Not only did the CSO’s declaration this week that Ireland’s GDP had leapt a staggering 26.3% in 2015 have economists scratching their heads, it also led to a Nobel Prize-winning one coining a completely new term.
‘Leprechaun economics’ is the business phrase of the week, and Trinity College Dublin economist John FitzGerald told Newstalk Breakfast this morning that it, and the suggestion that Irish officialdom is putting an unrealistically positive spin on the state the nation’s in, could hurt us.
Not that he believes Paul Krugman was wrong in what he tweeted – subsequently picked up by the Financial Times along with Nevin Economic Research Institute director Tom Healy's comment that he didn't know “if even Soviet Russia in the 1930s exceeded these figures."
"It's a fair comment on the numbers,” Fitzgerald said. “The numbers are crazy, they're bizarre…
“The reason the government and the Central Bank was pretty upset about it [was] because having people like Paul Krugman saying it's leprechaun economics makes us look like there's funny money going on. Yeah, there's funny money in this [the CSO figures].
“But the real economy is actually growing quite rapidly. We are recovering. It's a good place to do business.
“It's bad for our reputation when you have big numbers that nobody can understand. "
Distorted picture
So how is the CSO’s picture of 26.3% growth so distorted? The inflated numbers can be attributed to aircraft purchases, corporate restructuring, and companies moving assets (especially patents) to Ireland in capital inversion deals.
Fitzgerald used the example of the profits of a large multinational such as Apple flowing in and out of Ireland.
“The problem is that the profits flow back out because they don't belong to us,” he said. “It's doing nothing for Ireland.
“But it's the depreciation on their intellectual property [that] gets left behind in the accounts. So suddenly you have a company that moves in. Money comes in and money goes out, which messes up the exports and so on...
“So you don't know what's going on in the exports.
“Normally GNP should net off these kind of transactions, but they've left behind about €30bn in depreciation. It's a write-down in the value of the intellectual property which affects the company, but doesn't affect anybody in Ireland.
“If you look instead at a measure called Net Domestic Product (NDP), which takes out depreciation, it grew by 6.5% last year.”
Hidden dangers
FitzGerald voiced his concerns that the CSO figures mask what’s really going on with the economy. The danger being that they are used in the making of careless political moves in the future that could lead our increasingly booming economy to go bust all over again.
“The numbers are showing a very large current account surplus,” he said. “That's where we're exporting far more than we're importing. Actually I think the truth is probably that we may actually be importing more than we're exporting.
“That tells you the economy is reaching capacity in the real world; it's not what you can actually see in the headline numbers.
“If that's the case then the Budget should be a tight Budget this October. You don't pump money into an economy that is growing very rapidly…
“There's a danger things could get out of hand like it did in the last decade, and we need to keep a lid on things.”
FitzGerald concluded with his belief that we’re back to the early years of the last decade and should learn from history and not make the same economic mistakes twice.
“It may be that next year's Budget, the 2018 Budget, may actually have to raise taxes substantially to slow the economy. The problem is we need a lot of houses....”
The solution is that the State takes money out of the economy as it does so. Is FitzGerald remotely optimistic that will happen in a pragmatic way?
"I am concerned that it may not."
