In Irish folklore, the leprechauns love playing practical jokes and are responsible for all manner of mischief making on the island. From reading various news articles over the past couple of months (see, for example, this one from Bloomberg), it appears that the leprechauns have struck once again.
These articles all use Ireland’s official GDP data to suggest the Irish economy is in recovery following the Covid shutdowns and expected to be one of the few countries in the world to record positive growth for 2020.
Alas, one must be careful when making assumptions based on Irish economic data alone. Upon hearing the news that Ireland’s Central Statistics Office had recorded a GDP rise of 26.3% for the year 2015 – later revised upwards to 34.4% – the Nobel Prize-winning American economist Paul Krugman memorably coined it an example of “leprechaun economics”. To suggest that the Irish economy grew in annualised terms by 3.7 per cent in the third quarter 2020 – when unemployment here reached 28% – is to walk into the leprechauns’ trap.
The ‘mischief’ as identified by Krugman and others was that Irish economic data had become entirely detached from reality by the long-term distortive effects of tax-driven accounting flows. Economists later discovered that much of the GDP hike was attributable to just one company – Apple – moving intellectual property worth $300bn to Ireland, equivalent to around 20% of the entire country’s GDP. It was, at the time, the largest ever incidence of profit shifting by a multinational and remains the largest ever recorded example of an “hybrid-intellectual property tax inversion” – where companies move their IP assets to a low tax jurisdiction through a process of corporate restructuring.
The leprechauns' mischief - a national embarrassment for Ireland
The subversion of Ireland’s official GDP data by the aggressive tax practices used by US multinational corporations caused the country significant humiliation and brought a renewed focus on its tax system by international tax avoidance bodies. In response, in 2017 the Central Bank of Ireland created “Modified Gross National Income” (GNI*) as a new measure of the true position of the Irish economy, which aimed to discount the distorting effects of profit shifting by foreign multinationals. The evidence suggests that GNI* has only partially resolved the problem. A review by Eurostat, the European Statistical Office, found that GNI* was still artificially inflated by profit shifting and was essentially unreliable as a true economic indicator.
The great irony of Ireland’s GDP shenanigans is that, predictably, the main victim of the lark is Ireland itself. Only last month, we were treated to a prime example of how ‘Leprechaun Economics’ harms the Irish people, with the news that Ireland’s share of the massive recovery fund agreed by the European Union is to be cut by €352 million – the official reasoning being, of course, that the country’s GDP had held up so well! To add insult to injury, the subverted statistics are then (rather naturally, you might assume) used by the Irish government to claim that the economy is performing so well under their watch.
So how should the Irish economy be measured?
Irish statisticians and economists are still trying to come up with better ways to measure the economy, with many opting for Real Net National Product as a sensible solution. Alternative measurement criteria, such as the general employment rate and aggregate demand, strongly suggest that the “real” Irish economy has been severely impacted by the economic crisis wrought by the pandemic, and its performance is broadly similar to the other main Eurozone economies.
Perhaps those of us living in Ireland are better at spotting the leprechauns’ mischief. One doesn’t have to be an economist to know that we are in a deep economic crisis. However, the Irish economy is still fundamentally strong and it is expected to perform well over the coming years. Despite the pandemic, Dublin is benefitting from a ‘Brexit windfall’ from companies relocating from London in order to stay within the European Union. And, now with the proudly Irish-American President Biden in the White House, Ireland is in good stead to leave a torrid 2020 in the past.
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