Risks to Ireland’s economic outlook are “firmly tilted to the downside” and the energy price shock means it is “unavoidable” that people’s living standards will be impacted, according to officials at the Department of Finance.
The stark warnings are contained in a briefing document drawn up for new Minister for Finance Michael McGrath.
The papers also highlight Ireland’s heavy reliance on “volatile” windfall corporation tax receipts – a situation that leaves the public finances “vulnerable to a shock to the multinational sector”.
The publication of the briefing material comes amid fears of job losses in the tech sector in Ireland with both Google parent-company Alphabet and Microsoft this week announcing plans to cut staff numbers around the world.
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The Government does not expect to know the scale of any job losses at either company in Ireland for a number of weeks.
Intel last night announced that 30 of its non-manufacturing staff would face compulsory redundancy.
Economic turmoil
Minister for Enterprise Simon Coveney is to meet Google Ireland next week in a bid to clarify the impact of Alphabet’s announcement here. He said the tech sector in Ireland remained “strong” and impacted workers would be supported.
The Department of Finance briefing document – drawn up in December – offers a downbeat assessment of Ireland’s economic situation, predicting that inflation will continue at high levels and highlighting ongoing economic turmoil internationally.
The document says: “Uncertainty is elevated, and risks to the outlook are firmly tilted to the downside.”
There are similar remarks about the risks to the public finances and how the increasing reliance on corporation tax receipts is a “key vulnerability”.
It says: “Excluding windfall corporate tax receipts, the underlying fiscal position… is in deficit.”
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Mr McGrath acknowledged this situation earlier this month when he said that by far the most important factor behind last year’s €5 billion surplus was the strength of corporation tax revenue. He spoke of the risk to these receipts and said that was why the Government was transferring part of the windfall to the “rainy day fund”. He also pledged to keep the public finances on a “sustainable trajectory” to put the country in the best position to meet “future challenges”.
The briefing document states the external economic environment is “increasingly challenging”.
“The invasion of Ukraine and Russia’s weaponisation of gas supplies has triggered an exceptionally large energy price shock and undermined global economic prospects,” it says.
A section entitled “Adapting to an Energy Price Shock” says that: “Ireland is a net energy importer and so living standards will be lower than they would otherwise have been; this is unavoidable.”
Higher prices
It adds: “There will be some who are not in a position to absorb these higher prices – and short-term supports should be targeted towards these.”
The Government used Budget 2023 to announce cost-of-living measures like the electricity bill credits for all households totalling €600 and the expanded fuel allowance.
A number of tax measures like the reduced VAT rate for electricity and gas and the cut to excise on petrol and diesel are due to expire at the end of February, and the Government will be considering their future over the coming weeks.
Taoiseach Leo Varadkar has previously said there cannot be a “cliff edge” for households at the end of next month but it will not be possible to extend all measures.
Positives in the Department of Finance document are the “strong” rebound of economic activity following the Covid-19 pandemic “with little, if any, evidence of permanent ‘scarring’ to the economy”.
It also notes the recovery in the labour market with more than 2.5 million people in work with a near-record-low unemployment rate of just under 4.5 per cent recorded in October
The paper says employment growth was expected to “soften” at the end of 2022 and into the early part of this year while remaining at low levels of about 5 per cent throughout 2023.
The document’s assessments are to be updated ahead of the publication of the Stability Programme Update in March.
