The reopening of the economy was accompanied by a strong bounce-back in activity, but inflationary pressures emerged. High inflation, while still driven by elevated energy prices, has become more broad-based, especially through higher transport and service costs. In addition, property prices have been rising, reflecting strong demand, past underinvestment, and a sluggish supply response. The government has acted to offset some of the energy price shock.

High inflation and low confidence are set to lower domestic demand. On the external side, exports of multinational-dominated high-growth sectors will continue to support GDP growth, albeit at a decelerating rate (Table 1). While inflationary pressures are projected to gradually abate, war-related factors may keep up inflation, thereby denting domestic demand and slowing the economy further.

Labour markets have been resilient in the face of the pandemic, and labour shortages are increasing in some sectors, such as construction. Despite gains in labour force participation for youth and women, those with lower educational attainment continue to struggle to secure and retain employment. During the pandemic, the government has expanded training using digital technologies and the development of additional apprenticeship schemes, particularly for sectors – such as construction – that are in high demand.

The financial sector appears to have weathered recent shocks relatively well. Banks have returned to profitability and continue to work down their non-performing loans. Innovation in the sector has continued apace with growing digitalisation and the rising importance of Fintech.

The financial sector faces some structural problems. Mortgage arrears remain important and their low resolution may limit credit supply. Returns on equity are low and two banks are withdrawing from the market, raising concerns about concentration. The rise of lending by non-banks creates risks that need to be monitored closely.

Fiscal policy had enough room to react to the crises forcefully. While spending rose, strong revenue growth meant budget balances did not deteriorate as much as elsewhere in the OECD. However, fiscal policy is facing a number of pressures in the short run and on its longer-term sustainability.

The strong rebound in the economy allowed the authorities to withdraw COVID-19 support measures for households and firms. Thanks to excess corporate tax receipts, the budget is expected to move back into balance in 2022, despite substantial government support related to the energy shock. The government has put part of these extra receipts in the National Reserve Fund. A new fiscal rule is also trying to make spending less procyclical and avoid creating backlogs of spending that are currently a challenge for policymakers.

High inflation is putting pressure on the government to increase spending, which may undermine the new spending rule before it gains sufficient credibility to constrain policy. Additional persistent stimulus to demand should be avoided in the current context of high inflation. Any further fiscal support for vulnerable households should be temporary and targeted, and should be designed to maintain incentives for energy savings.

In the longer term, several underlying pressures will create threats to fiscal sustainability. The plans to raise the state pension age have been abandoned, and the September pension reform is centred around increasing social security contributions. More rapid population ageing will push up health costs. Climate change objectives will require government support over the coming decades. The recent multilateral agreement on corporate taxation could reduce the buoyancy of receipts, although effects are very uncertain.

The sharp increases in house prices in recent years have heightened affordability concerns. The housing stock has hardly kept pace with the rise in the number of households, and remains low (Figure 2). After the lifting of the lockdown, housing market pressures intensified, causing house prices to rise rapidly. Accommodation is hard to find, particularly for lower-income families.

The government has launched an ambitious Housing for All initiative. The programme seeks to improve zoning, planning, land availability and provision of social housing. Public investment in housing is being increased. The policy aims to increase homeownership and affordability, in a break with earlier policy efforts to ensure neutrality between ownership and renting.

Boosting residential accommodation will require action to enable a stronger supply response. The regulation and permitting system is complex and slow, and housing developments can be subject to judicial review, further slowing supply. The new planning system gives back the primary decision to the local level, which requires additional expertise and resources to make it effective and timely. In addition, construction costs are elevated and the demand for workers in the sector exceeds supply. The State is also a large landowner of sites that could be developed. Finally, expanding housing supply needs to be better embedded in planning for transport and infrastructure.

Health gains have been impressive over recent decades. Life expectancy is now amongst the best in the OECD and the population rates their health as good. Improving spending efficiency, reducing waiting times and simplifying the interaction of different parts of the system are key.

Spending on healthcare is now comparatively high. After a period of retrenchment, spending on health has risen recently and is now high in comparison with other OECD countries. It also accounts for a sizeable share of government spending (Figure 3). This largely reflects high costs. Pay is high and pharmaceutical spending does not make the most of low-cost alternatives. As ageing begins to accelerate, spending pressures are projected to increase. Already spending on long-term care is elevated. Achieving efficiency gains will be important in addressing these pressures.

The government has initiated a far-reaching overhaul of the health sector. The Sláintecare reforms will reconfigure the sector by moving away from a largely hospital-based system to one that will better integrate primary, community and long-term care. This will also involve some decentralisation, with the creation of Regional Health Areas. Effective implementation should remove the burden on expensive hospital care, improve data availability and governance as well as financial reporting and management, and allow for some simplification of the complex interactions between the private and public elements of the system.

Progress will require overcoming some longstanding problems. The period of spending retrenchment has left a number of legacy issues. Waiting times are long with private patients able to jump queues causing concerns about a de facto two-tiered system. Past underinvestment in buildings and equipment is slowly being corrected, but will take time to overcome fully. Working conditions, particularly during the COVID-19 pandemic, are difficult and attracting and retaining staff is a concern.

Ireland did not meet its 2020 emission reduction target. In addition, greenhouse gas emissions per capita are amongst the highest in the OECD, partly due to the importance of agriculture. The government has adopted demanding reduction targets for 2030 and 2050, seeking to reach net zero emissions by mid-century.

A major plank of abatement policy is the establishment of carbon budgets and sectoral emissions ceilings. Emission reductions in the power generation sector is key to obtaining overall emission reductions. Ireland has already begun to develop renewable resources, but development of additional onshore and offshore wind generation capacity will require major investment, including in the grid infrastructure to ensure it can deal with more intermittent supply. It will be important to frontload the reforms to streamline and simplify the planning and judicial review process in order to facilitate the investment needed to meet the climate targets. The transport sector accounts for around one-fifth of greenhouse gas emissions.

The agriculture sector presents particular difficulties for abatement. Achieving methane emission reductions has proven to be difficult and the dairy herd has actually been growing, making the targets even more difficult to reach. Without more progress in agriculture, meeting the 2030 target will require greater effort from other sectors. This will raise the overall costs of reductions substantially.