The Irish economy has been experiencing a period of relative stability, with strong public finances and a promising outlook for the coming years.
However, concerns have been raised over the potential impact of proposed tax cuts and the risk of inflation in the near future.
The Irish Fiscal Advisory Council has urged the government to exercise caution and plan for the long-term sustainability of the economy. The Tánaiste has acknowledged these concerns and emphasized the need to watch inflation closely. While the government is expected to introduce tax relief and increased public expenditure in the upcoming budget, there are several significant challenges facing Ireland.
These include rising age and pension costs, the impact of climate change, healthcare measures, and defense spending. Addressing these challenges will require a comprehensive and strategic approach, with a focus on long-term planning and investment.
Irish Fiscal Advisory Council’s Advice
The Irish Fiscal Advisory Council has urged the Government to plan for the future of the economy, given the strong public finances, surpluses expected in the coming years, and potential tax relief and additional expenditure in public services in the budget, amidst concerns over inflation and capacity constraints.
The Council noted that while the Irish economy has proven to be resilient so far, other markets that Ireland exports to are going through choppy waters, and there are several pressures facing the country, including age and pension costs, climate change, healthcare measures, and defence spending.
The Council also highlighted several methodological shortcomings in the Government’s Stability Programme Update, including the lack of provision beyond this year for Ukrainian refugees and the Mica redress scheme, the absence of costs of the auto-enrolment retirement savings system and the Christmas bonus in projections, and out-of-date forecasts for public finances.
They warned that long-term challenges in relation to climate change and an ageing population need to be addressed, and called for sustainable and strategic investment in infrastructure, climate, sustainability, rail, roads, and housing.
The proposed new Long-Term Savings Fund could play a key role in saving corporation tax windfalls and supporting the sustainability of the pension system in the future.
Current State of Irish Economy
One notable aspect of the current state of the Irish economy is its proven resilience, despite facing significant challenges such as age and pension costs, climate change, and healthcare measures.
Unemployment rates in the country are at record low levels, but the economy is grappling with capacity constraints, with workers scarce, particularly in the construction sector. The economy is also facing wage and rent pressures, which have emerged as a significant challenge for policymakers.
The underlying deficit, excluding excess corporation tax receipts, is expected to narrow to 0.6% of GNI* this year. Modified GNI* is a metric that attempts to give a better view of the Irish domestic economy.
The public finances in Ireland are strong, with surpluses expected in the coming years, albeit of a one-off nature. The net debt-to-GNI* ratio is projected to decline by 23 percentage points between end-2022 and end-2026, with windfall corporation tax receipts projected to account for about two-thirds of this fall.
However, public finances are being boosted by exceptional but unreliable inflows of corporation tax receipts from foreign multinationals, with just three corporate groups accounting for 30% of receipts from 2017 to 2021. There is a risk that this could reverse due to firm-specific factors or changes in the international tax environment.
Challenges Facing Ireland
Challenges facing the Irish economy are numerous and require strategic planning and investment. Among these challenges are age and pension costs, climate change, healthcare measures, and defence spending.
Addressing these issues will require long-term planning and sustainable investment strategies. As the population ages, pension and healthcare costs will continue to rise, putting pressure on public finances.
Climate change presents a global challenge that requires immediate action, and Ireland must take steps to mitigate its effects. Additionally, defence spending is necessary to ensure national security.
Sustainable and strategic investment in infrastructure, climate, sustainability, rail, roads, and housing is necessary to address these challenges and ensure the long-term health of the Irish economy. It is important for the Irish government to develop credible plans to manage these challenges and make choices between new tax and spending measures and existing spending to ensure that the economy remains resilient.
Long-Term Planning and Investment
Long-term planning and investment are crucial for ensuring the sustainability of the Irish economy, as highlighted by the projected decline of the net debt-to-GNI* ratio by 23 percentage points between end-2022 and end-2026, with windfall corporation tax receipts accounting for two-thirds of this fall.
The Fiscal Council has emphasized the need for sustainable and strategic investment in infrastructure, climate, sustainability, rail, roads, and housing. However, the council has also warned that with capacity constraints, there may be limited scope to raise investment.
To address these challenges, the proposed new Long-Term Savings Fund could play a key role in saving corporation tax windfalls and supporting the sustainability of the pension system in the future.
Additionally, long-term planning needs to improve, including developing more credible plans to manage ageing pressures in health and pensions and climate-related costs.
Choices will need to be made between new tax and spending measures and existing spending, and sustainable investment in infrastructure and housing will be necessary to ensure the long-term sustainability of the Irish economy.
