November brought a wave of job cuts and layoff announcements across the global tech sector that has left Ireland trying to guess what the future holds for one of its most valuable sectors.
While the announcements impacted workers directly, leaving hundreds of employees at tech giants such as Meta, Stripe, and Twitter refreshing their inboxes for clarity on what their future held, the cuts have put a renewed focus on what may be an over-reliance on a high-value but volatile source of tax revenue for the State.
In an email to staff last week, the Collisons said they were much too optimistic about their growth in 2022 and 2023 and “underestimated both the likelihood and impact of a broader slowdown”.
Their email could apply to many tech companies around the globe.
Meta’s CEO Mark Zuckerberg also admitted he got things wrong as he announced a worldwide cut of 11,000 jobs, the first major round of layoffs since the company was founded.
“I want to take accountability for these decisions and for how we got here,” Zuckerberg said in a memo to staff.
“I know this is tough for everyone, and I’m especially sorry to those affected.”
Meta’s stock has plunged 71% this year and is taking steps to pare costs following several quarters of disappointing earnings and a slide in revenue.
The retrenchment, the company’s most drastic since the founding of Facebook in 2004, reflects a sharp slowdown in the digital advertising market, an economy wobbling on the brink of recession, and Zuckerberg’s multibillion-dollar investment in a speculative virtual-reality push called the metaverse .
Alongside Meta, Stripe, and Twitter, the tech/online sector worldwide has seen company valuations plummet, forcing them to reevaluate their size and future growth following years of rapid expansion.
The job cuts and downsizing are all the more concerning when you consider that the global tech industry had seemed almost immune to the economic disruptions of recent years.
The tech sector in Ireland employs approximately 7% of the country’s workforce. While high by EU standards, it still pales in comparison to the numbers employed in the SME sector or in hospitality. The tech sector also pays very well. The average annual salary in the information, communications and technology (ICT) sector amounts to €74K, 64% higher than the national average.
And the tech industry has been in this position before.
The dotcom bubble in the early 2000s was a far more serious and significant correction. However, the innovative nature of technology means it will always have a future.
What is more significant for the recent job cuts is the focus it has placed on tax revenues.
Corporation tax receipts for the first 10 months of the year now stand at €16.2bn, which is €6.6bn ahead of the same period last year, driven by significant increases in profitability in the multinational sector. Ireland’s corporation tax revenues have more than doubled in the last five years.
To compound the issue, these corporation tax receipts are heavily concentrated, with more than half coming from just 10 companies.
“This level shift in corporate tax receipts, occurring over a very short timeframe, raises legitimate questions regarding the sustainability of this revenue stream,” a Department of Finance report said recently.
Given the size of some of these companies, the Government has concerns that any volatility can have an outsized impact on the Irish economy. The State saw this directly a decade ago in the pharmaceutical sector. Within the space of two years, a number of highly profitable drugs came off patent which resulted in a drop in corporation taxes from the sector.
And in 2006, tax revenues from the property market peaked at €7.2bn, nearly twice the level of two years earlier. The collapse of the property bubble saw receipts fall by nearly €6bn to €1.5bn by 2010 and, today, are still half of what they were in 2007.
In its report, the Department of Finance concedes that the pace at which technology is changing means that some firms or products that seem viable today could be redundant in the near future.
They pointed to high-tech and cutting-edge firms including Nokia and Blackberry which saw their dominant positions reduced to almost zero due to market competition.
“Recent economic experience highlights the risks associated with building up permanent expenditure commitments on the basis of temporary revenue streams is potentially hugely costly,” the Department of Finance report warns.
So the warning signs are there.
An over-reliance on a rapidly growing source of income concentrated on a single sector could have major repercussions of the State’s finances.
Ireland’s budgetary watchdog, the Irish Fiscal Advisory Council (IFAC) has led the charge, warning that the over-reliance on corporation tax receipts was “risky and prone to reversals”.
However, any overperformance of corporation tax relative to current forecasts should also be transferred to the rainy day fund or used for debt reduction.
“The Rainy Day Fund or a new National Pension Reserve Fund should be used to save excess corporation tax receipts, gradually reducing the State’s over-reliance on these risky revenues,” IFAC has said.
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