Irish pay to create a free-market icon

Ireland is often held up as a thriving country setting an example to New Zealand. But what about the subsidies?


When Irish media tycoon Dr Tony O'Reilly offered some pointers for New Zealand recently, both sides of the local economic debate claimed Ireland as proof for their arguments.

Look at how Ireland has trimmed its Government, said Roger Kerr of the Business Roundtable. State spending had been cut from more than 60 per cent of national income in the early 1980s to 27.5.

But Reserve Bank Governor Don Brash was less entranced when Dr O'Reilly told a Wellington gathering that Ireland could tolerate 6 per cent inflation.

Ireland's "hands-on" approach to luring foreign investment and regional development has been a model for our Labour-Alliance Government.

Whatever the causes, Ireland's performance has been extraordinary in the past 10 years.

In 1990, its income per person was 48 per cent of the Western average; today it is more than 70 per cent.

Its average growth rate of 9 per cent a year since 1994 is far and away the best in the West and exceeds even the Asian tigers Taiwan and South Korea.

Employment has risen from 1.1 million in 1990 to 1.7 million. Unemployment has dropped from 17 per cent of the workforce in the late 1980s to 4.3 per cent.

After 2.8 million people emigrated between 1881 and 1991, the Irish are coming home again. There has been a net inflow of 100,000 people during the 1990s.

The major cause of this amazing turnaround appears to be European monetary union.

Ironically, Ireland at first feared the single European currency, believing a common European monetary policy would be set to suit Germany and France.

But in practice, the euro means that businesses looking to serve the European market can now set up in the cheapest part of the euro area, without worrying about exchange rate risk.

And in 1990, Ireland was the poorest, and therefore cheapest, place in the area apart from Portugal.

But Ireland had the advantage for American investors of speaking English. And it has made itself an even cheaper place for foreign investors.

First, since 1981 it has had only a 10 per cent company tax rate on all manufacturing and on businesses in the Shannon Airport free trade zone and the Dublin international financial services area.

Other companies were still taxed at 36 per cent until last year. But this rate is being cut gradually to 12.5 per cent by 2003, when the tax rate on manufacturing and in the free trade zones will go up to the same 12.5 per cent.

As Dr O'Reilly put it: "We were able to offer the lowest tax rate in the world because we didn't already have a large corporate sector."

Most state revenue still comes from the local equivalent of GST, at rates of up to 21 per cent, and personal income tax of up to 46 per cent.

Second, new industries qualify for a rash of cash grants - up to 45 per cent of the cost of buildings and equipment in richer areas, and up to 60 per cent in "disadvantaged" regions, up to 100 per cent of initial training costs, employment grants for up to six months, up to half the cost of feasibility studies and research and development; and grants to buy land or pay 60 per cent of the rent for up to five years.

Thirdly, a series of wage accords with the unions since 1987 has kept wage rises generally below productivity increases through a national consensus aimed at creating more jobs. Workers accepted modest income tax cuts in return for their restraint.

The Irish Industrial Development Agency says labour costs in Ireland are now slightly above Spain and Portugal, but are below all other euro countries.

Ireland may, therefore, continue to grow more quickly than the rest of Europe until Irish wage rates catch up with the average and wipe out its main attraction for foreign investors. Then it will be up to the Irish to find new ways to keep growing.

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