In recent decades, Ireland made impressive strides in developing its economy and raising living standards. This progress has allowed the economy to weather the COVID-19 pandemic and cope effectively with the repercussions from Russia’s war of aggression against Ukraine. The economy has recovered, but inflationary pressures emerged and while the outlook is favourable, risks are tilted to the downside. The financial sector appears to have withstood the recent shocks, but faces some structural problems, including high legacy mortgage arrears. Fiscal policy had enough room to react to the crises forcefully and shield households and businesses from the full weight of the shocks. A number of pressures will affect fiscal policy in the short run and its sustainability over a longer horizon, including ageing, ensuring adequate supply of affordable housing, and combatting climate change. Labour force participation is still weak for those with lower education attainment and rising house prices are creating affordability concerns. The government has launched an ambitious Housing for All initiative to boost residential accommodation, which will require action to enable a stronger supply response. Ireland did not meet its 2020 emission reduction target. A major plank of abatement policy is the establishment of carbon budgets and sectoral emissions ceilings. The agriculture sector presents particular difficulties for abatement.
OECD Economic Surveys: Ireland 2022
1. Key Policy Insights
Abstract
1.1. Having withstood the COVID-19 shock, the economy faces further challenges
In recent decades, Ireland made impressive strides in developing its economy and raising living standards. Life expectancy at birth is now among the highest in the OECD, from relatively low levels in the 1990s, and the population’s self-reported health status was the best in the European Union in 2019. Thanks to a highly redistributive tax and transfer system, inequalities in disposable income are limited. The gap between the highest and lowest disposable incomes, as well as measures of poverty rates, are among the smallest in the OECD. Moreover, education is high quality with limited impact of socio-economic status. The relatively-young and well-educated population has been a key pull factor in the country’s successful strategy to attract foreign direct investment, together with a supportive business environment.
The economy weathered the COVID-19 pandemic and is coping effectively with the repercussions from Russia’s war against Ukraine. The lockdown was one of the strictest in the OECD and vaccination rates rose to amongst the best in the OECD. Benefitting from fiscal space, government policy reacted forcefully to support firms and households and preserve worker attachment to firms. Exports from the multinational part of the economy benefited from strong demand for medical and information communication technology goods and services. As a result, trend headline GDP growth remained robust while modified domestic demand, a national indicator that excludes globalisation-related investment in aircraft for leasing and on-shored intellectual property assets (Box 1.1), declined by 4.8% in 2020, before returning to pre-pandemic levels in the third quarter of 2021 (Figure 1.1, Panel A). The reopening of the economy was accompanied by a strong bounceback in activity and the unemployment rate dropped quickly (Panel B). The war in Ukraine has affected the Irish economy through the slowdown in global demand, particularly in major European trading partners, and the surge in energy and food prices, but the government announced a wide set of measures to support households and firms.
Figure 1.1. Robust external demand and extended income support sustained the economy
1. Excludes those large transactions of foreign corporations that do not have a big impact on the domestic economy.
2. The COVID-adjusted unemployment rate is an estimate of the share of the labour force that was not working due to unemployment or COVID-related absences.
Source: OECD, National Accounts database; Central Statistics Office; and Eurostat.
Ireland faces challenges to sustain growth and improve well-being over the longer term. To wit, the country’s ambitions to overhaul the health system to improve quality of care and value for money, ensure affordable housing and achieve a just carbon transition. In each area, substantial public spending is potentially needed and ensuring spending efficiency will be required. While the fiscal position is currently strong, with buoyant revenues, risks loom and cost-efficient policies will be needed.
Box 1.1. Different measures to capture the underlying dynamics of the domestic Irish economy
To better capture the underlying dynamics of the Irish economy, the Central Statistics Office publishes some alternative metrics, such as Modified Domestic Demand (MDD) and Modified Gross National Income (GNI*). The former measures domestic demand, but excludes volatile components of investment spending by multinationals, namely on-shored intellectual property assets and investment in aircraft for leasing, which have very little impact on the domestic economy. GNI* goes further by taking into account the import content of domestic expenditure and the contribution to growth from domestic net trade (i.e., excluding multinational dominated trade), thereby allowing for a comprehensive assessment of productivity trends. In particular, relative to the standard GNI, GNI* excludes the factor income of firms that have re-domiciled their headquarters to Ireland, as well as the depreciation of trade in on-shored intellectual property assets, R&D service imports and aircraft owned by aircraft-leasing companies. A related alternative metric is the modified current account balance (CA*), which removes a number of globalisation-related distortions, including trade and depreciation of intellectual property assets and aircraft related to leasing along with profits of redomiciled firms. Table 1.1 presents some of the main variables presented in the Basic Statistics Table at the start of this Survey as a share of GNI*.
Table 1.1. Selected variables as a share of GNI* and GDP
Source: OECD, National Accounts database; Central Statistics Office; World Bank, World Development Indicators; OECD, Health Expenditure and Financing database; OECD, Social Expenditure database; Department of Finance (2021), Forecasting GNI* - Detailing the Department of Finance Approach, Dublin; Central Statistics Office, Modified GNI; and Department of Finance (2019), The Balance of Payments in Ireland: Two Decades in EMU, Dublin.
Health care reform is a major political initiative. While measures of health sector performance are good overall and the system weathered the COVID-19 pandemic better than initially feared, care provision is relatively expensive and facing mounting spending pressures as the population begins to age rapidly. The Sláintecare reform presents opportunities to reform a complex healthcare system and provide more integrated cost-efficient care. At the same time, the government is facing the legacy of past underinvestment in the sector and the build-up of long waiting lists, which will need to be addressed over time.
Spending pressure has also emerged in the housing sector. A prolonged period of underinvestment, combined with a legal and regulatory system that hinders supply, account for a relatively old housing stock, housing shortages (particularly in the rental market) and weak housing supply. This has put upward pressure on house prices and rents and has led the government to introduce the Housing for All reforms in 2021. Addressing the issue will require sustained effort and faces implementation challenges, including labour shortages in the construction sector. Labour mobility, in turn, is affected by housing shortages and costs.
A third major pressure on policy is addressing climate change. Having missed the abatement target in 2020, the government has adopted a net-zero greenhouse gas emission target for 2050 with an interim target for 2030 and has begun to elaborate policies to meet them combining market-based and regulatory measures. Meeting the targets cost-efficiently will require significant reforms. Furthermore, investment needs in the transport sector and energy efficiency improvements in the existing housing stock will add to the demand for labour in construction, which should be addressed urgently. Achieving emission reductions in agriculture is difficult without a major downsizing of the sector, possibly calling for greater effort elsewhere. In addition, the regulatory and legal barriers facing major investments are also potential constraints on maximising the potential of renewables.
Despite openness to new technologies, spillovers to domestic firms from the multinational sector have been limited, resulting in modest productivity growth (OECD, 2020a). In addition, certain groups face difficulties maintaining attachment to the labour market and heightened risk of poverty. Measures fostering the acquisition of digital and green construction skills and improving access to finance for innovative SMEs, would likely boost participation and productivity in the domestic-oriented economy.
Against this background, the key messages of this Survey are:
Current revenue buoyancy has allowed Ireland to weather the COVID-19 pandemic and the repercussions of the Russia’s war of aggression against Ukraine, but action will be needed to put public finances on a sounder footing in the face of foreseeable pressures from ageing, including by addressing pro-cyclicality in spending and not delaying measures to meet the longer-term challenges.
Past underinvestment in housing and the need to reduce greenhouse gas emissions call for major investments. The government is boosting investment in these areas, but action is also required to reduce regulatory and legal hurdles, to reduce uncertainty and high transaction costs, which could derail progress on both fronts.
The government has launched a major reform of the health sector, Sláintecare. The sector is complex, relatively expensive and suffering from legacy issues, such as elevated waiting lists, that will be difficult to resolve quickly. Moving to a more integrated system of primary, community and hospital care offers solutions. It will be important to seek out efficiency gains and avoid raising spending to address short-run pressures.
1.2. Growing uncertainties will dent the pace of the recovery
During the pandemic, Ireland experienced several waves of infection and implemented strict containment policies and lockdowns involving curfews and the closing of non-essential businesses. This had a severe impact on the domestic-oriented sectors of the economy, with private consumption falling by around 12% in 2020. At the same time, strong external demand for pharmaceuticals, medical supplies and other pandemic-related goods and services – including information and communication technologies – boosted profits in sectors dominated by multinational enterprises and enabled Ireland’s total economy to avoid a recession, unlike virtually all other OECD economies. Strong roll-out and take-up of vaccines supported a gradual re-opening of activities in mid-2021, as sanitary conditions eased somewhat, and helped contain the impact of the Omicron variant on Ireland’s health system (Figure 1.2).
Figure 1.2. Success in vaccination helped overcome COVID-19
Source: OECD calculations based on Our World in Data.
The domestic economy grew strongly in the first half of 2022 as the positive impetus from the full relaxation of containment measures partly compensated for higher inflation and uncertainty exacerbated by Russia’s invasion of Ukraine. Growing wages and household excess savings, which still remain well above pre-pandemic levels, sustained consumer spending, as the economy reopened. However, with the sharp fall in consumer confidence (Figure 1.3, Panel A) and high inflation, private consumption growth moderated in the third quarter of 2022. The fall of confidence was less pronounced among businesses, which largely passed rising costs on to consumers (Panel B). Nevertheless, high uncertainty, lower real household disposable incomes and tightening financial conditions are weighing on domestic firms’ business outlook.
The labour market recovered strongly in the aftermath of the pandemic. The simultaneous winding down of the emergency pandemic unemployment payments and the employment wage subsidy schemes led to a rebound in the labour force. At the same time, job vacancies remain high at 1.5% (0.8% in the first quarter of 2020), but lower than the EU average of 2.9% in the third quarter of 2022. The pandemic also affected job transitions. In late 2021, 45% of people who returned to work were with another employer ̶ 31% in the same sector and 14% in a different sector (Department of Social Protection, 2022).
Figure 1.3. The risks to the recovery are considerable
1. Composite of manufacturing and services sectors.
Source: European Commission, Business and Consumer Surveys; and AIB / HIS Markit PMI indices.
Consumer price increases, while still driven by high energy prices, have become more broadly-based (Figure 1.4). Headline inflation was 9% in November, albeit below the 10% euro area average, and energy prices were up by 43%. Firming prices of transport, hospitality, and recreational services, in the wake of the full re-opening of the economy, contributed to the rise in core inflation, which stood at 4.7% in October. The share of goods recording price increases of over 5% increased to almost 60%. Soaring prices of energy and other essentials disproportionately affect poorer households (CSO, 2022) – particularly elderly, youths and lone parents (ESRI, 2022), which can further raise inequalities before taxes and transfers. Elevated input costs coupled with reduced demand pose a threat to SMEs relying on household discretionary spending.
Figure 1.4. Inflationary pressures have become broad-based
Harmonised indices
1. Preliminary estimates for November; light blue bars are October values.
2. Excluding energy, food, alcohol and tobacco.
Source: Eurostat, Monthly Harmonised Index of Consumer Prices.
Public support measures to limit the adverse impact of surging energy bills are sizeable. The first set of measures (0.6% of 2021 GDP and 1.1% of GNI*) included means-tested fuel allowances and some additional lump-sum payments to recipients, electricity credits, temporary reductions in fuel excise duties and VAT rates on electricity and gas, and a 20% reduction in public transport fares. The one-off and temporary cost-of-living package announced in Budget 2023 (€2.7 billion in expenditure and €1.7 billion in tax measures) extends these initial policies. It also includes additional welfare payments to all social protection recipients, an additional child benefit payment, support to eligible students, additional allocation of funds to support public services and community organisations (€300 million) and a new business energy support scheme (€1.2 billion). The share of targeted measures increased from 11% in the initial package to 40% in the new package (Central Bank of Ireland, 2022a), which is welcome (see below for a discussion).
