Ireland’s rapid economic recovery from Covid has stalled in the face of rising prices and cost-of-living pressures, the Irish Fiscal Advisory Council (Ifac) has warned.
In its latest fiscal assessment the budgetary watchdog said the rising cost of living had weakened real incomes and that would lead to flatter consumption patterns in the coming quarters.
Growth next year is expected to be just 0.4 per cent, down from a projected 5 per cent this year and 15 per cent last year. Ifac’s warning comes as the OECD said falling real incomes would lead to a sharp slowdown in the Irish economy next year.
In its latest global outlook report, the OECD forecasts growth for Ireland of just 0.9 per cent in 2023, down from a projected 8 per cent increase this year, while suggesting high costs and low confidence would dampen investment.
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As for Ifac, its outlook is further clouded by the prospect of recessions in Ireland’s main trading partners, most notably the UK, while the recent spate of job losses in the tech sector, one of the key growth sectors here, signalled a change in the business environment.
Russia’s ongoing war in Ukraine and its implications for energy and food prices also pose downside risks to the forecasts.
On the Government’s recent budget, Ifac said the €11 billion package of measures struck “an appropriate balance” between protecting vulnerable households and avoiding fuelling further inflation. However, it noted the additional spend would add 1.3 per cent to prices out to 2025, over and above where they would have been.
The Government is forecasting a budget deficit of about 3 per cent this year when excess corporation tax receipts are excluded. This represented a substantial narrowing of the deficit (down from 5.1 per cent in 2021) even with cost-of-living measures, the defective concrete blocks scheme, and increases in public sector pay, the council said, reflecting “strong revenue growth and lower pandemic-related spending”.
The Government’s longer-term budgetary strategy, in particular its failure to set out a clear strategy around how it plans to finance age-related spending and the shift to a carbon neutral economy, again came in for criticism.
“While the Government is navigating a steady path through the energy crisis, Ireland’s big longer-term challenges, from ageing to climate to the over-reliance on corporation tax, are becoming ever more urgent,” Ifac chairman Sebastian Barnes said.
“To help tackle these areas the Government needs to start planning ahead by forecasting at least five years ahead, making credible plans to address ageing and climate change, and reinforcing the budgetary framework around its 5 per cent spending rule,” he said.
The Government’s budgetary forecasts out to 2025 suggest it will have approximately €1.6 billion per year for additional spending measures, but the council maintains it will need a further €800 million just “to maintain the real value of existing services and benefits as ageing costs rise”.
The council welcomed the Government’s plan to commit €6 billion cumulatively over 2022 and 2023 into the new National Reserve Fund. “This could help to take the pressure off tax increases in future years as a means of bridging the funding shortfall for Ireland’s pension system that will develop,” it said.
However, it suggested the Government should increase the fund’s €8 billion cap, as well as establishing a more clear-cut purpose for the fund.
Overall the OECD said many countries are facing into a year long recession amid “persistent” inflation.
