Friday, 1 July 2011

Ireland’s Imperial Tithe

(some text corrected on 18 Oct 2012 to clarify the GDP-income gap)

A tithe is a form of tax or levy that is paid to the church, usually amounting to a tenth of a person’s income. In Ireland, the Roman Catholic church has an important role in society, with up to 90% of the population identifying themselves as Catholic. But the Irish people pay a tithe to imperialism, not to the church.

Ireland is one of the few countries in the world where the value of what is produced is far above the income that residents earn. The difference between production and income goes abroad, to foreign investors, and this gap is a bigger share of the economy than for any other developed country.[1]

In economic statistics, GDP (Gross Domestic Product) measures the gross value of output produced in the domestic economy. It is the most common measure used to compare countries. But this can be very misleading when the country is paying out a large income from what it produces to the foreign owners of assets held in the country. A separate Gross National Income measure of the economy makes an allowance for this, and for all cross-border flows of revenue.

Data just released for Ireland’s economy in 2010 show that GDP amounted to €156 billion. However, from this sum a net income amounting to nearly €28 billion was paid in wages, profits, interest and dividends to foreigners. Ireland did receive €1.5bn of EU subsidies, but against this it paid the EU €400m in taxes. Gross National Income accruing to Irish residents totalled €129.3bn, 17% less than the value of output in the domestic economy. So, nearly one-fifth – or two tithes! – from Ireland’s annual output was paid to foreign investors. Owing to this factor, domestic incomes also tend to grow by an average of 0.5% less than that of output.[2]

Chart 1: The Irish Tithe, 1995-2010

 Source: Central Statistics Office Ireland, and author’s calculations

This deduction from Ireland’s product has been a longstanding feature of the Irish economy, not a consequence of the latest crisis. It results from Irish government policy to attract foreign capital by offering low tax rates and other deals. However, the financial crisis has seen a bigger share of output flow to foreigners as the economy has shrunk while the payments have continued to rise. Chart 1 shows how the share of the ‘tithe’ has changed over the past 15 years.

Ireland’s combination of low tax rates for foreign corporations and EU grants for poor countries enabled it to emerge from the status of backward ex-British colony to be dubbed a ‘Celtic Tiger’. Generating fast growth, building a financial centre in Dublin and looking a lot more euro-sensible than the Brits, Ireland seemed to have it made. The Irish thought so too. Prompted by low interest rates following euro entry in 1999, and participating fully in the later speculative bubble - like their counterparts elsewhere - the Irish banks began to finance a property boom and Irish people bought into it. When property prices in Dublin began to rival those in central London, only a few academics protested that the bubble would surely burst.[3] National average house prices rose threefold between 1997 and the start of 2007, and by four times in Dublin. They have since fallen by some 35-40%.[4]

So, in addition to suffering a drop in income from the financial crisis, Ireland also has to work more than one day per week in order to pay the regular tithe to foreign investors.

Tony Norfield, 1 July 2011

[1] See the comparative data for 32 countries in the Eurostat Yearbook, 2010, Table 1.15, p136. On these data, the net outflow of income amounted to 14.4% of Irish GDP in 2008. Only Luxembourg had a higher 30% net outflow, but it is a special case as a banking centre and Luxembourg has a bigger 53% net inflow of ‘services’ income. Ireland’s services account, by contrast, shows a net outflow of revenue.
[2] Author’s calculations from Ireland’s Central Statistics Office data, Even with the recent fall in GDP, of 10% since 2007, the 12% fall in national income was even steeper!
[3] An excellent account of the Irish property bubble and bust is given by Michael Lewis in an article in Vanity Fair, ‘When Irish Eyes Are Crying’, 8 February 2011. See


Philip Ferguson said...

Hi Tony,

I've posted a link to this on The Irish Revolution. One wee quibble, I assume you're talking about the twenty-six county economy not the Irish eocnomy as a whole.


Tony Norfield said...

Phil, yes that's correct, the 'Ireland' referred to is the 26 counties, not the northern 6 counties. This was only a short article on more recent events, so I didn't want to get into the question of Partition by Britain. Partition did have a big impact on Ireland's economic development, apart from other things, but it looked for a while that the EU/EMU connection for the 26 counties was a way to progress.