Leprechaun economics () was a term coined by economist Paul Krugman to describe the 26.3 per cent rise in Irish 2015 GDP, later revised to 24.6 per cent, in a 12 July 2016 publication by the Irish Central Statistics Office (CSO), restating 2015 Irish national accounts. At that point, the distortion of Irish economic data by tax-driven accounting flows reached a climax. In 2020, Krugman said the term was a feature of all tax havens.
While the event that caused the artificial Irish GDP growth occurred in Q1 2015, the Irish CSO had to delay its GDP revision and redact the release of its regular economic data in 2016–2017 to protect the source's identity, as required by Irish law. Only in Q1 2018 could economists confirm Apple as the source, and that this was the largest ever base erosion and profit shifting (BEPS) action, and the largest hybrid–tax inversion of a U.S. corporation.
The event marked the replacement of Ireland's prohibited BEPS tool, the Double Irish, with the more powerful Capital Allowances for Intangible Assets (CAIA) tool. Apple used the CAIA tool to restructure out of its hybrid–Double Irish tool, on which the EU Commission would levy a €13 billion fine in August 2016. As a result of the action by Apple, a range of academics calculated that Ireland, already held by some to be a major tax haven, was the world's largest tax haven.
The "Leprechaun economics" incident had follow-on effects. In September 2016, Ireland became the first of the major tax havens to be "blacklisted" by a G20 economy, Brazil. In February 2017, Ireland replaced GDP with "Modified GNI (or GNI*)" (2017 Irish GDP was 162% of 2017 Irish GNI*, whereas EU–28 2017 GDP was 100% of GNI). In December 2017, the U.S. and the EU introduced countermeasures to the Irish BEPS tools. In October 2018, Ireland introduced a reverse tax, to discourage IP from leaving Ireland. In 2018, the OECD showed that Ireland's public debt metrics differ dramatically depending on whether Debt-to-GDP, Debt-to-GNI* or Debt-per-Capita is used; and in 2019, the IMF estimated 60 per cent of Irish foreign direct investment was "phantom".
Naming and use 2015 GDP data On the 12 July 2016, at 11am GMT, the Central Statistics Office posted a data revision showing that 2015 Irish GDP data rose by 26.3 per cent and 2015 Irish GNP rose by 18.7 per cent. Twenty four minutes later, at 11.24am GMT, Nobel Prize-winning economist Paul Krugman responded to the data release by posting:
From 12 to 13 July 2016, the term leprechaun economics was used widely by the Irish and international media when discussing Ireland's revised 26.3% 2015 GDP growth rate. Leprechaun economics became a label for the Irish 2015 GDP 26.3% growth rate, and has been as such by a diverse range of sources. In December 2019, the Irish Times named "Leprechaun Economics" as one of its "Top 10 business stories of the decade".
Irish economy Since July 2016, "leprechaun economics" has become used by economists in relation to caveats and concerns regarding Irish economic data.
In March 2018, the first paper was published in an established international economic journal, in this case the New Political Economy - with leprechaun economics in its title: "Celtic Phoenix or Leprechaun Economics? The Politics of an FDI-led Growth Model in Europe". By September 2018, the term leprechaun economics had been used 83 times during debates in the Irish Dáil Éireann.
In September 2019, former Northern Ireland minister Nelson McCausland, criticised Ireland's reliance on tax-driven schemes for economic growth, which he referred to as Leprechaun economics, in an opinion piece for The Belfast Telegraph titled: "Northern Ireland will prosper once it’s rid of the EU... not by being tied to 'economics of the leprechaun'".
Wider use Since July 2016, "leprechaun economics" has also been used many times (including by Krugman himself), to refer to distorted or unsound economic data outside Ireland, including by:
In January 2020, Krugman noted in the New York Times the more general application of the term, saying: "Now, I've coined a few economic phrases I'm proud of: "leprechaun economics" for the distortion of statistics caused by multinational corporations in search of tax havens, ..."; and followed with tweet saying: "You know what's really gratifying as a commentator? When a phrase you coined (leprechaun economics) is widely used without attribution. No, really — it means you've changed the discourse".
Controversy In June 2021, the Irish Ambassador to the US, Daniel Mulhall, wrote a letter to the New York Times saying, "This is not the first time your columnist has used the word 'leprechaun' when referring to Ireland, and I see it as my duty to point out that this represents an unacceptable slur."
Obfuscation of source (2016) Statistics Act
Despite the scale of the revision to 2015 Irish GDP, the Irish Central Statistics Office issued a short one-page note on 12 July 2016 explaining that it was as a result of an annual benchmarking exercise. The office also stated that: "As a consequence of the overall scale of these additions, elements of the results that would previously been published are now suppressed to protect the confidentiality of the contributing companies, in accordance with the Statistics Act 1993."
On the 12 July 2016, the Irish State attributed the 2015 growth revision to a combination of factors, including aircraft purchases (Ireland is a hub for aircraft securitisation), and the reclassification of technology and pharmaceutical corporate balance sheets following the closure of the Double Irish tax scheme in 2014, despite the fact that existing users of the Double Irish, which Noonan was referring to, had until 2020 to switch out of their Irish BEPS tool.
