The Conservatives used to urge people to look to Ireland to see how to organise business taxes. And until a year ago, the Celtic Tiger was enjoying a boom. Its low corporation tax regime attracted computer giants like Dell and Intel to base their European operations there. Incomes which used to be on a par with the poorest in Europe outstripped those in most other countries. Dublin, a sleepy backwater when I emigrated in 1983, joined Prague as the city break of choice. And house prices went through the roof as the owners of humble Dublin cottages found themselves sitting on a goldmine.
Such was Ireland’s success that its low-tax regime attracted admirers as diverse as John Redwood, who in 2007 told the British government to look across the Irish Sea to see how to run an economy, and the Scottish first minister Alex Salmond, who chose it as his model for an independent Scotland. ‘The UK is falling behind more successful economies like Ireland and the US,’ Redwood declared. ‘Ireland has shown just how quickly a rich country can grow if you set low tax rates, with a growth rate three times that of the UK, despite the expensive EU regulations.’ As recently as February 2008, Salmond wanted to emulate Ireland to become a ‘Celtic lion’.
Curiously, these new Hibernophiles have gone quiet of late. Ireland has been affected by the credit crunch much more harshly than Britain: its construction industry has collapsed along with house prices. The big multinationals are moving out. Yet the hapless Irish Taoiseach Brian Cowen was until recently following the Cameron-Osborne prescription for what to do in a recession almost to the letter. And he felt obliged to do so in large part because of a massive fiscal shortfall as a result of low corporate taxation.
Cowen increased VAT when Britain reduced it – VAT is now 21.5 per cent in the Republic compared with 15 per cent in the UK. This has led to a mass exodus to the bargains of Newry, across the border, helped by the sterling exchange rates. Stores like Superquinn, the Irish supermarket chain, laid off workers and closed stores as a result. ‘I have no doubt that the government decision to increase VAT in the October budget, just as VAT was being decreased in Northern Ireland, has been a significant contributing factor in these losses,’ said the Irish Labour party’s enterprise spokesman Willie Penrose.
Although he guaranteed deposits in Irish banks ahead of a similar British guarantee, Cowen delayed a bank bailout proper until February, something which contributed to unemployment rising above 9 per cent (it is just over 5 per cent in the north even with bad figures in February) and expected to touch 14 per cent before year end. When the bailout for Allied Irish Bank and Bank of Ireland came, it did, to be fair, include some strict requirements about lending to Irish firms and homeowners attached. But it was too late to prevent scores of company closures – with computer giant Dell moving to Poland – and lengthening dole queues.
And a huge deficit has led Cowen to slash public spending. The take-home pay of civil servants is being cut with a pension levy of up to 9.6 per cent on their gross earnings (though it will attract tax relief). While popular with those who have felt government spending has got out of control, it has been accompanied by less popular cuts in childcare, special needs teachers, new schools and class sizes. The government even tried to withdraw free medical care from the over 70s until a national outcry forced a U-turn.
All these changes are draining money out of the Irish economy at a time when a stimulus is badly needed. Needless to say, Fianna Fail, Cowen’s governing party, has never been more unpopular. Only 14 per cent of people are satisfied with the government, according to a recent Irish Times poll, and Fianna Fail has been pushed into third place behind Fine Gael and Labour for the first time in its history.
So Gordon Brown should stop calling the Tories the ‘do nothing’ party. He should instead spell out exactly what their prescription has meant for Redwood’s favourite low-tax economy.