Tech job cuts point to big challenges ahead for the Irish economy

What will the downturn in the tech sector mean for Ireland? As Twitter and Stripe become the latest companies to lay off staff here, the big question is whether we are looking at some kind of levelling off in growth in the sector, or something more serious. Stripe, the hugely successful online security company founded and run by the Collison brothers, said it had been over-optimistic about how quickly markets would grow, leading to the need to pull back. Large parts of the tech market are exposed to consumer trends in the middle of a cost-of-living crisis and will face big questions.

These are warning signs for Ireland – though it is just not clear yet whether the lights are flashing orange or red. Like a cyclist coming down a steep hill, momentum has kept the Irish economy going out the far side of Covid-19 and into 2022. The resilience of the jobs market in particular, helped by Government supports, has been remarkable. But momentum only gets you so far.

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What happens next in tech will be a big deal for Ireland, as the home for the international headquarters of many big multinational companies, mostly from the US. These companies are big corporate taxpayers and big employers – and their workforces pay a lot of income tax. They have been huge forces in their local economies, mainly in Dublin, driving office building and wider redevelopment of parts of the city. There is a lot at stake. Eurostat figures show that five companies account for 40 per cent of Irish manufactured exports – though this will be a mix of pharma and tech companies. Meanwhile, multinationals are the big players in service exports, which has been the biggest area of investment over the past decade in Ireland from firms such as Facebook – now Meta, Google, LinkedIn, Twitter and Microsoft.

It is clear now that the heady era of rapid growth, when the sector was expanding relentlessly and poaching staff from competitors, is coming to an end. The first signs came a few months ago with smaller venture-capital backed companies under pressure. Then there was news of job freezes and some quiet lay-offs, amid big falls in the share prices of some of the biggest companies. Now it has all kicked off and while the scale of the cuts at Twitter under Elon Musk may not be symptomatic of the state of the sector, what is happening at Stripe may be.

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Many companies have expanded too quickly for a world economy now under big pressure. We see this in manufacturing, where falling demand for computer chips is affecting firms like Intel, whose Irish employees await news on how a global restructuring will affect them. And the big digital service firms depend on consumers spending money online in one way or another. As spending is cut back in the face of a fierce cost-of-living crisis, so companies have to adjust.

The approach had been to grow revenue and market share and worry about profit later. Now the focus is back on profits and this means controlling – and in some cases cutting – costs. Corporate HQs are asking questions about costs in areas they simply would not have bothered about before. When California is asking about your office supplies budget, you know something is up.

The tax paid by the top 10 multinationals amounts to one euro in every eight of total tax revenue – and three or four companies pay the vast bulk of this

Those with greyer hair remember the bursting of the tech bubble in 2000. Lots of companies whose names generally finished with dot-com (anyone remember Pets.com?) had raised money on crazy valuations and the bursting of the bubble in March 2000 hit international growth and knocked on to Ireland, by then a big player in computer services and software. Growth slowed here but there was no recession. The tech sector rebalanced and eventually rebounded.

Now the Irish economy’s exposure is more significant. The tax paid by the top 10 multinationals amounts to one euro in every eight of total tax revenue – and three or four companies pay the vast bulk of this. Warnings from the Department of Finance that the huge jump in corporate tax in recent months will not be repeated in 2023 suggest that some of the really big players are reporting abnormally high profits that may be lower next year.

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[ Stripe plans to slash staff amid business slowdown ]

It remains to be seen how this balances out against the running out of tax allowances on the income from big intellectual property assets moved here after 2015, which could support revenue. This may be one reason why the growth in corporate tax has been so extraordinary this year and this momentum may keep it going for a while.

Income tax could be the first place the tech slowdown shows up – the Irish income tax system is particularly reliant on better paid employees and a lot of them work in tech or in sectors like accountancy and law, which depend on multinationals. The top 5 per cent of earners, those making more than €125,000 a year, pay 45 per cent of all income tax.

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With uncertainties over tax, the decision in the budget to build up a reserve fund and plan for exchequer surpluses this year and next looks smart.

Already employment in parts of the tech sector seems to be edging lower, though as the Ibec quarterly outlook this week pointed out, some of this may be due to difficulty in finding employees, which is happening at the same time as redundancies and hiring freezes are being announced elsewhere. CSO data suggests that employment across the economy, including in tech, may have softened over the summer. In tech the backdrop is a 20 per cent jump in employment since 2019.

We just don’t know yet whether we are looking at a speed bump for the sector or something more serious. The development of tech is still a large – and potentially massively profitable – economic venture. Is tech trimming its sails or heading for a storm? The answer will matter a lot in the months ahead.