Perhaps unaware of the meaning of the term in Ireland, the International Monetary Fund said in its recent review of the economy it believed a “soft landing” was imminent. Similar assurances were given to the Irish public before the financial crash. Fortunately, there is no reason to believe that history will repeat itself, even if economic forecasts in recent years have been largely worthless given the series of unexpected shocks.
After Covid-19 and its consequences as well as the war in Ukraine, there was actually a kind of return to stability in 2023. The war in Gaza caused some nervousness towards the end of the year, although the economic impact has so far been limited due to the conflict's geographical scope. However, geopolitical factors continue to play a large role in economic forecasts.
Economic growth in Ireland slowed during the year due to two main factors. One of these was the ongoing – albeit easing – cost of living crisis and the rise in interest rates, which affected household income. The second reason was a decline in exports of some multinational industries, particularly the pharmaceutical sector. This appears to be largely due to the sector's strong export push waning during the Covid-19 pandemic.
This decline in exports was the main reason for the decline in Ireland's gross domestic product and pushed the economy into a so-called “technical recession”. This term is used due to the distortion of Irish economic statistics caused by multinational activities. The domestic economy continued to grow compared to 2022. However, falling business investment has caused the domestic economy to falter in recent months, but consumer spending has continued to rise – albeit more slowly.
So while the recession may be technical, the slowdown is real. And one thing is clear from all the data: the extraordinary economic recovery following the end of the Covid-19 lockdowns is finally over, both internationally and in Ireland.
Nevertheless, the Irish labor market has held up and employment figures are at record levels. Total employment in Ireland has increased from just over 2.2 million in 2018 to 2.64 million now. The unemployment rate has increased in recent months, but is still well below 5 percent. There are some signs in recent data that overall employment has peaked. Notably, IDA Ireland's annual figures this year showed a slight decline in employment at its client companies. Figures from the Central Statistical Office suggest that employment across the economy has been virtually stable in recent months.
In terms of managing the economy, the government received good news in November when corporate tax returns soared after three months in which weaker figures had been a cause for concern. This suggests that the government will more or less achieve its revised annual target of around 23.5 billion euros from this tax and that, in turn, the overall budget surplus figures are likely to be achieved.
However, the episode underscored an important point. It is the reliance on a small number of companies to pay a large amount of corporate tax – the Fiscal Council estimates that three large companies may be responsible for more than a third of total revenue. The volatility in the autumn appeared to be linked to lower payments from some big companies – Apple and Pfizer – in 2023, and this underlines the risks Ireland faces here. It's also worth noting that while this year's figures are expected to be in line with targets, it will be the first year in some time that corporate tax revenues are not well above expectations.
In recent years, the government has managed this influx of funds by setting aside part of the funds in a special fund. It plans to formalize this now, creating two dedicated instruments for what it defines as excess corporate tax revenue: one to support investment and climate spending and the other as a longer-term fund to support future financing constraints. In order for meaningful amounts of money to end up in these funds, the flood of corporate tax money must continue.
With the Treasury in a strong surplus and Ireland's public debt burden easing, the government will enter a year that may see a general election saying it can be trusted with the state's finances. Towards the end of the years, she received strong criticism from the Finance Advisory Board, accusing her of “gimmickry” in some of her budget maneuvers. This is mainly related to the division between temporary and permanent expenses.
However, a central focus of the general election debate will be on the use of available resources – particularly for housing, but also in areas such as health and education. The government will claim that it is making some progress here; The opposition will argue that it should be doing much better. The polls suggest that Sinn Féin's housing campaign in particular has gained traction. A heated election debate lies ahead.
Comments are closed.