On 13 July 2016, the ex-Governor of the Central Bank of Ireland made the following comment:
The delay by the Central Statistics Office in publishing revisions to Q1 2015 data (the period in which the growth appeared), as well as the redaction of regular data from 2016 to 2017, meant that it would take almost three years for economists to show in Q1 2018. In addition, the Central Statistics Office further obfuscated the picture by asserting that the "leprechaun economics" growth was not attributable to a main source, but was from several sources and part of Ireland's position as a Modernised Global Economy.
While the Double Irish was a widely used Irish BEPS tool, Apple's Irish subsidiary, ASI, used a hybrid version approved by the Irish Revenue, which the EU Commission argued was state aid. In September 2016, the Central Statistics Office again denied this claim and repeated its assertion that the growth was from a range of sources including aircraft leasing.
By early 2017, research in the Sloan School of Management in the Massachusetts Institute of Technology, using the limited data released by the Irish Central Statistics Office, concluded: While corporate inversions and aircraft leasing firms were credited for increasing Irish GDP, the impact may have been exaggerated.
The use by Ireland of complex data protection and data privacy laws, such as contained in the 1993 Statistics Act, to protect Irish BEPS tools and Irish corporate tax avoidance schemes is documented by tax justice groups. The Irish Central Statistics Office was accused of "putting on the green jersey" to hide Apple's tax planning schemes, by some Irish political opposition groups. The Central Statistics Office (Ireland) did not list Modified GNI (discussed later) in their Key Summary Economic Indicitors for September 2018, but only GDP, GNP and Debt-to-GDP.
EU GDP levy In July 2016, the Irish media reported that while the drivers of Ireland's "leprechaun economics" growth might not have produced tangible additional tax revenues for Ireland, the 26.3% rise in Ireland's GDP directly increased the due cost of Ireland's annual EU budget levy, which is calculated as a percentage of Eurostat GDP, by an estimated €380 million per annum.
In September 2016, the Irish government appealed to the EU Commission to amend the terms of the EU GDP levy to a GNI approach, so Ireland would not incur the full €380 million increase. There were unsubstantiated claims by the Irish government that the effective impact of the increase in the GDP levy would be reduced to circa €280 million per annum.
The "leprechaun economics" affair prompted an October 2016 audit by Eurostat into Ireland's economic statistics, including questions from the International Monetary Fund, however no irregularities were detected and it was accepted that the Irish Central Statistics Office had followed the Eurostat guidelines, as detailed in the Eurostat ESA 2010 Guidelines manual, in preparing the 2015 National Accounts.
On the 8 November 2016, a report by the EU Director-General for Internal Policies ("DG IPOL") on Ireland's "leprechaun economics" affair, noted that Detailed explanations are not provided, due to confidentiality rules aimed at protecting companies, and that the International Monetary Fund had stated that Additional metrics better reflecting the underlying developments of the Irish economy should be developed. The report concluded that: It is becoming increasingly difficult to represent the complexity of economic activity in Ireland in a single headline indicator such as GDP.
Introduction of GNI* (2017)
Pre-2015 distortions From early academic research on tax havens by James R. Hines Jr. in 1994, Ireland has been noted as a tax haven (one of Hines' seven major havens). Hines would go on to become the most-cited author in the research of tax havens, recording Ireland's rise to become the 3rd largest global tax haven in the Hines 2010 list. As well as identifying and ranking tax havens, Hines, and others, including Dhammika Dharmapala, established that one of the main attributes of tax havens is the artificial distortion of the haven's GDP from the BEPS accounting flows. The highest GDP-per-capita countries, excluding oil and gas nations, are all tax havens.
In 2010, as part of Ireland's ECB bailout, Eurostat began tracking the distortion of Ireland's national accounts by BEPS flows. By 2011, Eurostat showed that Ireland's ratio of GNI to GDP, had fallen to 80% (i.e. Irish GDP was 125% of Irish GNI, or artificially inflated by 25%). Only Luxembourg, who ranked 1st on Hines' 2010 list of global tax havens, was lower at 73% (i.e. Luxembourg GDP was 137% of Luxembourg GNI). Eurostat's GNI/GDP table (see graphic) showed EU GDP is equal to EU GNI for almost every EU country, and for the aggregate EU–27 average. A 2015 Eurostat report showed that from 2010 to 2015, almost 23% of Ireland's GDP was now represented by untaxed multinational net royalty payments, thus implying that Irish GDP was now circa 130% of Irish GNI (e.g. artificially inflated by 30%).
Climax of 2015 Apple's Q1 2015 BEPS transaction implied that Irish GDP was now well over 155% of Irish GNI, exceeding even Luxembourg, and making it inappropriate for ongoing monitoring of the high level of Irish indebtedness. In response, in February 2017, the Central Bank of Ireland became the first of the major tax havens to abandon GDP and GNP as metrics, and replaced them with a new measure: Modified gross national income, or GNI* (or GNI Star).
In July 2017, the Financial Times reporting on the new GNI* measure said: "The Irish economy is about a third smaller than expected. The country’s current account surplus is actually a deficit. And its debt level is at least a quarter higher than taxpayers have been led to believe"; and that "Embarrassed by what Paul Krugman, the economist, denounced as "leprechaun economics", Ireland's policymakers were determined to avoid a repeat".
The move was timely; in 2018, research using 2015 data showed Ireland had become the world's largest tax haven (Zucman–Tørsløv–Wier 2018 list).