Interesting article about the Irish growth story from FT

Don't forget you can access the FT yourself. Quite a long read but good detail about the importance of different factors that lead to FDI into a country, plus some useful information about a mooted international tax treaty that could be helpful in essays. Be selective in what you carry from this:

Ireland seeks to lure life science investment despite corporate tax rise 

Dublin believes that the country’s skill base will attract pharma and medical companies 

Jamie Smyth in Dublin 

A surge in life sciences investment that helped make Ireland the EU’s top performing economy in the past two years will continue despite a rise in the corporate tax rate to 15 per cent, the country’s investment chief said. Michael Lohan said Ireland was poised to win several big investments from pharmaceutical and medical device companies attracted to the country’s blend of tax incentives, political stability, skilled workforce and EU membership. 

 “As uncertainty continues around the globe, Ireland’s certainty has become more attractive. People are seeking those islands of tranquillity, and Ireland is one of those,” Lohan, chief executive of the country’s foreign investment authority IDA Ireland, told the Financial Times.

 The number of people employed in life sciences in Ireland has surged by 80 per cent to almost 100,000 over the past decade on the back of almost $15bn in capital investment in the sector. Last year a record 301,475 people worked at multinationals, which paid 86 per cent of all corporate taxes received in the country of 5mn people. 

 Ireland has built its record as being one of the EU’s largest FDI recipients on its attractive headline corporate tax rate of 12.5 per cent, but Lohan is the confident that the rise to 15 per cent in January for all companies that generate $750mn or more in annual revenues is “not making a marked difference in terms of investment decisions”. But as countries such as the US pursue a “reshoring” manufacturing policy and consider tax incentives for pharma companies, analysts and investors warn that the wider OECD-led shake-up of corporate tax rules, as well as housing and energy shortages, could dent Dublin’s ability to attract multinationals. 

 “The key challenge for Ireland is addressing infrastructure constraints and other bottlenecks such as housing which are raising the costs for foreign investors,” said Conall Mac Coille, economist at Davy, a Dublin stockbroker. A downturn in the technology sector that is spurring job losses at Meta, X (formerly Twitter) and Accenture, all of which have operations in Ireland, has added to concerns about its competitiveness. 

 A second tranche of tax reforms called Pillar One, which are being overseen by the Paris-based OECD, would result in a portion of taxable profits generated by large multinationals being reassigned from Ireland to other markets. The change reflects how modern businesses can make profits in foreign markets without necessarily having a physical presence there. 

 Brad Setser, a senior fellow at the Council on Foreign Relations in Washington, said that the Pillar One reforms, and uncertainty over whether the US and other countries will implement the agreement, were the main threats to Ireland. 

 The OECD is hoping that the measure can come into force in 2025 but a failure by Washington to sign up to a global agreement, which looks likely as many Republicans in Congress remain opposed to it, could create trade tensions and complicate FDI decisions for US multinationals, Setser said. 

 For now, most investors are playing down the risks, suggesting that access to skills and support services in Ireland are more important than tax reforms. Mac Coille also noted that Ireland would maintain a corporate tax advantage over its rivals, including the UK, which in April raised its rate from 19 to 25 per cent. European OECD countries levy an average corporate rate of 21.5 per cent, according to the Tax Foundation think-tank.

 Ireland-based life science companies have tripled R&D spending, as they undertake higher value activities including manufacturing of complex biologic medicines. Since December the pace of investment has picked up, with Eli Lilly, Pfizer and AstraZeneca ploughing more than $2bn into manufacturing plants in Ireland, which is one of the world’s largest exporters of medicines. 

 Japanese drugmaker Takeda made its first investment in Ireland a quarter of a century ago when corporate tax was 10 per cent. It now employs 1,000 people and last year opened the country’s first cell therapy manufacturing plant. “People and talent are key. The academic institutions are really important,” said Shane Ryan, general manager Ireland at Takeda. 

 Ireland has the highest level of per capita Stem (science, technology, engineering and maths) graduates in the EU, according to Ireland’s government statistics office. Ireland’s EU membership is another factor because it provides access to a broader European workforce, said Ryan, adding that Takeda employs 43 nationalities across its four Irish sites. 

 Takeda is one of several life sciences companies which collaborate with Ireland’s National Institute for Bioprocessing Research and Training (Nibrt), an academic centre that provides training and research aimed at expanding the biopharma manufacturing industry. Almost 5,000 people train at the centre every year, including staff from the FDA and other global regulators.