Direct macroeconomic risks from Russia’s war against Ukraine are limited, as Ireland’s goods trade with Russia, Ukraine and Belarus is modest (Box 1.2). However, specific shocks could hit agriculture and some industries dependent on specialised energy inputs. As for trade in services, the aircraft leasing industry could be affected, although the impact on the domestic-oriented economy would be negligible. Following the Government’s commitment not to cap their number, Ireland had welcomed around 62 000 Ukrainian refugees by early November (equivalent to 1.2% of the country’s population), with state accommodation provided to about two thirds of them. At the same time, Ireland’s financial support for Ukrainian beneficiaries of temporary protection to cover basic need is amongst the EU’s most generous (OECD, 2022). Budget 2023 allocates €2 billion to provide support to refugees. Measures currently under discussion to meet their accommodation needs, in a context already marked by severe housing imbalances, include the building of modular housing on public serviced sites, reconversion of vacant or unused buildings and monthly allowances to assist Irish households with hosting costs.
Box 1.2. The impact of Russia’s war of aggression against Ukraine
Ireland’s trade links with Russia, Ukraine and Belarus are modest and, as a result, the direct macroeconomic risks are limited. However, specific shocks could hit agriculture and some industries dependent on fertilisers and specialised energy inputs. Total exports to and imports from Russia were €3.7 billion and €0.65 billion, respectively, in 2020, accounting for around 1% of total exports and 0.2% of total imports.
The main exports to Russia have been computer services (50%), aircraft leasing (25%) and pharmaceutical products (5%). Ireland has become an international hub for special purpose vehicles engaged in aircraft leasing. The war will have a sizeable impact on the Irish aircraft leasing industry, which currently manages over €100 billion in assets. About 150 planes are rented to Russian airlines and there are significant uncertainties over the possibility to recover these Irish-owned planes from Russia, which recently introduced new legislation allowing foreign aircrafts to be registered in the country. Reversals in aircraft leasing activities will likely create some volatility in future GDP numbers, through changes in both investment flows and imports.
Imports of goods from Russia account for around one-half of a percentage point of total goods trade and are mainly composed of energy products and fertilisers. Ireland sourced only 6% of its oil imports from Russian suppliers in 2021 – and no gas at all. On the other hand, the share in the imports of coal, coke and briquettes hovers around 65-70%, but this accounts for only around €140 million or 0.13% of total imports. More than 25% of Ireland’s imports of fertilisers came from Russian manufacturers. Business services account for around one-half of total imports from Russia.
Around 70 firms connected to Russia with total assets of €62 billion are involved in funds activity in the Irish Financial Services Centre. However, the impact of these firms on the domestic economy in terms of corporate taxation and administrative costs paid is quite low. While liquidity and solvency issues for these firms may raise reputational risk for the Irish financial sector, these assets are not owned by Irish firms and households.
The secondary impacts through energy prices and demand from European economies are more pronounced. Rising costs of energy and fertilisers are putting upward pressure on home heating, transport and food prices, which are among households’ largest spending items. The slowdown in activity in major trading partners reduces demand for exports, although the composition of exports enabled them to remain resilient despite weaker demand.
The unwinding of COVID-19 pandemic support and the effects of renewed inflationary pressures have the potential to increase business insolvencies. As in most OECD countries, insolvencies did not pick up even after the phasing out of emergency support measures (PWC, 2022a). However, insolvencies increased by 49% in the third quarter of 2022 compared to a year ago, even though they remain below pre-pandemic levels (PWC, 2022b). Around 4% of active Irish businesses may require restructuring, liquidation, or some form of company dissolution (McCann and McGeever, 2022). In this context, the Small Company Administrative Rescue Process (SCARP), introduced in 2021, is welcome. Relative to the more formalised examinership legal alternative, SCARP’s streamlined insolvency process could effectively accelerate the debt restructuring proceedings of insolvent but still viable SMEs, and the exit of zombie firms. Nevertheless, given the possibility that creditors may challenge proposals in court and the difficulties very small companies may face in funding even modest professional fees associated with restructuring, effective monitoring will be key.
The multinational portion of the economy saw a dramatic surge in exports during the pandemic (Figure 1.5, Panel A), thanks to the concentration in goods and services in high demand, in particular pharmaceutical goods, medical devices and ICT services, and geographically diversified markets (Figure 1.6). The new trading relations with the United Kingdom do not yet include restrictions on Irish exports of goods to Great Britain, and thus do not appear to have derailed Irish exports, while rising energy prices are pushing up the value of imports from the United Kingdom (Figure 1.5, Panel B). However, risks remain around the future of the Northern Ireland Protocol and the trading relationship with the United Kingdom. The United Kingdom has not yet implemented fully the Trade and Co-operation Agreement, whose checks on imports could hurt Irish exports. Trade with the rest of Europe has been affected. The loss of cabotage opportunities on the UK landbridge has led to a switch to shipping directly to Europe, mainly France. The port of Dublin has become an important node for European trade and has managed successfully to reorient shipping to accommodate more unaccompanied haulage, but further expansion may require greater development of other ports, such as Rosslare.
Figure 1.5. Trade has remained robust despite potential obstacles
Note: Panel A shows export volumes; Panel B shows the 5-month centred moving average.
Source: OECD, National Accounts database; and Central Statistical Office.
GDP and modified domestic demand growth are projected to be 10.1% and 8%, respectively, in 2022, reflecting the post-pandemic rebound in activity in the first half of the year. Going forward, falling real incomes due to inflation will hold back consumer spending up to 2023, despite significant wage growth. High costs and low confidence will reduce firms’ incentives to invest. Public investment support through the National Development Plan will partly offset weaker private business and residential investment, with Budget 2023 allocating €11.7 billion to capital expenditure in 2023. Modified domestic demand will thus only grow by 0.9% next year, before rebounding to 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 (Table 1.2). Inflation is projected to gradually ease by 2023, but with still relatively elevated core inflation.
If funding costs were to rise faster than expected, some domestic firms might downsize or ditch their investment plans. Additionally, protracted uncertainties around the full implementation of Brexit agreements may weaken firms’ competitiveness. Persistently high input price inflation, while weighing on firms’ profitability, could also hamper the fiscal sustainability of the ambitious government agenda to subsidise residential construction and retrofitting, in a bid to boost housing supply and ease pressure from high house prices and rents. These, however, could increase further because of additional demand for accommodation triggered by growing numbers of Ukrainian refugees. Furthermore, energy supply disruptions in the winter of 2023-24 could affect growth, including through weaker external demand. On the upside, GDP growth may turn out stronger, as multinational-dominated exports of pharmaceutical and medical goods may be more resilient than foreseen to slowdowns in major trading partners. In addition, other lower probability threats to the outlook could derail the recovery (Table 1.3).
Figure 1.6. Exports are geographically diversified and largely chemicals and ICT services
Source: OECD, International Trade Statistics database.
Table 1.2. Growth is projected to slow
Note: OECD Economic Outlook 112 projections for 2022-24 with updated annual national account historical data for 2020 and 2021 but not taking into account the quarterly data released on 2 December 2022 for 2022 Q1-Q3.
1. Contributions to changes in real GDP, actual amount in the first column.
2. Excludes those large transactions of foreign corporations that do not have a big impact on the domestic economy.
3. Excludes the factor income of firms that have re-domiciled their headquarters to Ireland, as well as the depreciation of trade in on-shored intellectual property assets, R&D service imports and aircraft owned by aircraft-leasing companies.
4. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.
5. Includes the one-off impact of recapitalisations in the banking sector.
6. The Maastricht definition of general government debt includes only loans, debt securities, and currency and deposits, with debt at face value rather than market value.
7. Modified current account balance removes a number of globalisation-related distortions, including trade and depreciation of intellectual property assets and aircraft related to leasing along with profits of redomiciled firms.
Source: OECD, Economic Outlook 112 (database) and Central Statistics Office.
Table 1.3. Low-probability events that could lead to major changes to the forecast
1.3. The financial sector is facing legacy and new challenges
The financial sector has withstood the COVID-19 pandemic. Retail banks returned to profitability after the losses incurred during the first year of the pandemic. Credit growth picked up from the lows during the lockdowns, largely driven by non-financial corporate sector borrowing. Non-bank financial institutions are growing in importance (Figure 1.7, Panel A). Non-performing loans on banks’ balance sheets have been falling steadily for both businesses and households, partly driven by loan sales to other parts of the financial system. Furthermore, residential mortgages no longer account for the majority of non-performing loans, representing further progress in addressing the legacy of the 2008 burst of the housing bubble. Finally, the COVID-19 pandemic has spurred further digitalisation, with strong growth in the use of digital and contactless means of payment (Panel B).
Figure 1.7. The financial sector is somewhat less dominated by banks and increasingly digital
1. Mortgages for primary residences.
Source: Central Bank of Ireland; and BPFI.
Even so, a number of structural issues remain, some stemming from the legacies of the 2008 global financial crisis. Mortgage arrears are still relatively elevated and non-performing loans in the commercial sector are also above pre-pandemic norms. Borrowing costs are relatively high and retail banks’ return on equity is somewhat lower than elsewhere in the European Union. This is partly a reflection of restructuring costs incurred to lower operating costs and diversify income sources. However, capital ratios exceed the EU average (Figure 1.8) and a higher inflation environment may offer opportunities to increase profits.
Retail banks account for around 60% of lending by the banking sector, and the announced withdrawal of two of the five retail banks will increase concentration in the sector, as their businesses are expected to be largely taken over by the remaining three (IMF, 2022a). To some degree, the growing importance of non-bank financial institutions will mitigate the potential reduction in competition. New services are being offered by the recent entrants, such as digital payment services and Irish customers appear to be relatively receptive to innovation. However, these non-bank financial institutions do not offer a full suite of banking services and potentially benefit from an uneven playing field, not being subject to the same regulatory measures. Prudential supervisors need to keep a careful eye on developments, both to protect customers and prevent the build-up of financial risks in the non-bank sector. The Central Bank of Ireland has been taking action to ensure consumer protection. In 2022, it fined two of the large banks around €100 million each over their actions of denying tracker mortgages or not passing decreasing market interest rates onto borrowers with tracker mortgages. In October 2022, the Central Bank of Ireland launched a review of the consumer protection code, which is welcome.
Figure 1.8. Capital ratios are somewhat higher than the EU average
Q2 2022
Note: NPL refer to non-performing loans.
Source: European Banking Authority.
Macroprudential tools served to support the financial sector during the recent crises. During the pandemic, the Central Bank of Ireland set the countercyclical capital buffer (CCyB) to zero. The institution-specific capital buffers for the systemically important institutions range between 0.5 and 1.5%. The Central Bank of Ireland announced an increase in the CCyB rate to 0.5% in June 2022 (effective from June 2023) and indicated that, depending on the evolution of macro financial conditions, a CCyB rate of 1.5% is expected to be announced by mid-2023. The expected tightening of the countercyclical buffer should be followed through, given the economy’s exposure to external shocks.
1.3.1. Dealing with mortgage arrears
The ratio of non-performing mortgage loans at 3.6% was higher than the EU average of 1.7% in the first quarter of 2022. Despite a steady decline in recent years, mortgage arrears as a percentage of outstanding mortgages were still around 6.4% in June 2022, concerning about 46 000 principal dwelling houses (Figure 1.9, Panel A). Of these, no formal demand for legal proceedings had been issued for 62% and 1.4% had been restructured (Panel B). Resolving mortgage arrears remains a significant problem. Lenders are required to adhere to the Central Bank of Ireland’s Code of Conduct on Mortgage Arrears and follow a Mortgage Arrears Resolution Process. Around 21 000 primary residences have been in arrears for over two years. About half these were either restructured or the account holder was co-operating with the mortgage holder. Of the remaining, when the account is not co-operating and thereby loses the protection of the Mortgage Arrears Resolution Process, the lender had issued legal proceedings for about one half of the accounts. The ability of banks to enforce collateral is weak and time consuming. The number of homes repossessed by banks when borrowers have been delinquent remains very low. In the second quarter of 2022, just 11 principal dwelling homes and two buy-to-rent houses were repossessed on the basis of a court order. For primary residences, this is notwithstanding 5 641 legal cases having been concluded in the second quarter of 2022 with arrears outstanding. Furthermore, another 5 908 legal cases were in process in the second quarter of 2022, of which around one third had been ongoing for over five years since the first court hearing (Central Bank of Ireland, 2022b), partly reflecting the frequent adjournment of mortgage arrears cases before the courts.
Figure 1.9. Outstanding mortgage arrears are a legacy of the property collapse
Q2 2022
Source: Central Bank of Ireland.
