Leprechaun economics

Leprechaun economics was a term coined by Noble Prize winning economist Paul Krugman in a tweet on his personal twitter account on the 12 July 2016 in response to the publication by the Irish Central Statistics Office (CSO) that Irish GDP had grown by 26.3% and Irish GNP had grown by 18.7% in 2015 Irish National Accounts.

Krugman tweeted "Leprechaun economics: Ireland reports 26 percent growth! But it doesn't make sense. Why are these in GDP?"

The use of the term received widespread coverage in the Irish and International media

Some Irish financial commentators took issue with the potentially pejorative nature of Krugman's term (and the implication of impropriety in the Irish National Accounts), when the Irish CSO had simply been following the proscribed EU rules for collating National Accounts statistics as detailed in the Eurostat ESA 2010 Guidelines manual.

"Leprechaun Economics" has been used several times since, including by Krugman himself, to describe economic data that is considered unsound and not to be taken at face value:

• Paul Krugman in relation to the expected effects of the US Tax Cuts and Jobs Act

• Paul Krugman in relation to national economics statistics from some Eastern European Countries

• Irish Times in relation to Irish house building completion statistics

• Bloomberg in relation to US economic data and in particular, US trade deficit figures

Official Explanations

The official explanation by the Irish CSO for the "Leprechaun Economics" economic growth was that it was due to a combination of factors including aircraft purchases (Ireland is a major location of aircraft securitisation SPVs) and the re-classification of corporate balance sheets (i.e. corporate tax inversion).

However the then Finance Minister, Michael Noonan, clarified 10 days later on RTE News, that the main driver of the "Leprechaun Economics" growth was Ireland's closing of the Double Irish tax structure in 2014/15 (as agreed under OECD guidelines) which led to some multi-nationals moving the intellectual property onshore to Ireland.

Immediate Implications

While the drivers of Ireland's "Leprechaun Economics" growth might not have produced tangible additional tax revenues to Ireland, the 26.3% rise in Ireland's GDP directly increased Ireland's annual EU budget levy (which is decided as % of GDP) by an estimated €380m per annum.

The affair also prompted an audit by Eurostat into Ireland's economic statistics (including questions from the IMF), however no irregularities ensued and it was accepted that the Irish CSO had followed the Eurostat guidelines appropriately in preparing the 2015 National Accounts.

Introduction of GNI*

While Ireland's GDP growth was always taken with a degree of caution by international markets, "Leprechaun Economics" highlighted how severely Ireland's economic statistics (both GDP and even GNP) can be distorted by multi-national movements of intellectual property / royalty payments (little of which generates actual tax revenues for Ireland). The most respected Irish financial commentators had been pointing out that the ratio of Ireland's GNI to GDP had been falling below 80% by 2011 (only Luxembourg was lower 73%) while the EU27 average was closer to 100%.

The report by the EU Commission into Ireland's National Accounts showed that between 2010 and 2015, over 23% of Ireland's GDP was represented by multi-national net royalty payments (of which little produces taxable income to Ireland). Post "Leprechaun Economics", it is likely that this % has increased materially again.

Because of this distortion Irish financial commentators have pointed out how difficult it is to draw comparisons with Ireland and other economies. The classic often quoted example is the comparison of Ireland's indebtedness (both Public and Private) when expressed per capita versus when expressed as % of GDP. On a "per capita" basis, Ireland is one of the most leveraged countries in the OCED (both on a Public Sector Debt basis and on a Private Sector Debt basis). On a "% of GDP" basis however, Ireland is deleveraging rapidly from the global credit crisis.

In response to these issues, and as a direct result of the "Leprechaun Economics" affair, the Governor of the Irish Central Bank convened a special steering group (Economic Statistics Review Group) to recommend economic statistics that would better represent the true position of the Irish economy. The result was the creation of a new metric - Gross National Income Starred (or GNI* for short). The difference between GNI* and GNI due to having to deal with two problems (a) The retained earnings of re-domiciled firms in Ireland (where the earnings ultimately accrue to foreign investors), and (b) depreciation on foreign-owned capital assets located in Ireland, such as intellectual property (which inflate the size of Irish GDP, but again the benefits accrue to foreign investors).

Ultimate Link to Apple

It was suspected in 2016 that much of the driver of "Leprechaun Economics" was due to Apple bringing their Apple Sales International (ASI) subsidiary (which is at the heart of the EU Commission's €13bn investigation into alleged illegal Irish State Aid to Apple) onshore to Ireland in January 2015. However this was disputed by the CSO.

University College Cork economist Seamus Coffey (Chairman of the State's Irish Fiscal Advisory Council and consultant to the Irish Government on Irish National Accounts and Taxation) published an article on his own Economics Blog on the 24th January 2018 confirming that Apple was the source of "Leprechaun Economics" (quoting from his article) :

"... We know Apple changed its structure from the first of January 2015. This is described in section 2.5.7 on page 42 of the Commission’s decision. This would be useful but bar telling us that the new structure came into operation on the first of January 2015 everything else is redacted. Although the details of the new structure were not revealed it was still felt that Ireland was still central to the structure and maybe even more so with the revised structure. Many of the dramatic shifts that occurred in Ireland’s national accounts and balance of payments data were attributed to Apple but this was largely supposition – even if it was likely to be true. Now we know it to be true. ..."

Mr Coffey has posted in detail on the financials of Apple's ASI subsidiary , and is often quoted in the media on the potential outcomes of the EU Commission case against Apple.

External links

• Irish Central Statistics Office
• Irish Fiscal Advisory Council
• Seamus Coffey University College Cork