Let them roar

The two economies of Ireland are struggling, but further tax breaks may be the key to unleashing the Celtic Tiger once more, says Finbarr Bermingham

At the end of 2011, the announcement of further austerity measures by Michael Noonan, Minister for Finance, rounded off an annus horribilis for the Irish economy. Unemployment sat at 14.3 per cent, with youth unemployment at a massive 29.8 per cent. For those living in the Republic, optimism is a distant memory - with austerity expected to continue "for as long as anyone can look forward". And yet, the nation is being held aloft by the EU and IMF as a poster boy for frugal financial management. For despite all the heartache of recent years, the economy is expected to stabilise in 2012, with contraction predicted to slow. In the Dáil Éireann (the lower house of the Irish parliament), politicians are pinning their hopes on a strong exports market, 95 per cent of which are generated by overseas companies attracted to setting up in Ireland by low corporation tax.

Rates of corporate taxation vary dramatically across the European Union. While the rate in both France and Germany is over 30 per cent and the UK's sits at 26 per cent, companies registered in the Republic of Ireland pay a mere 12.5 per cent corporation tax. The break has enabled Ireland to attract a host of household name companies, including Facebook, Google and Twitter, all of whom have set up international headquarters in Dublin. Last year alone, more than 13,000 new jobs were created by clients of IDA Ireland (the agency responsible for industrial development in Ireland and for attracting inward investment) - a 20 per cent increase on 2010. Of the 148 investments secured by the agency, 61 were from multinational companies investing in Ireland for the first time, including social network game developers Zynga, software manufacturers Quest, and multibillion dollar Indian outsourcing company HCL.

North and south

Not everyone, though, is enthused by the news. European Union leaders, particularly French president Nicolas Sarkozy and German chancellor Angela Merkel, have clashed with successive Irish taoiseachs (prime ministers) over the low levy. Both are keen on fiscal harmonisation across the eurozone and have repeatedly voiced their anger over the advantage Ireland has in attracting investment. They've urged the government to increase the corporation tax and have even offered a reduction in the interest payable on EU and IMF loans as an incentive. The Irish response has been decisive and uncompromising. "The position of the Irish government is absolutely clear. We are retaining our rate of corporation tax," says tánaiste (deputy prime minister) Eamon Gilmore. "It's hugely important for us to provide that certainty for investors and potential investors."

Over the border, the Northern Irish government in Stormont has been casting envious glances southward for years. Devolution stopped short of bestowing on politicians here the power to set taxes in Northern Ireland, and they find themselves bound to the 26 per cent rate set by the central government in Westminster. The first minister Peter Robinson, though, has been campaigning for a tax break that would allow the North to compete with the Republic. Robinson has called for Westminster to reduce corporation tax in Northern Ireland to 10 per cent, which would be by far the lowest rate in the EU. The resulting hole in the UK's tax revenues, he argues, could be filled by a cut of between