Addressing these legacy issues will require flexible and innovative policies, given the relatively low repayment capacity of a large number of debtors (Kelly et al., 2021). The 2020 Economic Survey of Ireland recommended granting creditors a collateral possession order for a future date to speed up non-performing loan resolution. Greater use of the ‘suspended’ possession order, like in the United Kingdom, could encourage engagement between the borrower and lender by granting lenders a collateral possession order which is suspended for a future date, with the suspension conditional on the borrower complying with well-defined criteria. For example, suspended possession orders in the United Kingdom allow the borrower to remain in the residence while continuing to pay off arrears. If the conditions are not met, the creditors can ask the courts to issue an eviction order. However, care should be taken to avoid unintended consequences, such as encouraging collateral to be run down by debtors.
Besides creating vulnerabilities, low resolution rates of mortgage arrears might be contributing to the low credit supply by banks to private households and small construction firms, with banks favouring lending to real estate investment trusts. At least half of households who rent from a local authority and from the private market are unable to access the credit needed to purchase a property at the median price of a dwelling in Dublin based on current loan-to-income (LTI) mortgage criteria (Government of Ireland, 2021a). Following a review of its 2015 macroprudential framework for mortgage lending, the Central Bank of Ireland relaxed its lending standards in October by raising LTI limits for first-time buyers from 3.5 times of annual gross income to four times and increasing loan-to-value limits for second and subsequent buyers from 80% to 90%. While these changes can help improve affordability in the face of rising interest rates and costs, they can also increase housing demand and prices and financial stability risks. Hence, they should be monitored closely.
The share of new mortgage lending from non-bank lenders has increased from less than 3% in 2018 to 13% in 2021 (Gaffney, Hennessy and McCann, 2022). Non-banks now account for almost one third of new lending in the refinancing and buy-to-let segments of the market. Non-banks have been reducing interest rates more rapidly than banks since 2018, and were charging a lower average rate to first-time buyers than retail banks in 2021 (Central Bank of Ireland, 2022c). Some of these lenders have responded to tighter global financial conditions with increases in interest rates for prospective new mortgage borrowers since the summer of 2022. Rising potential risks from non-bank lending to financial stability should be addressed. The monitoring of non-bank lenders beyond those engaged in mortgage activities should also be expanded (IMF, 2022b).
Non-banks are also playing an active role in the commercial real estate market (CRE), with property funds accounting for nearly 44% of the CRE market (Central Bank of Ireland, 2021a). Given the size of the sector, the impact of widespread forced sales by Irish property funds on the CRE market on financial and macroeconomic stability could be significant. The Central Bank of Ireland has introduced macroprudential measures in the non-bank sector, targeting those Irish-domiciled investment funds with over half their assets in the Irish property market and thus are particularly exposed to domestic real estate shocks. The new measures introduce liquidity timeframe guidance and a leverage limit tailored to these investor funds, with an aim to safeguard the resilience of this growing form of financial intermediation (Central Bank of Ireland, 2022d). Such stronger macroprudential measures for non-banks can help address vulnerabilities posed by those property funds with high levels of leverage and liquidity mismatch. They can also help level the playing field with banks.
1.3.2. Innovation in the financial sector
Fintech is relatively well-developed in Ireland (Ziegler et al., 2021), and is expected to expand further with new advances in technology and increased demand following the pandemic. For SMEs, non-bank lenders account for an estimated 37% of the value of total new lending (Heffernan et al., 2021). Such forms of finance can both introduce competition to the traditional banking sector and provide access to finance for entities that have trouble obtaining credit from traditional banks. Indeed, bank financing has been relatively expensive, particularly for SMEs in Ireland (National Competitiveness and Productivity Council, 2021a). In the context of the government’s International Financial Services Strategy Ireland for Finance, the Department of Finance established the Fintech Steering Group, and FinTech and digital finance is a priority theme in the 2022 Update to the Ireland for Finance Strategy. Enterprise Ireland launched the ‘Start in Ireland’ portal aimed at supporting entrepreneurs (including Fintech firms) at different stages of development with information for potential, new and existing start-ups (Government of Ireland, 2022a).
While allowing space for innovation to improve access to digital financial services, ensuring resilience and managing risks arising from Fintech are also key. Since many of these lenders rely on market-based funding rather than insured deposits, the resilience of this supply of financing may be more vulnerable to a downturn or higher interest rates and pose legal and administrative challenges for recovery resolution. Since 2018, the Innovation Hub of the Central Bank of Ireland has enabled informal engagement with these lenders about regulations. The Central Bank recently increased its supervision of regulated Fintech institutions, whose number went from low single digits to 40 in the past four years. A letter of supervisory expectations circulated in December 2021, including on regular reporting and establishing risk frameworks and exit strategies, asked for compliance reviews by institutions. However, many financial service providers remain unregulated. Hence, ensuring regulators have the power to obtain relevant information from such providers, as recommended by the 2020 Economic Survey of Ireland, is also crucial.
Table 1.4. Past OECD recommendations on financial stability and actions taken
1.4. Ensuring fiscal sustainability is key
1.4.1. The budget position is currently favourable
The economic rebound is helping to repair public finances. The robust interventions in the face of the pandemic pushed up public spending dramatically, causing budget deficits and debt to balloon, albeit by less than the rest of the OECD on average (Figure 1.10). At the same time, revenues surged, particularly personal and corporate income taxes. The budget deficit shrank in 2021 as the boost to exceptional spending - the pandemic unemployment payment and wage subsidy schemes - was wound down. The budget position is projected to return to balance by 2022, thanks to exceptionally high levels of corporation tax receipts. A spending rule, limiting permanent spending increases to 5% per annum (broadly the sum of trend growth of an underlying measure of economic activity assumed to be 3% and the 2% inflation target) over the medium term, was recently introduced, which improves the fiscal framework (Box 1.3).
Figure 1.10. The budget position is projected to return to balance
Note: Ireland* uses GNI* as a denominator instead of GDP. Debt is government gross financial liabilities.
Source: OECD Economic Outlook (database); and Central Statistics Office.
In September, the government announced a package of one-off measures (€4.4 billion) to cushion the effects of high inflation on households and firms, and budgetary measures for 2023 (€6.9 billion). Budget 2023 implies an increase in the core expenditure growth rate from 8.1% to 9.1% in 2022 and from 5% to 6.3% in 2023, compared to the April Stability Programme (Government of Ireland, 2022b). The announced overall fiscal stance, which aims to balance between providing support and not adding to inflation, is broadly appropriate.
Around half of the announced temporary measures are targeted (Irish Fiscal Advisory Council, 2022a), while some (electricity credits, double child benefit payment, extension of the VAT and excise reductions on fuel, gas, and electricity) remain untargeted, as in many other OECD countries. As surging energy prices represent a terms-of-trade shock, which is arguably permanent given the expected path of fossil fuel prices, economic agents ultimately need to adjust. In this context, cushioning the blow should not become an obstacle to this process, which at the same time represents a potential constraint on fiscal policy if the measures become entrenched. Furthermore, to ensure greater fiscal and environmental sustainability, such measures should be withdrawn or phased out, and additional persistent stimulus to demand should be avoided in the current context of high inflation. Any further fiscal measure, if needed, should be temporary and better target poorer households, particularly in the event of major increases in food prices, keep the impact on domestic activity broadly neutral and be designed not to distort price signals so that incentives for energy savings are maintained.
Box 1.3. Ireland’s domestic fiscal framework
As a member of the European Union, the public finances in Ireland are subject to the provisions of the Stability and Growth Pact (SGP). The EU fiscal framework seeks to ensure sound public finances within the Union, avoiding excessive deficits and/or debt levels and encouraging appropriate counter-cyclical fiscal policy. The SGP is a rules-based framework within which Member States’ budgetary decisions are made. Ireland’s domestic fiscal framework was set out in the Fiscal Responsibility Act 2012, and mirrors the European framework. That same year, the Irish Fiscal Advisory Council was formally established, which assesses the government’s forecasts, compliance with fiscal rules and fiscal stance. In 2013, a Medium-term Expenditure Framework introduced three-year government and ministerial expenditure ceilings.
In view of the challenges related to the measurement of both the size and cyclical position of the Irish economy, the Irish Government decided to reinforce the fiscal framework and introduced a domestic expenditure rule in 2021, whereby permanent spending is allowed to increase by 5% per annum (broadly the sum of trend growth of an underlying measure of economic activity assumed to be 3% and the 2% inflation target) over the medium term (Department of Finance, 2021). This rule is designed to meet the dual objectives of expanding public services while maintaining public finances on a sustainable trajectory.
To minimise the risk of relying on volatile and unpredictable receipts to fund permanent increases in expenditure, the Government has also published a new metric, the underlying fiscal balance (GGB*), which excludes estimates of ‘excess’ corporation tax (CT) receipts, as these are potentially transitory. The Department of Finance uses scenario analyses to quantify the level of ‘windfall’ receipts, i.e., the amount that cannot be explained by underlying drivers (Department of Finance, 2022). These include, among others, comparing: i) the current share of CT receipts with its long-run average share (2000-21) in both total tax receipts and GNI*; ii) actual CT receipts to a scenario where CT increased in line with GNI* growth from 2014 onwards (2014 is chosen as it is prior to the level shift in CT receipts in 2015 and preceded, in general, the significant changes in intellectual property on-shoring that have taken place in recent years); and iii) CT receipts with a scenario in which CT payments by foreign multinationals increase in line with wages in the foreign-owned sector from 2014 onwards. The spending rule aims to ensure that expenditure policy is decoupled from windfall tax revenues, and in particular from ‘excess’ corporation tax receipts, in the years ahead.
Source: Department of Finance (2019), Addressing Fiscal Vulnerabilities, Dublin; Department of Finance (2022), De-Risking the Public Finances – Assessing Corporation Tax Receipts, Dublin; and Department of Finance (2021), 2021 Summer Economic Statement, Dublin.
While pressure on spending has increased, revenues have been extraordinarily buoyant. Corporate and personal income tax receipts have soared on the back of surging profits and strong employment and wage growth, and consumption tax revenues also grew strongly. In 2021, total tax revenues rose by 20% over 2020 (more than €11 billion). Corporate taxes amounted to €21.1 billion at the end of November 2022, amounting to an annual increase of €7.6 billion. Government tax revenues are heavily dependent on corporate tax receipts, accounting for over one-fifth of total revenues in 2021 and rising to one fourth in the first half of 2022. The extremely strong export performance of the major multinationals in the pharmaceutical, medical goods and information and communications technologies sectors account for some of the buoyancy. However, this creates a vulnerability to more subdued export performance in the future and a reconfiguration of the location of production and intellectual property in response to changes in the international tax environment. Just ten companies account for about one half of all corporate income tax receipts.
Various estimates suggest that EUR 6 billion to 9 billion of revenues are potentially transitory and could leave Ireland (Irish Fiscal Advisory Council, 2022b; Department of Finance, 2022a). Without these excess (windfall) receipts, the fiscal balance would be a deficit of €8 billion (-3.1% of GNI*), compared to a surplus of €1 billion (0.4% of GNI*) in 2022 (Government of Ireland, 2022b). Against this background, upside revenue surprises should be saved in the National Reserve Fund (so-called Rainy Day Fund, created in 2019, but liquidated due to the pandemic) as a way of reducing reliance on potentially transient forms of income, while preparing for long-term fiscal challenges, rather than facilitating an upward creep of spending. By design, the Fund has caps on yearly and overall contributions of EUR 500 million and EUR 8 billion, respectively. In September, the government announced the replenishing of the fund with €2 billion in 2022 and €4 billion in 2023, which was approved by a resolution by the lower house of Parliament. These caps should be lifted to make the fund more effective, and contributions more automatic and further windfall tax revenues should be continued to be directed to the Fund.
In the past, fiscal policy has been pro-cyclical (Cronin and Mcquinn, 2017). Notably around the 2008 global financial crisis (GFC), the boost in spending before and the sharp retrenchment after the peak were pronounced. As is often the case, the retrenchment in spending was felt more severely in investment (Figure 1.11). Not only does pro-cyclicality increase the amplitude of the shock, but it has longer-term impacts through the curtailment of longer-term spending, particularly investment. Some of the challenges confronting policymakers today, such as housing and healthcare, are a legacy of the need to cut spending too quickly during the GFC. In this regard, while revenues are exceptionally strong, recurrent spending should not be allowed to drift up.
