Economic prospects are good but clouded with uncertainty
Reviving productivity is the key for future output and labour earnings
OECD Economic Surveys: Ireland 2018
OECD Economic Surveys: Ireland
Executive summary
Abstract
Economic conditions are good…
Living standards are high in Ireland, with recent improvements underpinned by the strongest post-crisis output recovery in the OECD. The Irish economy has demonstrated impressive durability over the past three decades. Average wages are now comparable with the top tier of OECD countries and income inequality is reduced through the highly redistributive tax and transfer system. At the same time, the population report a high level of work-life balance, feel safe in public spaces and have strong social connections.
The robust economic recovery has now broadened to domestic demand. Irish export performance has displayed a sustained improvement and business investment by local firms is now recovering strongly, particularly in the construction sector. Household consumption has also been revived, aided by cuts in direct household taxes, strong employment growth and modest import price inflation. The unemployment rate has declined rapidly (Figure A), leading to a pick-up in wage growth in some sectors.
Figure A. The economy has recovered strongly
Source: OECD Economic Outlook: Statistics and Projections (database); Central Statistics Office.
The economy is projected to continue expanding over the next two years, albeit at a more sustainable pace. The labour market will tighten further, with the unemployment rate projected to fall to around 5½ per cent. This will place further upward pressure on wages and inflation, with consumer prices expected to rise by over 2% in 2019. As real disposable income growth weakens, household consumption growth will also slow. Private construction activity will continue to be spurred by rising property prices, but equipment and machinery investment is likely to be held back by increasing uncertainty in the business sector. GDP growth is expected to be around 2½ per cent in 2019 (Table 1).
Table 1. The economy will continue to expand at a solid pace
Source: OECD Economic Outlook.
…but prospects are clouded with uncertainty
Brexit is a serious risk to the economic outlook. OECD estimates show that a trade arrangement between the UK and EU governed by the World Trade Organisation’s Most-Favoured Nation Rules could reduce total Irish exports by 20% in some sectors such as agriculture and food. Given the large share of multinational firms in the Irish economy, an additional risk to the outlook is rising international tax competition.
Heightened uncertainty makes it vital to further improve the fiscal position. Public finances have improved noticeably, but government debt remains high and tax receipts have become more subject to volatility (Figure B). Further public debt reduction would create scope for budgetary policy to support the economy in the event of a negative shock. This could be achieved through broadening the tax base in a way that does not significantly reduce medium‑term growth. For example, while ensuring that social inclusiveness is maintained, VAT preferential rates and exemptions could be eliminated and the property tax yield raised through more regular revaluations of the base.
Figure B. Gross government debt ratios are declining but remain high
Source: Central Statistics Office and OECD.
Vulnerabilities in the financial sector also need to be further addressed. While non-performing loans on bank balance sheets have declined by around 60% from their peak, the stock remains high (Figure C). This reflects judicial inefficiencies relating to the repossession of collateral and limited progress in improving the regulatory framework for writing-off NPLs. Measures that address these weaknesses, such as introducing stronger incentives for banks to reduce NPLs, will promote the efficient allocation of capital as well as the resilience of the economy overall.
Figure C. The NPL ratio remains high
Q2 2017
Source: European Banking Authority.
Reviving productivity is the key for future output and labour earnings…
Most Irish firms have experienced declining productivity over the past decade. This has largely reflected the poor performance of local firms, with the large productivity gap between foreign-owned and local enterprises having widened (Figure D). The resilience of the Irish economy hinges on unblocking the productivity potential of these local businesses. This can be achieved by further improving the enabling environment for them to succeed and grow.
Figure D. The large productivity gap has widened
Labour productivity index (Irish firms in 2006=100)
Source: Department of Business, Enterprise and Innovation.
There are high regulatory barriers to entrepreneurship (Figure E). This reduces competitive pressures on incumbents and the reallocation of resources to new firms that have good ideas. In particular, there are costly regulations relating to commercial property and legal services, while the costs of business failure are high. Access to finance for young firms needs to improve as well and will benefit from further efforts that mend the health of the banking sector and raise the efficacy of state-supported lending initiatives.
Figure E. Barriers to entrepreneurship are high
PMR indicators
Source: OECD PMR Indicators Database.
Further improvement in Irish infrastructure is needed to promote firm growth (Figure F). The government plans to increase capital spending significantly over the coming four years and the projects undertaken must continue to be carefully prioritised through evidence-based evaluation of those with the highest returns. To do this more effectively, systemic collection of information on the performance of existing assets is crucial.
Figure F. The quality of domestic infrastructure needs to be improved
Source: World Economic Forum.
Productivity spillovers can be enhanced by raising the absorptive capacity of local businesses. The capacity of local firms to absorb and implement new technologies is impeded by relatively weak managerial skills. This partly reflects the low proportion of workers participating in lifelong learning activities. With burgeoning skill demand, there should be an increase in the share of training funding to those in employment. Innovation and the ability for Irish firms to fully utilise new technologies is also weakened by low research and development activities. There is scope to reorient innovation policy to better promote the research intensity of local firms. In particular, public grants for business research and development could be increasingly used, as it would better reach local entrepreneurs that may be in a loss-making position and hence less swayed by tax exemptions on research funding.
…though other significant challenges for wellbeing exist
Life satisfaction is high, but Ireland underperforms in housing, health and getting people into work (Figure G). In each of these policy domains, it is often individuals with lower incomes or skills that are most adversely impacted by policy deficiencies. As such, well-designed reforms can both improve aggregate wellbeing and contribute to a more inclusive society.
Figure G. Life satisfaction is high but challenges exist
Note: The figure represents the relative position of Ireland with respect to OECD's best (100) and worst (0) performer in each of the areas.
Source: OECD Better Life Index 2017 and OECD Government at a Glance 2017.
Housing affordability is reduced by low dwelling supply in Ireland’s main cities. Recent policy measures have sought to improve affordability, but have mostly focused on the demand-side. A longer-term solution is to prioritise measures that promote dwelling supply. At present, some unnecessary housing regulations in urban centres reduce the density of housing development and raise costs for developers. There are also well-located swathes of land that are underutilised and should be rezoned for residential purposes. To promote the efficient use of such land, a broad-based land tax should be introduced.
The health system is failing in terms of cost, patient satisfaction and waiting times (Figure H). Demand pressures are likely to heighten as well, with the population expected to age markedly over the coming 15 years. Ireland does not have universal coverage for primary healthcare, contributing to poor access and high health costs for some households that cannot afford private insurance. While there is scope for further improvements in health spending efficiency, a path to providing universal coverage should be laid out.
Figure H. There are lengthy waiting times for medical procedures
Days waiting, 2016
Note: The figure shows average waiting times across a variety of procedures. Data are for 2015 for NZL.
Source: OECD Health Statistics 2017.
Some vulnerable groups do not participate in the labour market (Figure I). Employment rates are particularly low for young low-educated individuals. Some aspects of the social welfare system continue to disincentivise labour market participation by imposing high effective tax rates when taking up work. More active engagement with the labour market may be promoted through well-enforced job search requirements attached to social benefits and effective training programmes for the long-term unemployed. Ireland also exhibits relatively weak labour force participation for women. In response, the government is introducing a new childcare subsidy. However, the comparatively steep withdrawal of some means-tested benefits means that the participation tax rate will remain high for many women.
Figure I. The labour utilisation rate is low
Source: OECD Employment Outlook.