 Matt Moran, director of BioPharmaChem Ireland, an industry group, said that Nibrt highlighted the benefits of close collaboration between pro-enterprise Irish governments, academia and industry. “Compliance and regulation is very good. Many of these plants are approved by the US Food and Drug Administration,” Moran said.

 Initial Irish investments by Pfizer and Bristol Myers Squibb more than a half century ago encouraged other multinationals to follow, he said. Ireland is now a manufacturing centre for some of the world’s top-selling drugs, including Merck’s cancer therapy Keytruda and Pfizer’s Covid-19 vaccine. 

 Moran said that competition for life sciences investment from the US was becoming more intense following a US push to “reshore” manufacturing, a key plank of President Joe Biden’s economic programme. “Ireland was a bit of a no-brainer [for new investment]. Now companies look at US states as well — so we just need to be better,” Moran said. 

 The pharmaceutical industry is focusing on the resilience of supply chains following recent disruptions caused by the pandemic and a spate of drug shortages linked to manufacturing problems in India and the US.  The IDA said this trend was benefiting Ireland, which manufactures everything from drug ingredients to tablets and more complex biological medicines. 

 Dublin’s decision to keep its borders open and facilitate exports of life-saving drugs while competitors erected trade barriers during the coronavirus pandemic helped the IDA win two life science investments initially destined for the US and China, the agency said. “We have benefited from the more conservative approach to managing the supply chain,” said Rory Mullen, head of biopharma and food at the IDA. “Covid has changed that decision-making process.” 

 Additional reporting by Emma Agyemang

UK's balance of payments is a big issue - and getting bigger:

 

We are on track for a currency crisis – and bankruptcy

Our leaders fail to grasp that taking back control also means taking back responsibility

JEREMY WARNER2 July 2022 • 12:00pm

Britain's current account deficit is easily the biggest such deficit ever CREDIT: Yui Mok /PA

Jeepers! We may be all tightening our belts in response to the cost of living squeeze, but as a nation, we are still spending far more than we are earning. Indeed, we are doing so in record amounts.

Living beyond our means has long been a national habit, so it shouldn’t perhaps come as any surprise. The sheer size of the addiction is nonetheless quite a shock.

According to the latest national accounts, published last week, Britain’s current account deficit widened in the first quarter of this year to an astonishing 8.3pc of Gross Domestic Product, easily the biggest such deficit ever.

In layman’s terms, what this means is that overall expenditure in the UK is exceeding national income by nearly a tenth of the value of the entire economy.

All other things being equal, there would be nothing left at all in the national coffers in little more than ten years from now if we were to carry on like this.

Fortunately, the balance of payments doesn’t work quite like that; the deficit is paid for by inflows of capital from overseas, so the fact that we are still able to finance such a high level of consumption might be taken as a vote of confidence in the UK, rather than a cause for panic.

What is more, the Office for National Statistics has changed the way it collects the data, which may make the deterioration look worse than it really is. 

All the same, the situation looks alarming enough; even excluding sales of gold and other precious metals, which can be volatile, the deficit was still an eye watering 7.1pc, against an average of just 2.6pc last year.

It is hard to be certain about the exact causes of this deterioration. Certainly the soaring costs of imported energy and food were a major factor. But the UK also exports quite a lot of oil and gas, so there was a big offset in this regard.

The main factor was instead a big leap in imports of finished and semi manufactured goods. There was also a marked deterioration in exports of goods, though not as large as the increase in imports. Whatever ministers say to the contrary, it is hard to escape the conclusion that this is at least in part a Brexit effect. 

As demand came surging back, post the pandemic, the flaws in Boris Johnson’s “oven ready” trade deal with the EU have been cruelly exposed.

The EU trades pretty much freely with us - our choice, by the way, so as not to further add to inflation with increased bureaucratic restrictions on trade - but our exports to them are already encountering the full panoply of barriers that afflict non EU members that are not part of the single market.

The surge in imports may also have something to do with acute labour shortages in key sectors. British companies may as a consequence have found it harder to satisfy domestic demand than otherwise. 

In any case, there is no denying where the balance of power in our new trading relationship with Europe lies; it is predictably with the much larger jurisdiction - the EU. So much for the much touted claim that because we import far more from them than they do from us, Britain would maintain the whip hand in any ongoing relationship.

The total trade deficit has widened

Combination chart with 4 data series.