Figure 1.11. Government spending has been quite volatile, particularly public investment
Note: Figures are for public spending and public gross fixed capital formation.
Source: Central Statistical Office.
The establishment of the Irish Fiscal Advisory Council in 2012 has provided a constraint on fiscal policy and warnings against excessive spending growth during the economic expansion (Bach, 2020; Jonung, Begg and Tutty, 2016). Output gap-based estimates of the structural balance are too uncertain in a small very volatile economy, such as Ireland, to provide a useable anchor for fiscal policy. As such, the move to the recently introduced country-specific spending rule is a pragmatic approach to bring more predictability to fiscal policy. The planned increase in spending to cushion households from high inflation (see above) will temporarily push spending above the new 5% rule. Going forward, it will be important to return to adherence to the new rule as soon as possible to move fiscal policy onto a more predictable stable spending path to reap the full benefits, including greater resilience to future shocks.
The fiscal framework could be further improved to recognise the impact of tax measures, give it legislative status, capture the full range of general government spending, and link it to debt targets (Irish Fiscal Advisory Council, 2022b). The legislative requirement should be considered as it would imply a clearer specification of the rule and could be linked to a “comply or explain” requirement to improve its effectiveness. It will be important to align these with forthcoming changes to EU fiscal rules. Publishing departmental expenditure ceilings would also improve the transparency of the rule (Irish Fiscal Advisory Council, 2021). In addition, longer-horizon medium-term budgets should be prepared. Moreover, it is essential to regularly update and publish the cost of the government’s major medium-term commitments discussed below (e.g., achieving climate objectives, implementing the health care reform, Sláintecare, and pensions).
1.4.2. Over the longer run, fiscal pressures will emerge
A number of underlying pressures and recent policy changes combine to create threats to fiscal sustainability in the long run. Substantial spending growth is in store for housing, ageing, health and the energy transition. Moreover, changes in international taxation with the agreement of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting in October 2021 may have implications for Ireland’s tax revenues since the agreement calls for a higher statutory income tax rate for large firms registered in Ireland.
Pension sustainability
As the population begins to age more rapidly, state pension expenditures are projected to rise from 3.8% of GNI* in 2019 to 7.9% in 2050 and 9.2% in 2070 (Pensions Commission, 2021). Including public sector pensions, pension expenditures would rise from 7.4% of GNI* in 2019 to 12.1% by 2050 (Department of Finance, 2021). Increasing longevity is projected to create an annual shortfall in social security contributions of around €2.4 billion in 2030, which will increase steadily to €13 billion in 2050 (Pensions Commission, 2021).
A planned increase in the state pension age, to ensure future sustainability, by one year to 67 at the beginning of 2021 and to 68 in 2028 was repealed. In addition, a pathway to early retirement was opened by the amendment of existing rules for jobseeker benefits for those required to retire under a contract of employment at 65 through the introduction of a new benefit for 65 year olds in 2021 (one year before the state pension age, with a payment matching that of unemployment benefits but without job-search requirements). A 2021 review by the Pensions Commission set out a preferred reform option (Package 4), which includes gradual increases in the pension age from 2028, higher social security contributions for employees, employers and the self-employed, and other unspecified funding sources (mostly likely further tax increases or spending reductions elsewhere) (Figure 1.12).
The pension reform announced in September puts the burden of adjustment on social security contributions (Pay-related Social Insurance) rather than the state pension age, which is kept at 66. The reform provides incentives for those who continue to work beyond 66 to receive a higher pension payment from 2024, moves towards to a total contributions approach to link pension rates to the number of working years and paid contributions (to be phased in the next 10 years from 2024), and commits to review and adjust the level and rate of increase in social insurance rates every five years. In addition, a number of aspects are designed to improve equity: an enhanced state pension provision for long-term carers from 2024 and a commitment to explore the design of a scheme to provide a benefit payment for people who, following a long working life (40 years or more), are not in a position to remain working in their early 60s. Finally, the reform will introduce measures that allow, but do not compel, an employee to stay in employment until the state pension age, while the Pensions Commission had recommended to avoid setting retirement ages in employment contracts before the state pension age, which could further help close the gap between effective retirement age of 63.6 and the state pension age of 66.
Figure 1.12. Pension reforms should utilise a mix of policy tools
Contributions of policy reforms to projected shortfalls
Note: PRSI refers to pay-related social insurance. All packages include PSRI increases for the self-employed of 4% to 10% initially by 2030, followed by increases of 3.5 percentage point (pp.) by 2040 and 1.1 pp. by 2050 in Package 1, 2.95 pp. by 2040 and 0.15 pp. by 2050 in Package 2, 2.8 pp. by 2040 and 0.9 pp. by 2050 in Package 3, and 2.4 pp. by 2040 and 0.1 pp. by 2050 in Package 4. PSRI increases employers and employees each face are of 0.6 pp. by 2030, 1.6 pp. by 2040 and 1.1 pp. by 2050 in Package 1, 0.3 pp. by 2030, 1.6 pp. by 2040 and 0.15 pp. by 2050 in Package 2, 0.2 pp. by 2030, 1.55 pp. by 2040 and 0.9 pp. by 2050 in Package 3, and no increase by 2030, increases of 1.35 pp. by 2040 and 0.1 pp. by 2050 in Package 4. Packages 2 and 4 include an increase in the state pension age gradually from 2028 to 67 by 2031 and from 2033 to 68 by 2039. Packages 3 and 4 include exchequer contributions of 10% of state pension contributory expenditures.
Source: Pension Commission (2021).
While some measures are in line with the recommendations of the Pensions Commission, two main concerns and uncertainties remain. First, while some of the reforms, such as the move to a total contributions approach, incentives to work to age 70, and possible increases in the taxation of older individuals, can make the pension system more sustainable, there are no calculations of the fiscal impact of the reform. For example, higher pensions for retiring at age 70 could be cost-neutral, depending on the design (Pensions Commission, 2021). Second, the Pension Commission’s report stated that a mix of different measures, including a gradual increase in the state pension age to 67 between 2028 and 2031 and to 68 in 2039, should be part of the policy mix, as using any one of the policy levers by itself to meet the projected shortfalls would require such an extreme change that it would be almost impossible to implement. Keeping the pension age at 66 puts more pressure on the tax system and will increase labour costs. For a worker on a typical annual wage of about €35 000, around €1 800 additional taxes per year would be needed in the coming decades (Irish Fiscal Advisory Council, 2022b). Hence, an increase in the pension age should be part of the reform package.
In the medium term, a more ambitious change to make reforms long-lasting, without a need for constant political negotiations over short-term solutions, would be to adopt an automatic adjustment mechanism, as some EU countries have (e.g., Denmark, Finland, the Netherlands), to help lower uncertainties affecting financial sustainability. For example, the introduction of an automatic link between the retirement age and life expectancy would lower pension spending by one percentage point of GDP in Ireland in 2070 (European Commission, 2021a).
Health
Along with pension spending, the healthcare sector is a major driver of public spending in the longer term. The impact of ageing is projected to raise health and long-term care spending from around 8.5% of GNI* in 2019 to as much as 13.2% in 2050 (Irish Fiscal Advisory Council, 2020). In the short run, the costs of implementing Sláintecare to reform the healthcare sector by moving away from a largely hospital-based system to one that will better integrate primary, community and long-term care, reducing waiting lists and addressing the legacy of underinvestment (see Chapter 2) are weighing on public finances.
Climate change, housing and infrastructure
The government has committed to meeting a net-zero greenhouse gas emission target by 2050, with an interim target for 2030. The National Development Plan has identified avenues for green investment (e.g., energy efficiency in buildings, sustainable mobility), while around half of the recovery and resilience plan funds are allocated to the green transition (see below). As the government is still elaborating the policies to meet these targets, the full fiscal implications cannot be quantified yet. However, these policies are likely to involve stepping up green public investments and a variety of incentives for households and businesses to take action. The 2021 Climate Action Plan indicates that investment needs of around 2% of GNI* annually would not yield a positive return and by implication require government support or regulation (Government of Ireland, 2021b). Other estimates highlight that the cost of meeting the 2030 targets could be higher if sectors where emission reductions are difficult to achieve in the short to medium run, such as agriculture, are not required to make the same abatement effort. In these conditions, required public spending to achieve much larger cuts in emissions from energy could double (FitzGerald, 2021).
The Housing for All Strategy has committed €20 billion over the next five years to address the housing shortage by improving zoning, land availability, and provision of social and affordable housing (see below for details). In addition, spending on infrastructure to meet the greenhouse gas emission reduction targets will require substantial public spending. This includes putting in place the infrastructure to harness the potential for renewable energy and increase the use of electrification in both the transport and residential and commercial buildings. As part of the National Development Plan, the government plans to increase capital spending to 5.4% of GNI* and keep it roughly at that level to address some of the key infrastructure needs. This is about a one percentage point increase from 2020 and if maintained would help limit the pro-cyclicality of investment spending. This would potentially boost output by 0.7 to 0.9% by 2030 (Conroy, Casey and Jordan-Doak, 2021). However, the number of construction workers is constrained and the competing demands of increasing housing supply and climate change mitigation may bid up prices in the sector absent efforts to boost supply.
Taxation of multinational enterprises
In October 2021, Ireland joined the Inclusive Framework on Base Erosion and Profit Shifting. This will mark a sea change with Ireland obliged to raise its corporate income tax rate from 12.5% to 15%. The current Irish corporate income tax rate was phased in starting in 1996 (there was a special rate for manufactures of 10% and before that, an exports profits tax relief meant the effective rate was 0%). The international tax agreement is set to be implemented in 2023 at the earliest. The revenue consequences are uncertain, but government estimates suggest a revenue loss of around €2 billion compared with business as usual once Pillars 1 and 2 are fully implemented.
Debt sustainability analysis
Debt levels are already elevated, at 100.8% of GNI* in 2021 (as against an EU average of 75.1% of GDP). On a per capita basis, they are quite high compared with other EU countries (Figure 1.13), suggesting limited room for further increases without heightening risks to fiscal resilience. While the short-term outlook for fiscal policy is relatively benign and debt levels are projected to decline, in the longer term, as the various spending and revenue pressures begin to materialise, the picture is more worrying. According to OECD projections, public debt will not stabilise by 2050 without significant reforms (Figure 1.14).
Figure 1.13. Debt on a per capita basis is elevated
Gross government debt per capita, 2021 or latest available data
Note: Data for the United Kingdom refer to 2020.
Source: OECD calculations based on OECD, National Accounts database.
Figure 1.14. Reforms are needed to ensure debt sustainability
Note: The baseline scenario is calibrated on OECD long-term model simulations and Irish Fiscal Advisory Council (2020) spending assumptions, adjusted for recent fiscal outturns. The shock scenario assumes a gradual erosion of tax revenue (€4 billion per annum by 2032, at 2020 constant prices). The reform scenario builds on the shock scenario assuming pension reforms following package 4 proposed by the Pension Commission, an improvement in public sector cost efficiency (mainly in the health sector phasing in 15% gain in spending efficiency over 20 years). All scenarios include ageing costs.
Source: OECD secretariat calculations.
Table 1.5. Past OECD recommendations on fiscal and pension policies and actions taken
1.5. Labour and product markets meeting the economy’s needs
The national recovery and resilience plan (Box 1.4) includes a number of initiatives which can improve employment (boosting digital skills and improving active labour market policies for jobseekers) and productivity growth of domestic firms (supporting their digitalisation, reducing barriers to investment, such as regulatory barriers to entrepreneurship, housing affordability and skill shortages). According to calculations by the European Commission, not including the impact of structural reforms, the plan can lift Ireland’s GDP by 0.3-0.5% by 2026 and create 6 200 additional jobs (European Commission, 2021b). Ireland also published an Economic Recovery Plan in 2021, which among other initiatives, aims to create 50 000 additional training places by 2025 to boost employment (Government of Ireland, 2021c). Box 1.5 quantifies the potential impact of some of the structural reforms discussed in this Survey.
