OECD Economic Outlook, Volume 2022 Issue 2

Ireland

GDP growth is projected to exceed 10% in 2022, following the full relaxation of pandemic-related restrictions early in the year. Falling real incomes due to high inflation will hold back consumer spending up to mid-2023, despite significant wage growth. High costs and low confidence will reduce firms’ incentives to invest. Modified domestic demand will thus only grow by 0.9% next year, before rebounding by 3.1% in 2024. As exports in multinational-dominated sectors, though moderating, will remain supportive, GDP is projected to grow by 3.8% in 2023 and 3.3% in 2024.

On the back of record-high tax receipts, boosted by multinationals’ large profits and labour market resilience, the government announced a wide set of measures to support households and SMEs against high inflation in 2022-23. If needed, further measures should be targeted and temporary. The welcome decision to allocate part of the windfall corporate tax revenues to the National Reserve Fund should be continued in the event of further windfall gains. Reverting to the new spending rule, after temporarily deviating from it in 2022 and 2023, would move fiscal policy onto a more stable spending path.

Rising prices are lowering real household incomes

The full relaxation of pandemic-related restrictions in early 2022 led to a rebound in consumer and domestic firms’ capital spending in the second quarter. On the back of higher energy prices and supply chain constraints, pent-up demand lifted inflation to a record high of 9.6% in June. Recent retail sales and credit card payments data suggest weaker consumer spending in the third quarter, as rising prices hit households’ real incomes, despite sizeable wage growth amidst tight labour market conditions.

Ireland

1. Calculations based on a common set of 213 sub-indices.

Source: Eurostat; and OECD Economic Outlook 112 database.

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Ireland: Demand, output and prices

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Consumer and energy price inflation were high in October, at respectively 9.6% and 48% year-on-year, according to preliminary estimates. Furthermore, inflationary pressures have become more broad-based with 5.1% core inflation in September. Soaring prices of energy and other essentials disproportionately affect poorer households – particularly elderly, youths and lone parents. Likewise, elevated input costs coupled with reduced demand pose a threat to SMEs relying on household discretionary spending. Hence, in September, the government introduced a wide package of partly one-off budgetary measures (2.6% of GDP) – about 40% of which is targeted, aimed at supporting households and SMEs against high inflation in 2022-23.

Windfall tax revenues will boost public finances

High corporate tax receipts, which accounted for one fifth of government revenues in 2021, are supporting public finances. Whilst the recently introduced spending rule, which caps annual primary spending growth at 5%, is set to be temporarily breached in 2022 and 2023, due to the cost of the adopted fiscal packages, the budget position is expected to reach a balance this year and a surplus in 2023. Given the potentially transient nature of corporate tax revenues, the decision to put EUR 6 billion of windfall tax gains in the National Reserve Fund by 2023 is welcome. The wide set of cost-of-living measures announced in September, ranging from targeted welfare payments, tax measures, and an SME energy support scheme to universal energy credits and temporarily reduced indirect taxes, will help the most exposed households and businesses in 2022-23. Public investment support through the National Development Plan will partly offset weaker private business and residential investment. Budget 2023 also allocates EUR 2 billion to support Ukrainian refugees, whose numbers topped 62 000 by early November (1.2% of Ireland’s population). Public support is set to be scaled back in 2024, as economic conditions improve.

Risks to domestic activity are considerable

Higher inflation and uncertainty, exacerbated by Russia’s invasion of Ukraine, will weigh on domestic activity. Real income losses will hold back household consumption from end-2022 to mid-2023, despite government support and strong wage growth. Consumer spending is projected to strengthen somewhat thereafter, as inflationary pressures gradually recede thanks to reduced energy prices and the rebalancing of supply chains, which will also support business investment. With core inflation still relatively high in 2024, risk-averse households are likely to keep savings well above pre-pandemic levels. On the external side, exports of multinational-dominated high-growth sectors will continue to support GDP growth, albeit less, as exports of medical products ease in 2024. More elevated input and funding costs than assumed might further delay domestic firms’ investment and the government’s plans to boost housing supply and residential retrofitting. Lingering uncertainties around the full implementation of Brexit agreements could further weigh on firms’ competitiveness. Moreover, renewed instances of non-delivery of contracted electricity generation, on the back of surging demand from datacentres, might increase the risk of supply disruptions and weigh on growth.

Sustainable public finances are needed to deliver on long-term reforms

Long-term fiscal sustainability is key to the effective delivery of the government’s investment-intensive reform agenda to ensure a just climate transition, as well as affordable quality housing and health services. In this context, allocating any future windfall tax gains to the National Reserve Fund is warranted. In addition, structural reforms will be required for sustainable and resilient growth. Overhauling planning, permit and judicial review regulations could help speed up needed investment in network and renewable generation capacity and housing. The design of policy schemes to shield businesses and consumers from high energy prices should avoid undermining incentives for energy savings.