapid recovery of the 1990s.
– A return of “social partnership” in 1987
facilitated these developments
– Trade of nominal wage claims for income tax
cuts
27
The facts
• During the first part of the fiscal
correction, the economy seemed to
shrinking
• When the emphasis shifted to
expenditure control – rather than tax
increases – the economy grew strongly
• Cause and effect less straightforward!
28
Taxes as % of GNP
45%
40%
35%
30%
25%
20%
15%
10%
5%
Taxes on incom e
Taxes on Expenditure
Total
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
0%
29
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
Taxes as % of GNP and Real Growth
45%
35%
30%
20%
12%
10%
40%
8%
6%
4%
2%
0%
25%
-2%
-4%
30
Change in tax burden and real growth
rates
37
27
%
17
Change in tax
burden
7
-3
-13
1979-88
1989-2003
Change in tax
burden
-23
31
The tax reductions delivered under
social partnership
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1979
1984
Average tax rate (incl employee
social security contirbutions)
2002
2007
Marginal tax rate (incl employee
social security contirbutions)
32
Corporation Tax Policy
The tax regime experienced by business in
Ireland has remained stable over long periods
and consistently favour a low tax rate on
profits:
• A zero tax rate on profits from exports lasted
from 1954 to 1980.
• A 10% tax rate on manufacturing profits
applied from 1980, and will continue until 2010
for those entitled to it in July 1998.
• A 12½% tax rate on corporate trading income
applies from 1/1/2003 and is EU approved.
33
Corporation Tax Policy
Full repatriation of profits was always
permitted
However, a generous corporation tax
regime not sufficient to attract FDI:
But when combined with a well-educated
labour force, competitiveness wage levels,
and open access to the large EU market,
it worked wonders
34
Not all the effects of this policy are
positive
Transfer pricing and the growth of an entrepôt
economy
Sectors with extraordinarily high value added per
employee
Round Island One (Microsoft)
• Turnover $3.9 billion
• Value added per employee $2.5 million
• Corporation taxes paid in Ireland: $3.8 million
35
Impact of transfer pricing
Very marked in sectors such as
• Pharmaceuticals
• Soft ware
• Microelectronics
• Certain food concentrates (Coca Cola)
The gap between GDP and GNP is now
15% of GDP – a world record
36
Corporation Tax Policy
The present uniform low rate of corporation tax
has been used in particular to drive the
development of Ireland’s international
financial services sector, where employment has
grown spectacularly.
It has also generated uneasy among some EU
members, who fear that “tax competition” will
lead to a “race to the bottom”
Ireland is strongly opposed to “tax
harmonization” as a response to this.
37
International Financial Services
The International Financial Services Centre
(IFSC). established with EU approval as a taxincentive zone in 1987.
Initially a ring-fenced tax jurisdiction in a
designated area in the north inner city of
Dublin.
Since December 2000 new cross-border
international-financial services companies are
taxed at the new standard rate of 12.5 per cent
The Centre has become an integral part of the
jurisdiction of Ireland
38
International Financial Services
The initial employment target of 8,000 jobs has long been
exceeded.
The level of employment in the wider Irish international
financial services sector has reached 22,000 by 2006.
The largest single sub-sector was banking, which employs
9,923, followed by Fund Management, with 9,227, and
Insurance, with 3,027.
Thus the original scheme has been extremely successful,
exceeding its overall employment targets and creating a
significant international financial service centre in what
was until recently a derelict area of Dublin.
Attracted large inflow of service FDI
39
Fallout from US sub-prime mortgage market
• On 15th August 2007 Sachsen LB Europe plc
confirmed that its Dublin subsidiary in Dublin,
the Ormond Quay conduit, had to be rescued
by a loan of €17.3 billion.
• This episode highlights the need to have a
single financial regulator across the Eurozone
and drew some unwelcome attention to the
nature of some of the firms in Irish
International Financial Services Industry.
40
Summary
Many favourable factors came together to create
the Irish economic “miracle”
Rapid economic growth was facilitated by
• Favourable external developments
• A successful fiscal correction
• An elastic labour supply and increased
flexibility of the labour market
• Increased inflows of FDI
• Increased flows of EU structural funds
41
Summary
The reversal of the upward trend in the burden of
taxation after the mid-1980s was undoubtedly a
key feature of the fiscal adjustment
This reduced tax wedges, especially on labour,
and stimulated an increased supply of work
effort
It was facilitated by the return to “social
partnership” in 1987
The effectiveness of Ireland’s low corporation tax
rate greatly increased in the new global
economic environment of the 1990s.
42
Summary
The extension of Ireland’s low corporation
tax rate to a ring-fenced International
Financial Centre in Dublin in 1987
proved hugely successful
There are now 22,000 people employed in
International Financial Services in
Ireland and the sector has been
integrated into the economy.
43
The future…
The economy has now entered an
adjustment phase.
The construction sector, which accounts for
12.5% of employment and fuelled a very
high level of immigration, is now
contracting
How rapidly?
The exceptionally buoyant fiscal situation is
deteriorating
44
The future
It remains to be seen how steep the
slowdown will be and which sectors of
the economy will be the engines of
growth going forward
45