Box 1.4. Ireland’s recovery and resilience plan
Ireland’s recovery and resilience plan (€989 million in grants, 0.3% of 2019 GDP) includes 25 measures (16 investments and 9 reforms) and is structured around three axes:
1. Green transition (52.4%): to encourage a shift from private cars to rail transport, promote energy efficiency in residential and public buildings and businesses, and support bio-diversity (restoration and rehabilitation of wetlands to change land use from peat extraction to carbon sequestration).
2. Digitalisation (29.4%): to support the digitalisation of the public sector, especially the healthcare system, the digitalisation of SMEs and the promotion of digital skills (e.g. provide connectivity and ICT equipment to disadvantaged learners in schools).
3. Social and economic recovery and job creation: to support access to the labour market and upskilling of workers with a focus on green and digital skills, boost the quality of higher education (e.g. new education and training programmes in technological universities, regional innovation hubs) and lifelong learning, to increase the supply of social and affordable housing and support the fight against money laundering.
Source: Government of Ireland (2021d), National Recovery and Resilience Plan, Dublin.
1.5.1. Boosting employment and labour mobility
Labour force participation at around 80% (for those aged 25-64) is above the OECD average and well above the rates prevailing in the 1990s. Following the pandemic, participation rates increased for many groups, such as female, young and older workers, likely reflecting cyclical factors, tight labour markets and remote working, but they remain low for those with lower educational attainment. At the same time, job vacancies remain high at 1.5%, but lower than the EU average of 2.9%. According to an October 2021 survey, difficult-to-fill vacancies were high in life sciences, information technology, construction, health and financial activities (SOLAS, 2021). Skill mismatches play a role as do disincentives embedded in the tax and benefit system and in some cases barriers to geographical mobility, although the rise of remote work could help the latter (SOLAS, 2022). Addressing these issues would help raise participation and for some groups reduce the incidence of poverty.
Changes in the structure of the economy after the pandemic could complicate labour force attachment as sectors that often serve as pathways into employment, such as the hospitality sector, may slim down. Other uncertainties include the extent to which international migration contributes to labour force growth in the future. Ukrainian refugees can help alleviate some labour shortages if they are well integrated into Irish labour markets. Around 64% of them are of working age (aged 20-64), of which 68% are women. Ireland has provided them with work rights, access to housing and health, social welfare payments where appropriate, as well as vocational training and job assistance to speed up their integration (OECD, 2022a). However, the employment rate of refugees remains low at 14.8% so far, with language as the main barrier to labour market entry.
Box 1.5. Potential impact of reforms on growth and the fiscal balance
Table 1.6 broadly illustrates the growth impact of some key structural reforms proposed in this Survey. The fiscal impacts presented in Table 1.7 do not take into account indirect effects, such as those induced by the positive impact of the reforms on growth and public revenues, and some recommendations are not quantifiable.
Table 1.6. Potential impact of selected proposed reforms on GDP per capita
Note: These estimates are illustrative. The impact on the level of GDP per capita is estimated using historical relationships between reforms and growth in OECD countries. The model does not capture policy-induced changes in deep-rooted preferences like risk aversion and their subsequent effects on economic variables. These numbers are similar to those in the 2020 Economic Survey of Ireland.
Source: OECD calculations based on (Égert and Gal, 2017).
Table 1.7. Illustrative direct fiscal impact of selected recommended reforms
Note: The policies are to: i) close half the gap of current health spending as a share of GNI* in Ireland with the OECD average health spending as a share of GDP; and ii) increase ALMP spending per unemployed as a % of GDP per capita by 0.6% to the OECD average.
Source: OECD calculations.
Providing the skills needed
Ireland is nearing the end of a 10 year skills strategy in 2025 to create a well-trained and skilled labour force capable of responding to the needs of the economy. An OECD Skills Strategy project is currently assessing how the strategy might need to be adapted to ensure that it is still fit for purpose (OECD, forthcoming). The evolution of the economy in recent years has shown growing demand in some sectors, not least construction more recently, but also in high-tech activities. The implications of the Climate Action Plan dictate that some sectors of the economy will diminish in importance and workers will need to change jobs, pointing to the importance of helping workers acquire new skills and find new employment opportunities. Hence, the focus of the recovery plan on strengthening access to training, particularly for digital skills, is welcome.
The public employment services have been given more resources and reorganised to help workers into employment more effectively. Greater use of digitalisation during the pandemic has allowed online interactions, which a majority of jobseekers prefer and helps tailor programmes to the individual. Online meetings have also facilitated interactions with a broader range of potential employers. As an emergency response to COVID-19 pandemic, eligibility for online further education and training programmes (e.g., e-College) were extended. In the construction sector, training efforts are carried out with employers and targeting the skills in short demand and aiming to bring greater innovation into the sector. Since 2016, 41 new ones have been added to the existing 25 more traditional craft apprenticeships, including one in the healthcare sector, and Budget 2023 includes additional support for craft apprenticeship programmes. Whereas in the past apprenticeships were mainly taken up by males, the take-up is now more gender-balanced. The developments in job search and training are laudable and should be evaluated over time to ensure they do contribute to better job outcomes and the best use of public funds. This can inform the elaboration of the next national skills strategy. Innovative training, however, should not become a barrier to entry, for example by creating occupational licensing.
Boosting female labour force participation
Ireland has made significant progress in increasing female labour force participation rates after the pandemic, but there is still room for improvement. Female labour force participation surpassed pre-pandemic levels (56%), reaching an all-time high of 60% in the final quarter of 2021, but has declined slightly to 59.1% in the third quarter of 2022. This improvement was particularly in sectors less affected by COVID-19, possibly driven by the use of remote work insofar as women are more likely to work from home. Hence, facilitating flexible work arrangements and opportunities to telework, including through investment in digital infrastructure, could yield further gains. Various policies to expand quality childcare capacity and affordability introduced in recent years have also played a role. The National Childcare Scheme was expanded with increased subsidised hours and eligibility for subsidies and the allowance of subsidies to be used for after-school care. A €221 million new scheme for core funding for early learning and care and school age childcare was introduced in 2022. Budget 2023 increases the childcare hourly universal subsidy from 50 cents to €1.40. Continuing to provide adequate public financial support for childcare and measures to expand childcare capacity is key.
Reducing disincentives to participate
The tax and benefit system can present disincentives to participate or participate more fully. Effective marginal tax rates can be quite high at different income thresholds. The Irish tax and benefit system contains a number of “cliff edges” where tax liabilities jump or benefit entitlements suddenly fall when income exceeds a certain level, creating strong disincentives to increase income beyond these levels (Browne et al., 2018). For example, such cliff-edges and step-effects arise when earnings surpass the liability threshold for pay-related sociaI insurance (at €352 per week) and universal social charge (at €13 000 per year), and when working more than three days a week on low levels of pay, leaving individuals ineligible for a partial jobseekers allowance payment (Commission on Welfare and Taxation, 2022). The income threshold to qualify for social housing, in relation to the high cost of housing, can also limit labour market participation or hours worked. In addition, the medical card (which exempts families from fees for medical services) is withdrawn when family income exceeds a certain amount (OECD, 2020a).
Reforms to the tax and benefit scheme, should nonetheless bear in mind the impact on equity. The tax and transfer system has a relatively strong redistributive impact (Figure 1.15). However, the flip side of this is that the tax base is very narrow, with almost one-in-three workers paying little or no income tax in 2021, and the bottom 50% of taxpayers contributing just 4% to the overall income tax take (Department of Finance, 2022b and 2022c). If corporate income tax revenues decline, reconsidering the personal income tax base will acquire increasing saliency. The exclusion of large numbers of individuals from the personal tax system should be reconsidered to broaden tax bases and remove cliff-edge effects (Commission on Welfare and Taxation, 2022). The government has committed to develop a medium-term roadmap for personal taxation reform by Summer 2023. The Irish Fiscal Advisory Council has highlighted the need to improve data to quantify the Commission’s proposals, calculating that, based on the proposals they are able to quantify, tax revenues as a share of GNI* could increase by 5.3 percentage points (Casey, 2022; IFAC, 2022c). In this context, introducing more tax bands and rates would smooth the progressiveness of income taxes at lower incomes and prevent income threshold effects that create disincentives to work. These should be combined with means-tested cash transfers for the low-income households to prevent any undesired impact of spreading the tax burden more broadly.
Facilitating mobility
Housing policies can hinder workers’ geographical mobility. Residential mobility rates within countries, defined as the percentage of individuals that changed residence within five years, at around 20%, is slightly above the OECD average, but much lower than 30-40% in Australia and Nordic countries (Causa and Pichelmann, 2020). The homeownership rate at around 70% in Ireland is around the OECD average of 71.5%. Homeownership is often associated with a higher cost of moving than renting. The lack of available rental housing in major cities is creating difficulties for the recruitment of workers, including newly qualified nurses. Tenants of social housing are also less likely to move residence than private-sector renters. Evidence from across OECD countries suggests that cash housing allowances tend to mitigate some of the impact of housing support on mobility (Causa and Pichelmann, 2020). However, this needs to be balanced with the effect of cash transfers/housing vouchers on prices when supply is not forthcoming. The Housing for All Strategy that encourages homeownership through a shared-equity scheme to help purchase a newly built property for first-time buyers (discussed below), might exacerbate labour mobility challenges. Reducing policy-driven barriers to housing supply, for example reforming poorly designed land-use and planning policies, may facilitate moving (see below).
Figure 1.15. Household income inequality is relatively low
Household income distribution, Gini coefficient¹, 2019 or latest available year
1. Scale from 0 ("perfect equality") to 1 ("perfect inequality").
Source: OECD, Income Distribution database (IDD).
1.5.2. Improving the business environment
Increasing SME productivity
Business dynamism and the start-up rate are relatively low in Ireland. In 2020, Ireland’s enterprise birth rate of 6.7% was lower than the European average of 8.9%. In addition, new firm-level research suggests that convergence in productivity levels of new entrants towards the level of incumbents is driven by the exit of the lowest productivity entrants rather than a broad-based catch-up across surviving entrant firms (Lawless and Rehill, 2022). Following a sharp decline of 30.4% in the second quarter of 2020, new company registrations recovered swiftly (National Competitiveness and Productivity Council, 2021b). Irish SMEs are innovative, but they are not very active in international markets (OECD, 2019). While the 2018 OECD product market regulations indicators show that the regulatory burden in Irish product markets is close to the OECD average, regulatory burdens on start-ups are relatively high, driven mainly by complex regulatory procedures and the system for licences and permissions. Ireland’s recovery plan will introduce the SME test, asking policy makers to consider the potential burden any proposed regulations or legislation places on SMEs, which is expected to help lower regulatory obstacles to SME growth. Linking other existing licensing portals to the Integrated Licence Application Service and requiring licensing authorities without online procedures to participate would also help. The recovery plan states that a single SME portal, with an aim to reduce the administrative burden on SMEs, is under consideration. This is a welcome initiative and should be implemented as soon as feasible.
The productivity gap between foreign and domestic firms and sectors remains large (Figure 1.16). The labour productivity of domestic companies increased on average by 0.7% per annum between 2011 and 2020, well below that of multinationals, which increased by 9.4%. The different trajectories during the pandemic suggest that the differences widened even further. Supporting closer economic links between foreign-owned firms and SMEs across and within industries via trade linkages, labour mobility and innovation cooperation could help raise productivity levels of SMEs. SMEs also lag in some digital respects, such as enterprise resource planning and customer relationship management, which will become increasingly important with the digital transformation. The recovery plan includes measures to support the digitalisation of SMEs, such as the establishment of Irish European digital innovation hubs. The creation of clusters could also help bridge the productivity gap.
Figure 1.16. Labour productivity of local firms remains low
Source: Department of Enterprise, Trade and Employment, Annual Business Survey of Economic Impact 2020 Report.
Fighting corruption
Indicators of perceived risks of corruption in the public sector suggest Ireland ranks in the middle of the OECD (Figure 1.17, Panel A), though it is better placed on the control of corruption (Panels B-D). However, Ireland’s performance remains relatively poor in comparison to European Nordic countries or other small and open OECD economies, like New Zealand and Switzerland. According to a European Commission survey, 59% of Irish citizens consider that corruption is widespread, against an EU average of 68% (European Commission, 2022a). Similarly, 60% of Irish citizens think corruption is part of the country’s business culture, broadly in line with the EU average, and only 42% would know where to report a possible case of corruption, were they to experience or witness one, as against 46% of EU citizens.
