From Socialist Voice, July 2010

The recession is over!


The recession is over (Irish Times, 1 July 2010), if you use gross domestic product as the measure of output. GDP increased by 2.7 per cent in the first quarter of 2010 compared with the first quarter of 2009. But this measure is totally inappropriate, because of the peculiar nature of the Irish economy.
     A better measure for Ireland is gross national product (GNP). If this is used we are not out of recession, as GNP fell by 0.5 per cent.
     The two measures differ because of the operations of transnational corporations in Ireland. They use a tax fiddle called transfer pricing to increase their after-tax profits.
     Here is a simple example with normal pricing. A product costs €40 to produce in the United States. It is shipped to Ireland to an associate company and processed. It is then sold to an associate company in Britain for €100. The contribution to the Irish economy is €60. This is the GNP figure. With transfer pricing, the product from the United States is shipped to Ireland for €20 and then sold to Britain for €120. The contribution to the economy is therefore €100. This is the GDP figure.
     The difference of €40 between the two figures is the extra profit earned in Ireland and therefore subject to tax at the rate of 12½ per cent, compared with 30 per cent in the United States and Britain. Profits in both the United States and Britain would be down €20, as well as the tax paid.
     The tax paid in Ireland would be 12½ per cent of €40, that, is €5. If the transfer payment did not take place, the tax paid on €40 million in the United States and Britain would be €12 million.
     In the first quarter of 2010, Ireland’s GDP was €41,753 million, while its GNP was €33,636 million; so this tax fiddle has a major distorting effect on the figures.
     Both these figures measure production. A better measure of the welfare of citizens is consumer spending, and this was down by 0.8 per cent in the first quarter of 2010 compared with the first quarter of 2009. As the economy improves, spending increases, and people are better off.
     Expenditure by the Government on goods and services was down by 8.9 per cent over the same period. Like consumption, this has a direct effect on the welfare of the people.
     Also, developments in employment and unemployment are more important to workers than economists’ definition of economic growth.
[KC]

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