The chart has 1 X axis displaying Time. Data ranges from 2019-03-01 00:00:00 to 2022-03-01 00:00:00.

The chart has 1 Y axis displaying £bn. Data ranges from -62.2 to 37.

£bnTrade in goods balance (excluding precious metals)Total trade balance (excluding precious metals)Total trade balance (including precious metals)Trade in services balanceJul '19Jan '20Jul '20Jan '21Jul '21Jan '22-75-50-2502550SOURCE: ONS

THE TOTAL TRADE DEFICIT HAS WIDENED

End of interactive chart.

Small wonder that the Government still refuses to commission an economic impact assessment of Brexit; the findings would not reflect well on our exit deal.

In the circumstances, it is perhaps a surprise that the pound is not under more pressure in foreign exchange markets than it is. So far this year, it has fallen more than 10pc against the dollar, but it has been broadly flat against the euro, and is off only 3pc on a trade weighted basis.

There is little sign as yet of a fully blown currency crisis, where interest rates have to be jacked up precipitously to guard against the inflationary consequences of a collapsing pound.

A big current account deficit doesn’t necessarily matter if there are enough investors willing to finance it with inflows of capital. But it does leave the country reliant on what Mark Carney, former Governor of the Bank of England, called “the kindness of strangers”.

For the moment, there seems to be no particular problem in this regard, despite the rising interest rate differential with the US. Anecdotally, there is still a long queue of foreign buyers looking to buy up British companies, and even to invest in UK Government debt. Net investment in the UK increased by £158.9 billion in the first quarter.

It may be that appetite for British assets is about to plummet, but this is by no means set in stone. Those who think that UK gilts are “sitting on a bed of nitroglycerin”, as the self styled bond king, Bill Gross, famously said of them at the time of the financial crisis, should consider this; Britain is virtually alone in the world in having never defaulted.

Theoretically more creditworthy countries such as the US and Germany most certainly have, the latter massively on at least four occasions in the last century. This enviable and almost unique record of creditworthiness is not something the UK Treasury is about to surrender. However bad things get, Britain will always pay its debts.

Nonetheless, looking at the latest balance of payments statistics, there are some worrying straws in the wind that are eventually going to require huge and politically difficult changes in policy. 

Portfolio investment overseas decreased by £103.6bn in the first quarter, reflecting a quite widespread sale of overseas shares. This is tantamount to selling off the family silver to finance current consumption, and is plainly not sustainable on an indefinite basis.

The ONS also struggled to reconcile the recorded current account deficit of £55.7bn with the £29.6bn of net inflows. Since the balance of payments must by definition always balance, the shortfall is listed as unexplained “net errors and omissions”.

Either the current account deficit is not as big as reported, or there is another possibly quite unstable source of inflow which is not being recorded.

Whatever the truth, the UK plainly cannot keep running up current account deficits of this order of magnitude indefinitely, or for that matter expect the rest of the world to keep financing them - not in any case while it remains a relatively high tax, big state economy. 

Taking back control also means taking back responsibility, and yet our Brexiting Government doesn’t seem to have grasped the fact. The remorseless logic of Brexit is that of the small state, low tax economy, yet we seem headed in the opposite direction. Uncorrected, our present trajectory can only end in a currency crisis and bankruptcy.

To finance a trade deficit of the current size, and eventually bring it back into balance, you need to attract a lot of foreign investment. You do not go about this task by whacking up income tax, corporation tax, and other forms of business taxation. Let’s hope that we don’t require another mega crisis for this brutal truth to sink in.

Useful content on what makes for a good investment environment

 From today's Sunday Times.

ROBERT COLVILE

Bosses can’t enter French airspace without being hijacked by Macron, and they love it

Robert Colvile

Sunday May 22 2022, 12.01am, The Sunday Times

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‘The true driver of growth is not government. It is the energy and dynamism and originality of the private sector.” Boris Johnson’s address to the CBI in November will live in infamy as “the Peppa Pig speech”. But his remarks as a whole were intended to make a profound point. It is not just rather wonderful that a pig that looks like a hairdryer has become a business worth £6 billion and counting. It is that post-Brexit Britain will prosper only if it is hospitable to innovation and entrepreneurship — the kind of innovation, as he pointed out, that saved countless lives during the Covid crisis.

Yet since the referendum the signals we have been sending business have been mixed — to put it politely.