The government is overhauling the criminal legislative framework to counter corruption more effectively. Following the 2018 consolidation of bribery and corruption laws, which made failure to report violations to authorities a criminal offence, an in-depth review of anti-corruption and anti-fraud criminal justice enforcement was launched (European Commission, 2021c). Completed at end-2020, the assessment resulted in a set of recommendations that were later streamlined into an implementation plan focussed primarily on legislative, structural and resourcing measures. The selected recommendations included the establishment of a cross-sectoral Advisory Council supporting the government’s strategic and policy decisions on economic crime and corruption, together with a formal forum of senior representatives from relevant bodies, to enhance inter-agency coordination and information sharing (Department of Justice, 2020). The forum has met regularly since June 2021 and the establishment of the Advisory Council was completed in May 2022. Additional support to anti-corruption policy should come from the introduction of a new bid-rigging cartel offence and the strengthening of the Competition and Consumer Protection Commission’s investigative powers, as recommended in the above review, but not yet implemented.
Figure 1.17. Ireland is not among the best performers in addressing corruption
Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-based subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project.
Source: World Bank; Transparency International; Varieties of Democracy Institute; University of Gothenburg, and University of Notre Dame.
Resources devoted to investigating and prosecuting economic crimes and corruption have risen only gradually. This weighed on investigative effectiveness due to the growing number of cases detected and handled. In particular, lack of access to adequate technology enabling the examination of large amounts of multi-sourced electronic data delayed investigations of the Garda Anti-Corruption Unit, recently established within the National Economic Crime Bureau (European Commission, 2021c). At the same time, initiatives are being taken to ease barriers to access justice, namely through increased efforts to tackle high litigation costs and lengthy court proceedings, and to promote the digitalisation of justice (European Commission, 2022a).
Ireland’s regulatory framework for public sector ethics is complex and fragmented. Forthcoming legislative reform proposals are expected to consolidate divergent national- and local-level rules governing the disclosure of interests, assets and donations, as well as the imposition of sanctions, which fuelled uncertainty on their actual application, resulting in a perceived lack of penalties for civil servants breaching ethical requirements (Department of Public Expenditure and Reform, 2021). This is to be complemented by an overhaul of oversight structures and enhanced streamlining of declaration proceedings. Assigning greater powers and resources to the Standards in Public Office Commission would improve its effectiveness in pursuing compliance with codes of conduct and monitoring irregularities.
Amendments to the 2014 Protected Disclosures Act, approved in July 2022, could help ensure more effective tackling of corruption. The new rules – implementing a 2019 EU Directive – are set to extend whistleblower protection beyond standard workers, to include volunteers, unpaid trainees, job applicants, as well as shareholders and board members. Additionally, they will require private organisations with at least 50 employees to set up procedures for protected disclosures and relative feedback, whilst smaller entities will be temporarily exempted from implementation in light of the relatively high compliance costs (Department of Public Expenditure and Reform, 2022a). At the same time, by identifying the unauthorised disclosure of a whistleblower’s identity as a criminal offence, together with any retaliatory proceeding or attempt to hinder a person from reporting, the new legislation will improve whistleblower’s protection versus employers, strengthening incentives to report corruption cases.
Implementation of the OECD Anti-Bribery Convention has progressed, but some issues remain pending, namely with reference to the liability of legal persons and the width of the ‘foreign official’ definition (Department of Justice, 2020). Efforts to extend mutual legal assistance with non-EU countries, either through designations under the law or treaties, should continue.
Table 1.8. Past OECD recommendations on labour markets and productivity and actions taken
1.6. Affordable housing is a major challenge
1.6.1. Rising housing prices create affordability concerns
More than a decade of underinvestment following the 2008 property market crash has decreased the housing stock per capita. Between 2009 and 2017, Ireland’s total estimated housing stock grew by only 35 000 units, while the population grew by 263 000. The number of dwellings per 1000 inhabitants decreased from 436 in 2011 to 416 in 2019, against an average increase from 444 to 468 in the OECD (Figure 1.18, Panel A). The composition of the housing stock is also insufficient to meet the increased demand for rental apartments. After increasing by 40% annually between 2017 and 2019, lockdowns due to the pandemic limited the number of annual dwelling completions in 2020-21 (Panel B). Construction activity picked up after the re-opening of the economy. The number of housing commencements increased substantially and the number of new home completions for the first three quarters of 2022 was 20 807, but the gap between supply and demand remains large. The government estimates net additional housing needs to be around 33 000 per year to 2030, with 14 000 around the Greater Dublin Area.
Figure 1.18. Housing markets face price and supply pressures
Note: In Panel A, refer to statlink for details on country-year coverage. In Panel B, scheme house refers to houses that form part of a multi-unit development of two or more houses connected to a single Electricity Supply Board network. In Panel D, price-to-income ratio refers to nominal house prices divided by nominal disposable income (household disposable income after taxes and transfers divided by population) per person.
Source: OECD, Affordable Housing database; Central Statistics Office; OECD, Analytical House Price Indicators; and OECD, National Accounts database.
Real house prices and the ratio of house prices to income have been increasing (Figure 1.18, Panels C-D). Real house prices increased by 4% year-on-year in the third quarter of 2022. Housing affordability is a long-standing challenge, with relatively high housing-related costs as a share of total household costs at 25.6%, compared to the OECD average of 22.6%, and a relatively high share of population spending more than 40% of their disposable income on private rents (Figure 1.19). With persistent housing shortages, house prices have outpaced household income, worsening housing affordability, especially for low-income tenants and homebuyers around Dublin. The number of years of gross disposable income required by an average household to buy a 100 square meter dwelling is 16.3 in 2021, among the highest in the EU (European Commission, 2022b). Budget 2023 allocates €6.2 billion to support housing supply and affordability, including measures on rents (e.g., a €500 income tax credit for renters) and social housing.
Figure 1.19. Housing affordability is a concern
Note: In Panel A, data represent the relative share of housing-related expenditures, namely, housing, water, electricity, gas and other fuels, in households’ final consumption expenditure, based on National Accounts. Detailed methodological note can be found at Housing Affordability indicators - OECD. In Panel B, due to data limitations, tenants at subsidised rates are included into the private market rent category in the Netherlands, Denmark, New Zealand and Sweden. Detailed methodological note can be found at Housing costs over income - OECD.
Source: OECD, National Accounts database; and OECD, Affordable Housing database.
1.6.2. The Housing for All Strategy is ambitious, but near-term effects might be limited
A 2021 spending review of housing policies identified a number of trends and issues (Government of Ireland, 2021a). These include the increase in house prices, driven by high construction costs, speculative land hoarding by landowners and developers restricting the supply of development land, and related low affordability, and pro-cyclicality of publicly provided funding support to housing, with the slowdown of social housing development during recessionary periods undermining the long-term and timely supply of social housing. In addition, urbanisation and changes in household formation (smaller units) have shifted the demand to smaller rental housing. While this has driven growth of private institutional investors in the rental market, supply remains low.
Fragmented approaches to housing reforms in the past have failed to deliver a big enough response to these structural problems. The ambitious Housing for All Strategy (Box 1.6), which includes improving zoning, planning, land availability, and provision of social housing, has an overall target of 300 000 new homes by 2030, including 54 000 affordable homes (new buildings for purchase or rent). The strategy considers the economic and social consequences of a systemic all-government policy approach, which is welcome, but it will take time to deliver significant results. It will be important to prioritise supply-side measures as policies that stimulate demand further given the existing supply-demand imbalances could increase price pressures in the near term.
Box 1.6. Housing for All
In September 2021, the government introduced the Housing for All Strategy (around €20 billion over the next five years) with four main objectives: i) supporting homeownership and increasing affordability; ii) eradicating homelessness, increasing social housing delivery and supporting social inclusion; iii) increasing new housing supply; and iv) addressing vacancies and efficient use of existing stock.
In addition to the pledge to support the building of more than 300 000 new dwellings by 2030, the plan includes measures aimed at increasing the delivery of affordable homes to either purchase or rent at subsidised prices, providing more social housing, simplifying planning legislation, increasing funding for land acquisitions and infrastructure spending by local authorities, enhancing land value sharing mechanisms, introducing urban development zones and a new tax aimed at activating vacant land for residential purposes. It also introduces a national affordable purchase shared-equity “First Home” scheme for newly-built homes in private developments (maximum of 8 000 by 2026), a local authority led affordable purchase scheme (28 000 by 2030) and a new form of tenure (Cost rental), with rents at least 25% below market level and a target of 18 000 homes by 2030.
Source: Government of Ireland (2021e), Housing for All - a New Housing Plan for Ireland, Dublin.
Housing for All adds the “First Home” affordable purchase shared-equity scheme to help purchase a newly built property to the existing schemes for first-time buyers: the “Help-to-Buy” incentive, which provides a tax refund of up to 10% of the purchase price under certain conditions, and the “Local Authority Home Loan” scheme providing lower cost mortgages to first-home buyers who are unable to obtain funding in the mortgage market. The “First Home” scheme, jointly supported by the state and participating mortgage lenders, aims to bridge the gap for eligible purchasers between their combined deposit and mortgage, and the price of the new home. Under the scheme, the equity facility can be up to 30% of the house value (maximum 20% if also using Help-to-Buy incentive), and will be junior to the mortgage from the participating lending institution (i.e., absorb losses before the mortgage in case of borrower default). A household-specific income limit (the assessment is based on the maximum mortgage available to the applicant household falling short of the amount required to purchase the home), and region-based house price caps (ranging between €250 000 and €500 000) apply. While the Central Bank of Ireland has amended mortgage measures to clarify the participation of retail banks in the shared-equity scheme, it recommends a regular review of the scheme and adjustment, if needed (De Búrca, Kelly and O'Brien, 2021).
While the impact of the plan on supply will take time in terms of delivery and for the effects to feed through to prices, the different schemes to support first-time buyers have the potential to increase price pressures in the short run in a supply-constrained market. For example, a help-to-buy scheme in the United Kingdom, while delivering some benefits in some areas (Box 1.7), was not effective in supply-constrained areas. A recent evaluation of the Irish “Help-to-Buy” scheme found that the scheme was poorly targeted (Department of Finance, 2022d), but given the current economic situation, it was extended another two years with Budget 2023, suggesting that such schemes might be hard to withdraw once introduced. Hence, stimulating demand further given the existing supply-demand imbalances should be carefully considered. The ”First Home” scheme should continue to be kept narrowly targeted and limited in size. Establishing reporting mechanisms and evaluation procedures to assess the impact of this sequencing of the rollout of demand and supply side policies is key.
Box 1.7. The Help-to-Buy scheme in England
The Help-to-Buy scheme, introduced in 2013, provides an equity loan up to 20% (40% in London). It is wholly state-funded and the equity loan is repayable after a maximum of 25 years or on the sale of the property. The proportion of the scheme in total housing transactions has increased from around 4% in 2015 to 6.5% in 2020, reaching 8% in London.
A number of evaluations suggest that the scheme has resulted in substitution rather than additionality in mortgage markets (Benetton et al., 2019). A 2020 evaluation found that while it increased homeownership and house construction, around three-fifths of buyers could have bought a property without the support of the scheme (National Audit Office, 2019). The scheme boosted construction without affecting prices in some locations, but in areas with severe long-run supply constraints, such as London, it increased house prices with little impact on construction volumes and aggregate mortgage lending (Carozzi, Hilber and Yu, 2020).
1.6.3. Addressing supply constraints is key
High construction costs, labour and skill shortages, complex regulations, cumbersome judicial reviews delaying construction projects, the underuse of publicly-owned land for residential construction, as well as complex and restrictive rent legislation, which limit buy-to-rent properties coming onto the market, constrain housing supply.
The rising cost of housing construction may affect the cost-effectiveness of planned spending increases on housing and delay the delivery of the relevant plans (Figure 1.20). The cost of building and construction materials, which had increased by only 1.2% per year on average since 2016, increased by 21% in July 2022 from a year earlier, reaching 47% for steel and reinforcing metal. Brexit (given that Ireland is dependent on the United Kingdom for some materials), and the war in Ukraine exacerbating supply bottlenecks are pushing up construction costs further this year. A Sector Employment Order, which came into effect in February 2022, sets relatively high statutory minimum rates of pay and other conditions for workers in the construction sector. This may boost the supply of labour, but can also add to costs. An ongoing residential construction cost study and the statutory register established for construction providers in 2022 can help. On the other hand, the 5% levy on certain concrete products introduced in Budget 2023 could be passed on to future residents of newly built properties, which may impact housing affordability.
