Cliff Taylor: Is the Irish tech sector really facing a crisis?

Over the years, the Irish economy has tended to be either up or down. Booming or crashing. And so it is understandable that we focus on the dangers of the economy’s reliance on the big multinational sectors, tech and pharma. This has been underlined by the announcement from Accenture of 890 job cuts, many of them related to outsourced business it undertakes for some of the major tech players.

We have all spent more than enough time trying to calculate the risks to jobs, the tax take and the wider economy if tech hits trouble. The Department of Finance publishes its forecasts with and without what it judges to be the windfall element of corporate taxation – the bit which it judges to be vulnerable. Sooner or later, the fear is, it is all bound to go wrong and we will be back in a 2008-style crisis.

And there are threats. The signs are that the Irish economic bounce-back post-Covid – the period of really strong growth driven by a recovery in domestic spending and a surge in multinational activity – is ending. Now we face a more mixed period with higher interest rates squeezing spending power in many households and the tech sector trimming its sails. This week Apple, whose fortunes are vital for Ireland, recorded the third quarter of falling annual sales. At home, employment growth is slowing, as is the professional jobs market. Forecasters still expect growth in the domestic economy here, but at a more modest level.

But perspective is needed. There are no signs of a collapse in the tech sector, even if the working out of its over-hiring and over-expansion is going to take some time. Tech insiders are surprised at how many of the big players got hiring and cost decisions wrong. Their powerful institutional investors remain nervous. Stock market IPOs of tech companies have dried up. The party which allowed firms to raise vast sums when they had not yet made a cent in profit is over – for now, anyway. These cycles take time to work through and those let go in Accenture are among the unfortunate victims.

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With Ireland’s creaking infrastructure, the need to upgrade in areas like energy and water and the shortage of building workers, the slowdown of the hectic expansion of these companies may be no bad thing, once it doesn’t go too far

As the tech sector retrenches, other areas of the economy will be hit, too. The office market has slowed sharply as the big tech players cut new office development and sublet some of their existing stock. Rents and valuations are falling, particularly for offices which don’t meet the latest environmental standards. Research by BNP Paribas suggests that 15 per cent of office stock could be vacant by year end. And the combination of tech job cutbacks and working from home will take its toll on the wider city-centre service economy of coffee shops, restaurants and so on.

That said, with Ireland’s creaking infrastructure, the need to upgrade in areas like energy and water and the shortage of building workers, the slowdown of the hectic expansion of these companies may be no bad thing, once it doesn’t go too far.

There is no reason to fear a tech collapse, or the kind of restructuring of the big companies which could put a big hole in our tax revenues. A report from employers’ group Ibec this week argues that despite some risks, corporate tax is as likely to outperform as underperform over the next few years. The increase in the tax rate on the profits of the biggest companies next year to 15 per cent, and the possibility of Ireland collecting some extra revenue from another part of the OECD deal, could boost returns. Meanwhile, the part of the deal which will cost Ireland is not now going to come into effect for a few more years, at least.

The challenge is not to find the money, it is to unlock its potential to address the challenges we spend so much time talking about - in housing, water, energy, hospitals, schools

One worry is the row in the US over parts of the OECD deal, with Republicans accusing Joe Biden and his treasury secretary Janet Yellen of giving away US tax revenues to foreign countries – such as Ireland. This could put this country back in the spotlight during the US presidential election campaign.

Reasons for concern

But there are always uncertainties and reasons for concern. Even if the tech sector pulls back a bit and the slowing global economy has an impact on multinational profits, Ireland’s public finances are flush. And there is also a bag of savings of Irish households on the balance sheet of the major banks. The challenge is not to find the money, it is to unlock its potential to address the challenges we spend so much time talking about – in housing, water, energy, hospitals, schools and so on. In the capacity of the economy to deal with a rising population. In turn, the shortfalls in these areas are not only hurting society, they are damaging the prospects for further investment.

If the tech sector treads water, then it is going to cause some economic pain, for sure. Ireland has got used to the extraordinary economic and public finance boost from the growth of tech and pharma, which accelerated after 2015 due to a change in international tax rules. Now prospects are a bit more mixed – there are pluses and minuses and some things to be concerned about. But none of them point to a sudden collapse in corporate tax revenue, which has moved to a new level. The outlook remains for significant budget surpluses.

[ Tech job losses ‘reaffirm concerns’ about sectoral concentration of foreign investment, report warns ]

[ Dramatic fall in number of ICT work permits issued to foreign workers ]

Ireland thus has an opportunity to invest to fix a lot of the problems in infrastructure over the coming years. An obvious challenge is that the economy is now at full capacity and there are few spare resources to undertake the required investment, particularly in the construction sector. Some slowdown in economic growth may create more options here.

Political debate on this tends to focus on top-line demands to spend more. But the real challenge is in the detail, of how to actually get this done. It is in the knotty work of choosing projects, scoping and planning them properly, and getting them done in a reasonable time frame. It is navigating the need to boost investment at a time when unemployment is low and inflationary threats remain. But, thanks in part to the bounty from tech and pharma, Ireland has the money. It is not going to disappear overnight. The biggest task is using it wisely. The risk is letting the money slip away in a hundred and one giveaways in the next few budgets.