Sir, – Prof John FitzGerald claims that "today our standard of living is 10 per cent higher than the EU-15 and 15 per cent higher than the UK" ("Open economy and education the key to prosperity", Business, Opinion, January 28th). This would be a heart-warming conclusion if it were true, but unfortunately it is not.
As is well known, Irish national accounts statistics are hugely distorted and referred to by Nobel Prize winner Paul Krugman as “leprechaun economics”. Some US economists regard Irish national statistics as saying more about the tax affairs of US corporations than about the Irish economy. If we were to use the standard measure of international differences in living standards, GDP per head, then Ireland would be 89 per cent richer than the EU average, 80 per cent above the UK and half as rich again as even Germany. No-one in their right mind believes any of that, and Ireland’s national statisticians have had to resort to using more informative measures. This involves attempting to strip out the distortions due to multinational companies inflating their Irish profits and channelling their international profits and assets through Ireland to avoid paying taxes in their home countries.
For many years the preferred measure was gross national income (GNI) which excludes profits accruing to foreign-owned corporations. As the multinationals became ever more adept at funnelling finances through Ireland, even this was not enough and a completely new measure had to be devised (with Prof FitzGerald’s help). This is GDP* (pronounced GDP star). In addition to excluding profits of foreign multinationals, this also excludes the profits of largely-foreign-owned firms which register their headquarters in Ireland to avoid tax. It also excludes depreciation on assets, including leased aircraft or intellectual property such as brands and research and development. This became a major issue as international firms increasingly declared Ireland to be the home of their global assets. GDP* is a much better measure than raw GDP and it seems to be this measure that Prof Fitzgerald relies on to reach his conclusion about Irish living standards. However, it is not a direct measure of living standards. Much more appropriate is to calculate directly what people spend on their own behalf and add what government spends in support of their living standards, for instance on health, health and housing. This measure, called “actual individual consumption” (AIC) is recommended by former Irish Central Bank governor Patrick Honohan and is calculated by Eurostat and World Bank statisticians. Using this more direct measure, Irish living standards are 5 per cent below the EU 27 average and well below all of the countries of north-west Europe. They are also 16 per cent below the UK and about the same as in Northern Ireland. This comparison with the UK puts Irish living standards fully a third below that claimed by Prof FitzGerald. It is important to know which is correct, since huge exaggerations of Ireland’s relative position will distort policy-makers’ perception of priorities. The rise of Sinn Féin for instance makes more sense if the AIC measure is correct and Ireland lags well behind most other western European countries.
Most important are assessments of Ireland’s low-tax economic model and its gains from EU membership.
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Using World Bank data, Patrick Honohan shows that Irish living standards are much the same relative to western Europe as they were in 1950 before Ireland became a tax haven or joined the EU. If Northern Ireland is taken as a benchmark, then Ireland might have done as well economically by staying the UK since 1921. All of this is of course a million miles from what is generally believed in Ireland and it is time the Irish stopped fooling themselves. – Yours, etc,
Dr GRAHAM GUDGIN,
(Special Adviser
to the First Minister
of Northern Ireland 1998-2002),
University of Cambridge.