The relatively low productivity of the construction sector in international perspective contributes to high construction costs (Russell et al., 2021; Department of Public Expenditure and Reform, 2020). The Housing for All Strategy aims to improve innovation and productivity of the residential construction sector. A modern methods of construction (MMC) leadership and integration group has been established to bring together different stakeholders, and a number of initiatives to spread the use of MMC in residential construction are in progress (Built to Innovate, which extends Enterprise Ireland’s innovation and productivity schemes to domestically-focused construction firms, and a Demonstration Park for MMC). A Construction Technology Centre to increase industry-academic collaboration has been established, and the Foreign Direct Investment Agency (IDA Ireland) is working on attracting more international construction firms to boost capacity. The Construction Sector group facilitates regular open dialogue between the government and the construction sector to increase efficiency and digital adoption. These efforts should be continued, and be frontloaded, especially given the added constraint of labour shortages in the sector. Incentivising the use of rigorous planning processes and modular and prefabricated solutions as well as investments in digital technology and advance automation via public procurement can also boost productivity in the sector (McKinsey, 2017).
Availability of skilled staff is the most common cited barrier to investment in the construction sector, followed by regulations (European Investment Bank, 2021), and job vacancies in the construction and real estate sectors have increased since 2016. This partly reflects the fact that non-Irish workers in construction (40 700 at the peak in 2007) have left, and the number of individuals entering construction-related education and apprenticeships has been small since the property bust (Tedin and Faubert, 2020), even though it rose in 2021. The Housing for All targets imply an estimated rise of total labour demand from housing construction from approximately 40 000 full-time equivalent workers now to 67 500 by the middle of the decade, with the total demand peaking at just over 80 000 towards the end of the decade (Expert Group on Future Skill Needs, 2021). To address the gaps, A Build Digital Project to support digital skills, new apprenticeship opportunities and a campaign targeted at school leavers to build up capacity in the sector are envisaged, but there will be a lag to deliver results. In 2022, the Future Building Initiative was launched to facilitate the matching of employers’ vacancies to jobseekers seeking employment, which is welcome.
Figure 1.20. High construction costs constrain housing supply
Industrial Price Index (Excluding VAT), building and construction materials and wages
Source: Central Statistics Office.
Using publicly-owned land for residential construction may improve housing affordability. The State is often one of the major landowners of undeveloped land. In 2018, publicly-owned land was estimated to have capacity for the development of over 50 000 housing units, which could be utilised for social or affordable housing (NESC, 2018). Housing for All tasked the Land Development Agency to develop and regenerate relevant public land for housing, which will largely be made available for affordable and social housing. Part of these developments should increase the supply of smaller apartments rather than the traditional larger houses.
Using public land to increase apartment supply can complement the Croí Cónaithe (Cities) Scheme, a fund to support the building of apartments for sale in big cities (target of 5 000 apartments up to 2025). Around 12% of dwellings in Ireland are apartments, compared with around half in the European Union, even though over half of Irish households include just one or two people. In 2021, only around one fifth of apartments with planning permissions was completed, in contrast to the completion of almost all houses with permissions. It is important that appropriately-sized dwellings in the right locations are built to match demand and to ensure that firms in cities can attract skilled labour from within and outside Ireland.
Housing developments are also subject to planning and permitting delays, and often to legal challenge. A survey of residential developers found that 40% set aside 11-15 months to receive permission and 42% allow at least 16 months, while 61% expect an additional 12 months for appeals and judicial reviews (National Competitiveness and Productivity Council, 2022). The 2021 Planning and Development (Large Scale Residential Development) Act introduced mandatory timelines to speed up the process for large developments (100 housing units or more and student accommodations comprising of 200 or more bed spaces). The streamlining of planning and judicial review processes should be prioritised. The Attorney General is currently conducting a review of the planning code, with a view to facilitate greater clarity and long-term visibility in planning outcomes. It is expected that the review will propose the establishment of a new division of the High Court for planning and environmental issues, and wider reforms to reduce the number of judicial reviews, which would be welcome.
The new planning system also gives back the primary decision-making to the local level, while the An Bord Pleanála (Board), Ireland's national independent planning, will be in charge of appeals. The aim is to increase transparency and public participation and reduce the number of judicial review applications, but international evidence suggests that a high degree of decentralisation can result in more restrictive land-use policy settings (OECD, 2021a). Furthermore, a number of reviews in 2021-22 have highlighted the insufficient resourcing of the planning departments of local authorities (National Competitiveness and Productivity Council, 2022). Hence, it will be important to ensure that local planning offices are adequately resourced with staff and expertise to prevent delays in the approval process for housing and other critical social and physical infrastructure.
There are also some concerns that the prioritisation of housing over other social and physical infrastructure (healthcare, education, water, electricity, etc.) could delay planning permissions in these areas (National Competitiveness and Productivity Council, 2021a). Such infrastructural deficits can indirectly affect housing. For example, almost 25 000 homes in Dublin were on hold in the last quarter of 2021 due to a lack of water supply (Government of Ireland, 2022c), which mostly reflects the complex planning processes. The planned introduction of a serviced land tax and a land value sharing mechanism to strengthen links between housing investment and complementary infrastructure development can help.
A vacant site levy was introduced to increase land availability and reduce land inflation. Since 2019, the levy was 7% of the market value of the land (up from 3% in 2018), and paid to the local authority each year. It had some limited impact in supporting land development. In April 2019, 360 vacant sites were registered, 162 of them in Dublin, with many local authorities citing barriers to the implementation of the levy due to difficulties in interpreting the law and identifying vacant sites and their ownership, and the lack of resources for administering the levy. Eight out of 31 local authorities still did not have an active register in the third quarter of 2020, and in the period between January and October 2020, a total of around €1.2 million was collected, mostly in Dublin. This has highlighted the need for a more centralised approach and clarity to minimise administrative costs.
Budget 2023 provided an update on the implementation of a Residential Zoned Land Tax (3% rate), announced in Budget 2022, to replace the vacant site levy, as recommended in the 2018 and 2020 OECD Economic Surveys of Ireland, and the Commission on Welfare and Taxation. The tax will be administered by revenue commissioners, which should lower administrative costs for local authorities. It should have broader scope than the existing vacant site levy, as it will apply to all lands zoned and serviced for housing that are mapped and in scope. However, the applied rate is only 3%, as against the 7% previous levy, which could limit its effectiveness. The government has committed to evaluate the rate and adjust it, if needed, which should be followed through. The replacement will have a two (three) year lead-in-time for land zoned before (after) January 2022, due to the need for a large-scale mapping exercise, which is currently being rolled out, with the draft maps published in November.
1.6.4. Policies to boost rental supply and stabilise rent costs could have unintended consequences
Macroprudential measures have helped curb house price inflation in the owner-occupied sector since 2018, but prices in the rental sector continued growing to levels well above those prior the 2008 crisis. Rents for new tenancies in the first quarter of 2022 were 9.2% higher than a year ago (Residential Tenancies Board, 2022a), with a higher increase outside of Dublin. Rental supply has reached historic lows, partly reflecting greater recourse to remote work. The number of newly registered tenancies has declined on a year-on-year basis by 32% in the first quarter of 2022. The share of notices of termination due to owners selling the property more than tripled in the second quarter of 2022 compared to the last quarter of 2019 (RTB, 2022b), and the number of private, largely small-scale landlords in the private rental sector has declined, with many properties becoming owner-occupied (Central Bank of Ireland, 2021b).
A number of policies over the past decade might have had unintended consequences in terms of limiting rental supply. The ban on bedsit accommodation (one bedroom and shared cooking facilities), which came into effect in 2013, aimed to prevent the use of inadequate dwellings for modern habitation in terms of heating and sanitation. However, it had adverse implications for some low-income tenants in city centres, increasing homelessness, and created extra demand and price pressures for other segments. Tax allowances for accommodation, such as the “Section 23 relief”, allowing investors to offset rental income against the cost of the property, less its site value, contributed to excess supply of housing in rural areas during the construction boom, but also improved supply in cities. While the withdrawal of these tax allowances in 2008 helped improve public finances and removed the associated negative externalities (Government of Ireland, 2022c), it might have restricted supply in the short run. One side effect of these tax allowances was that unlike in the rest of Europe, where institutional investors play a central role in the provision of rental accommodation, those investors were effectively priced out by the tax break, for which they could not qualify (Lyons, 2021).
In an attempt to limit the rate of rent inflation, price controls were introduced in December 2016, which limited the rate of increase in rents to 4% per year in areas designated as Rent Pressure Zones (RPZs), which was decreased to 2% per year, with the 2021 Residential Tenancies (Amendment) Act. According to a 2019 evaluation, the rate of price inflation across all RPZs fell from just over 9% for the seven quarters before the regulations to just under 6.4% in the seven quarters since, while there was no change in non-RPZ areas (Ahrens, Martinez-Cillero and O'Toole, 2019). However, the effect in Cork, Dublin and the surrounding areas was less significant. Rental price caps can change investment dynamics and behaviour of buyers and sellers. While providing short-term alleviation to sitting tenants in terms of price increases, rent controls impose price rigidities that may have a detrimental effect on the quality and quantity of supply in the medium to long term (OECD, 2020b). Together with high sale prices, rent controls in RPZs and a more complicated compliance framework might be driving the decreasing number of tenancies registered, with mainly small landlords leaving the rental market (European Commission, 2022b). Other ongoing initiatives to help renters include the Cost Rental Equity Loan mechanism to deliver 750 cost rental homes in 2023, and the rent tax credit valued at €500 per renter per year, which is expected to reach 400 000 people in rental accommodation.
Reducing the complexity and restrictiveness of rent legislation may increase the number of buy-to-let properties coming onto the market. According to a recent survey, the main factors influencing buy-to-let properties coming onto the market are rental legislation, landlords coming out of negative equity and low returns (SCSI, 2021). Growing interest in build-to-let by institutional investors has helped contain the decrease in rental stock. International institutional capital has become a major source of finance for residential property developments, making 80% of annual residential investment between 2017 and 2019 (Lyons, 2021).
1.7. Lowering greenhouse gas emissions
Ireland has relatively high emissions of greenhouse gas, somewhat larger than the OECD average in 2020 (11.6 and 10.6 tonnes of CO2 equivalents per capita, respectively). Greenhouse gas emissions peaked in the early 2000s (Figure 1.21), and while generally on a downward path since then, they have risen again recently, with emissions increasing by 4.7% in 2021 compared to 2020, to 1.1% above 2019 levels (EPA, 2022). At a sectoral level, emissions in energy industries and industrial processes have decreased substantially since the mid-2000s. Limiting emissions from the agriculture and transport sectors (36% and 18% of total greenhouse gas emissions, respectively, in 2020) remains challenging.
Figure 1.21. Greenhouse gas emissions remain above 1990 levels
Source: Environmental Protection Agency.
While greenhouse gas emissions have decoupled from economic growth and energy intensity declined (Figure 1.22, Panels A-B), strong population and economic growth with limited abatement in agriculture and transport has hindered meeting emission reduction targets. Around one quarter of Ireland’s greenhouse gas emissions are covered by the European Union Emission Trading System. Greenhouse gas emissions outside the emission trading system exceeded the target of a 20% reduction under the EU’s Effort Sharing Decision and the government will need to buy emission credits to ensure compliance. Furthermore, emission projections suggest that Ireland will also fail to meet the 2030 target under the EU’s Effort Sharing Regulation, without additional measures.
Against this background, the government is laying out the legislative basis to strengthen climate change policy. The 2021 Climate Action and Low Carbon Development Act commits to achieve net zero greenhouse gas emissions by 2050. To reinforce this commitment, Parliament enshrined into law a binding interim target to reduce emissions by 51% (relative to 2018 levels) by 2030. In order to meet this interim target, emissions should decrease at an average annual rate of 7% up to 2030, which highlights the ambitious nature of the most recent climate objectives, given that comparable reductions have only occurred around major economic downturns. As noted earlier, achieving these goals will require major investments, whose benefits have increased further with high energy prices. The Climate Action Advisory Council considers that delaying emission reductions will increase the costs of mitigation, and that buying credits may lock in current technologies (Climate Change Advisory Council, 2021).