For the past few months I’ve been working on a project with my colleagues at the Centre for Policy Studies think tank, supported by Shore Capital. We have spoken to more than 100 senior decision-makers, controlling hundreds of billions of pounds in capital, about what they think of Britain as an investment destination. It is, as far as we’re aware, the largest such exercise anyone has carried out. And the overwhelming message of the report, which is published tomorrow, is that Britain has been gradually becoming a worse place to put your money.

This verdict was all the more powerful for being fairly measured. People didn’t start ranting to us about Brexit. They didn’t excoriate the government. They talked about Britain’s natural advantages, its strengths in all manner of sectors, the high level of investment it attracts and how it was still a much more attractive destination on many fronts than its rivals in Europe.

But they also talked about the burden of tax. The safety-first culture of regulation. The planning system. The lack of certainty. How the government still hasn’t set out an irresistible narrative about post-Brexit Britain as an investment destination. How Whitehall departments never seem to talk to one another. About a hundred niggly things, from queues at Heathrow to limits on investment schemes, that we could be doing better.

To see why they may have a point, consider the chancellor’s own address to the CBI, at its annual dinner last week. The headlines blared: “Sunak vows to cut business taxes”. But that isn’t what he was promising at all.

Yes, the chancellor did promise new tax breaks for business investment in the autumn. That’s very good news: the woeful level of such investment is one of our biggest economic problems. But these new rates will be a replacement for the temporary “super-deduction” brought in to juice corporate spending during the pandemic. They may be more generous. They will probably be less so.

And then, next April, comes the real stinger: a six-point increase in corporation tax for firms making more than £250,000 in profit. This is a great big thumping tax rise on business. By the end of this parliament it will earn the Treasury more than £17 billion a year.

That isn’t the end of it. Last month the government made the extremely sensible decision to protect low and middle earners from its national insurance rises (a compromise first suggested in this column). But the hike in the other half of national insurance, paid by employers, went ahead as planned.

Similarly, the energy price cap has helped to protect consumers from soaring gas prices — even if it does not feel that way. But there is no cap for businesses, which have been exposed to the full horror in the markets.

Then there is the debate over a windfall tax on energy companies. This measure remains what it always has been — economically damaging, fiscally insignificant (when compared with the scale of the cost-of-living crisis) and politically irresistible.

Those in No 10 are right when they resist such a tax as “un-Conservative”. But how Conservative was it to raise the prospect in the first place, to force energy companies to increase investment? As with Michael Gove’s arm-twisting of the housebuilders on cladding, the quid pro quo was very clear: do what we want, or we’ll tax you. In other words: nice dividend you’ve got there. Shame if anything happened to it.

It’s easy to see why each of these decisions has, individually, been made. The government needs to repay the enormous costs of the pandemic. Taxing businesses is a lot more popular than taxing consumers. The Treasury thinks George Osborne reduced corporation tax too much anyway. We do need massive investment in energy to cut costs, cut carbon and cut out Putin.

But, taken as a whole, it’s hardly an agenda that puts business first — or encourages it to move here.

It’s not just about policy, though. What many of our interviewees talked about was the importance of culture, tone and narrative. Of the pro-business agenda being consistently championed from the top.

The example that came up constantly was Emmanuel Macron. Apparently, a chief executive can hardly cross into French airspace these days without having their plane diverted to the Elysée Palace. One business leader told us that invitations to the president’s latest glitzy investment summit at Versailles went out within hours of his re-election — with follow-up emails sent to junior colleagues to make sure the message had landed.

Britain put on its own investment gala in October, featuring dinner at Downing Street and tea with the Queen. But we aren’t holding another on the same scale until 2023. The prime minister has a crowded priority list, but he proved as mayor of London that, when he puts his back into it, there are few people better at wooing business — or championing wealth creation.

Many people in No 10 and the Treasury, at very high levels, completely get the importance of this agenda. The creation of the Office for Investment has been widely praised, as has the chancellor’s proposed reform of financial regulation. But we need to make it an absolute priority.

Shouting to the world that Britain is a resolutely, implacably and vocally pro-business country isn’t the kind of thing that wins votes, though I wish it were. But it’s the only way to generate the growth that votes come from. One of the key points from our research is that investors want to buy into success: the more business-friendly Britain is, the more dynamic our domestic economy, the more the world’s best companies and talent will want to come on board.

As one of our interviewees said, complaining about the slow pace of post-Brexit reform: “On much of this stuff, everyone knows what needs to be done. We need to get on and do it.” Amen.