Meeting the 2030 and 2050 emission reduction targets will be challenging (Figure 1.23). Environment related taxes are relatively low (Figure 1.22, Panels C-D). The tax on carbon has been increasing. Even faced with inflationary pressures, Budget 2023 includes a €7.5 increase to €48.5, and the tax rate will rise gradually annually to €100 by 2030. The sequenced increase in the carbon tax rate is expected to reduce emissions (and GDP). Offsetting some of the distributional consequences will require means to recycle these revenues to vulnerable households. Evidence from a number of OECD countries suggests that such policies appear necessary for households to support abatement (Dechezleprêtre et al., 2022). Hence, it is welcome that the government has committed to use these revenues for retrofitting, welfare supports for vulnerable households, and green agriculture initiatives, to be implemented in each budget (Department of Public Expenditure and Reform, 2022b).
Figure 1.22. Environmental taxes are relatively low
Note: Panel A includes CO2 emissions from combustion of coal, oil, natural gas and other fuels. Gross Domestic Product (GDP) is expressed at constant 2015 USD using PPP.
Source: OECD, Green Growth Indicators.
A major plank of abatement policy is the establishment of carbon budgets and sectoral emissions ceilings to apply to different sectors of the economy. Parliament adopted its first carbon budget programme in April 2022, underpinned by sectoral Climate Action Plans. The carbon budgets set the path of reductions required over five-year periods to meet the greenhouse gas emission targets. These are then distributed to different sectors of the economy, reflecting the estimated opportunities for them to reduce their emissions. The sectoral ceilings were set in July 2022, ranging from targeted reductions in emissions of 75% in electricity to 25% in agriculture by 2030 (Government of Ireland, 2022d). These ceilings depend on the possible abatement costs, such that sectors where emission reductions are difficult in the short run face less demanding targets than others. In this way, there is some burden sharing across sectors. However, this approach may not harmonise marginal abatement costs and increase the overall costs of mitigation. The Climate Action Advisory Council has stated that there is a need to clarify consistency of these ceilings with the carbon budgets and include the land use sector as soon as possible (Climate Action Advisory Council, 2022).
Figure 1.23. Emission reduction targets are challenging
Note: Greenhouse gas emissions including land use, land-use change and forestry (LULUCF). The linear path is the interpolated path to the emission reduction targets relative to 2018 levels for 2030 (-51%) and 2050 (net zero emissions) as stated in the 2021 Climate Action Plan.
Source: Environmental Protection Agency and OECD secretariat calculations.
1.7.1. Increasing the contribution of renewables
Emission reductions in the power generation sector are key to obtain overall emission reductions and would also improve energy security in the current context of heightened energy supply uncertainty. The share of renewables in electricity generation has risen and more carbon-intensive forms of electricity generation have declined in importance (Figure 1.24). Renewables accounted for 13.5% of energy consumption in 2020 – below the 16% EU Renewable Energy Directive target – and 40% of electricity production. The Climate Action Plan targets a substantial boost to around 70-80% of electricity generated by renewables in 2030 to contribute to a 60-80% reduction in greenhouse gas emissions from the electricity sector compared to 2018. Meeting this target will require major new investment in generation capacity - both onshore and offshore wind turbines - as well as the associated infrastructure.
The investment in new capacity is complicated. Integrating more intermittent supply requires complementary investment to ensure security and continuity of supply. This includes sufficient transmission capacity and the ability to balance supply and demand across the network. Investment in these network facilities and the wind turbines themselves face potentially long and uncertain lead times to obtain planning permissions and then overcome judicial reviews. A major project can expect to take three to four years in planning and permitting and then in judicial review before construction work commences. As such, installing network capacity in time to meet the 2030 intermediate emission reduction target is difficult in the current planning framework. Measures to expedite the process and stop unwarranted barriers derailing investment projects are likely needed to ensure sufficient capacity is installed in time. The planning reform programme, due to be finalised at the end of 2022, should be implemented as a matter of urgency to help streamline and simplify the planning and judicial review process.
Figure 1.24. Renewable energy use has risen
Share of renewables in primary energy supply
Source: OECD, Green Growth Indicators.
1.7.2. Greening transport
Transport accounts for around one fifth of greenhouse gas emissions, with emissions having risen since the early 1990s. The 2021 Climate Action Plan targeted a massive shift from internal combustion engine vehicles to around one million electric vehicles (passenger cars and light commercial vehicles) by 2030. Around 20 000 passenger electric vehicles (battery-powered and plug-in hybrid electric vehicles) were registered in 2021. The current subsidies for electric vehicles are expensive and take-up has been limited, although rising more recently. The subsidies have tended to be regressive in that generally wealthier households purchased the new electric vehicles eligible for the grant offered by the Sustainable Energy Authority of Ireland. In reaction, the subsidies have been capped and restricted to lower-cost vehicles more recently. Continuing to support private passenger car dependency has additional drawbacks with congestion around the major urban areas a major issue. Cities across the OECD have adopted a suite of measures, including congestion charging, increasing the price of parking or reducing its availability, and changing roads to alternative use. Congestion charges in Ireland could help reduce the associated social costs, including the impact on health.
Reducing reliance on privately-owned passenger cars and providing alternatives should be prioritised. This includes providing the infrastructure for low or no carbon transport. The 2022 National Sustainable Mobility Policy, which runs to 2030, aims to move towards greener transport that is better integrated and facilitating a variety of mobility options for individuals (including walking, cycling, micro-transport, on-demand and high-occupancy shared transport and public transport). These goals should be prioritised and guide the redefinition of Ireland’s electrification strategy (OECD, 2022b). Greening transport in this direction requires work in several areas, including street redesign, spatial planning that is focused on increasing proximity, and support for shared mobility (OECD, 2021b). Efforts to communicate to people the benefits of sustainable transport systems are also key. The combined effects of encouraging switching away from internal combustion engines, including by reflecting the social and environmental costs, and providing viable lower or no emission alternatives will help meet the ambitious emission reductions in the transport sector.
1.7.3. Emission reductions in businesses and households
Foreseen emission reductions in the enterprise sector are smaller at 35% by 2030 from 2018 levels. 71% of the emissions in the sector are covered by the European Union Emission Trading System. Within the sector (e.g., in the cement industry), the possibilities of reducing emissions further are likely limited (Box 1.8). Other enterprises will be liable to the carbon tax, which is gradually increasing until 2030. For firms, the Public Service Obligation levy, which is charged to all electricity users, is a fixed charge rather than use-based, which reduces the incentives to minimise electricity consumption under normal conditions (i.e. before the current energy price hikes). Households face a lower charge.
Box 1.8. Cement production in Denmark and difficulties in reducing emissions
Abatement efforts in the cement industry are difficult to achieve. The ubiquity of cement use in construction and the lack of alternative materials combined with the energy use and chemical reactions in its production, makes cement an important source of greenhouse gas emissions (Miller et al., 2021). Worldwide, cement accounts for around 7% of total anthropogenic emissions. Without technological advances, policies to mitigate cement production emissions within a country are likely to lead to carbon leakage when cement is imported.
Other OECD countries are also grappling with how to achieve emission reductions in the cement industry. The Danish cement industry consists of a single producer, Aalborg Portland, which is the world’s largest exporter of white cement. Aalborg Portland is the largest single emitter of CO2 in Denmark, responsible for more than 4% of national emissions in 2018 (2.2 million tonnes). Industrial process emissions from cement production are subject to emission pricing under the EU ETS. The government has entered into a cooperation agreement with Aalborg Portland that secures greenhouse gas emission reductions of 0.5 million tonnes of CO2e by 2030. Rather than reducing production, the emphasis is on replacing fossil fuels, using clay instead of chalk to reduce process emissions and using excess heat for district heating of homes in Aalborg. More expensive technologies, notably carbon capture, may be needed to make further cuts (OECD, 2021c).
The housing stock and commercial real estate have made some progress in reducing emissions, partly thanks to reduced coal use in open fires and greater thermal efficiency. However, progress has stalled since 2014. A large share of housing now relies on oil-fired space and water heating. In 2020, oil products accounted for around two-fifths of final residential energy use (Ó Cléirigh, 2020). As a result, greenhouse gas emissions in the residential sector are elevated in comparison with other OECD economies.
Further progress in reducing emissions will require moving away from oil-fired heating, greater use of renewables, such as installing heat pumps, and retrofitting the existing housing stock with energy saving materials. Reducing dependence on oil-fired heating would insulate Irish households from oil price shocks in the future. The government has pledged to support households, allocating €8 billion to 2030 with the aim of achieving 500 000 home energy upgrades, with Budget 2023 allocating funding for 37 000 houses. This is estimated to reduce emissions in the sector by at least one third. Households most at risk from energy poverty are eligible for free upgrades. However, some cash-constrained households may be unable to invest without additional support. The costs of retrofitting an energy inefficient home to the required standard can exceed €50 000, of which the grants could cover up to half. Even with substantial reductions in energy use, the capital costs will not be recouped for decades (FitzGerald, 2021). Households not wishing to take on additional debt would be eligible for higher grants, but the investments would be limited to thermal insulation. The availability of construction workers may present a constraint on progress, given competing demands from residential construction and infrastructure projects. Already a backlog has built up. In this regard, working to lift supply by increasing the inflow of workers will be important.
1.7.4. Reducing emissions in agriculture
Unlike most other OECD countries, the share of agriculture in emissions is high at around 36% of emissions (Figure 1.25). Only in New Zealand is the share larger. Agriculture is the largest sectoral contributor to greenhouse gas emissions, with emissions coming from livestock, the use of fertilisers, manure management and grasslands. Furthermore, the dairy herd has been growing. The greenhouse gas emissions generated are mainly by methane from livestock, which is more potent than carbon dioxide, but stays in the atmosphere for shorter periods.
Figure 1.25. Agriculture accounts for a large share of emissions
GHG emissions share (excluding land use, land-use change and forestry)
Source: OECD, Greenhouse Gas Emissions database.
Agriculture contributes indirectly to emissions from land use and land use change, which account for around 7% of total emissions. These emissions are mainly driven by drainage of grasslands on organic soils. Business as usual projections suggest emissions will continue to increase. Programmes to manage grasslands, rewetting wetlands as well as reforestation could contribute to abatement efforts.
There is no target for methane emission reductions in Ireland. Internationally, due to the difficulties of cutting methane emissions (without either reducing livestock numbers or incurring high abatement costs), methane reduction targets are often set separately from those for other greenhouse gases. For example, New Zealand has treated agriculture separately from other sectors, with specific targets for biogenic methane and nitrous oxide emissions. New Zealand also has plans to subject agricultural greenhouse gas emissions to a carbon tax. A partnership between the government and the agricultural sector was established to prepare a pricing mechanism, including the development of on-farm accounting and reporting systems for greenhouse gas sources and sinks (OECD, 2022c). If insufficient progress is made in developing the system for implementation, agriculture will become liable to the emission trading scheme that is New Zealand’s principal abatement instrument.
The Irish government has released its Food Vision 2030 Strategy, with the aim of transforming agriculture to become a leader in sustainable food systems over the next decade. The Strategy foresees significant improvements in Irish farming, especially on issues related to air/water quality and biodiversity (Government of Ireland, 2022e). The goals on climate action, on the other hand, are less ambitious. Emission reduction targets for agriculture were set at 25%, lower than the overall objective of cutting total greenhouse gas emissions by 51% by 2030 (relative to 2018 levels).
The relatively modest emission reduction targets for agriculture shift a much larger burden of responsibility to non-agricultural sectors to meet the national mitigation commitment. FitzGerald (2021) estimates that government spending would need to rise by around 0.6% of GNI* annually until 2030 to cut agricultural emissions by 33%. Higher spending will have knock-on effects through the higher implicit tax burdens depressing GDP growth. The costs of shifting the burden to non-agriculture sectors are high because additional abatement in other sectors will be difficult and expensive to achieve.
Table 1.9. Past OECD recommendations on environment and actions taken
Recommendations on macroeconomic and structural policies
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