It’s been a strange week. At home, the headlines have been about a €9 billion projected budget surplus this year and those €500 Ryder Cup tickets – another symbol of Ireland’s high-cost economy. Internationally, the Middle East crisis drags on, oil prices swing around, the EU announces emergency measures, and there are increased concerns about the longer-term impact on international energy markets and the world economy.
The Irish economy, meanwhile, seems to operate in some kind of bubble. Sure, fuel prices have risen, triggering the recent disruptive protests. But the official forecasts this week were of continued growth and surpluses. If, in a severe scenario, oil prices were to rise to average $150 a barrel heading into next winter, they said, the economy would still keep growing, even though inflation would be running at close to 7 per cent by the turn of the year.
Meanwhile, the forecast for the surplus of State revenue over spending this year – increased to €9.2 billion, from €5.1 billion on budget day – is really significant. Ireland was one of only five EU countries in surplus last year; on average, EU governments are borrowing close to 3 per cent of national output, while Ireland’s is in surplus by not far off the same amount.
The national debate continues as if Ireland’s economic exceptionalism can be taken for granted. Other EU countries are scrambling to hold down borrowing – just look at France – while also reacting to the energy shock. In Ireland, normal transmission continues. Budget Ministers Simon Harris and Jack Chambers compete to support budget income tax reductions, while from the Taoiseach down, the Government is making no secret of its plan to do more to respond to the energy crisis. The only question is whether they can hold out until budget day. Talk of keeping the national powder “dry” is a bit of a joke – well before budget day it will be soaked with fresh commitments.
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If energy prices stay roughly where they are and gradually fall back, economic growth will be lower and inflation higher. Unfortunate and troublesome, but not a repeat of 2022. But we have no idea whether this is how events will play out. And both the national debate and the financial markets seem to be largely ignoring the risks.
Promising a few euro off people’s weekly tax bills which you may or may not be able to deliver is pointless against a backdrop of huge uncertainty
As we saw from the Department of Finance forecasts, if tensions continue and oil prices head sharply higher, then inflation will, too. Goodbody economist Dermot O’Leary wrote this week that in a severe scenario outlined in the official forecasts – with oil prices holding at $150 a barrel – the estimate that the economy could still grow by 1.5 per cent could be “overly benign”. The difficulty with forecasting these kinds of situations is that it is near-impossible to account for the uncertainties they bring, the hits to confidence and the chain of economic consequences. And remember that Ireland is one of the EU countries most exposed to energy shocks.
Ireland got through the Covid shutdowns and the 2022 inflation spike remarkably well, though the latter left a legacy of higher prices. It further embedded the high-cost economy, headlined this week by those Ryder Cup tickets. This is part of a wider story.
Analysis by the Department of Finance published with this week’s forecasts underlined the huge growth in the price of services in Ireland in recent years – think health insurance, eating out, GP bills, hotels, and so on. In contrast, the price of goods – a shirt, or a piece of furniture, or whatever – has not risen much. Domestic services are having to compete in a jobs market with highly productive multinationals, and so have to increase their prices. Consumers pay the price.
This is part of the story of squeezed households and businesses which the Government is dealing with. So how should it respond in the weeks ahead?
The first thing is to stop making budget promises. The world may be more benign by October, or it may still be in turmoil. Promising a few euro off people’s weekly tax bills which you may or may not be able to deliver is pointless against a backdrop of huge uncertainty and some grim forecasts about the damage already inflicted on energy markets. Yes, income taxes should be adjusted for inflation so the burden does not keep rising, but this will be a sideshow in the budget if energy markets do not settle and the world economy heads into a recession or something like it.
No one can guarantee that the economy will continue to outperform just about everywhere else in growth terms. Let’s hope it does – and the resilience of recent years has been impressive
Real thinking is needed, meanwhile, on the spending side. The Government rushed into expensive energy credits after the 2022 inflation surge, with 50 per cent of recipients saying subsequently they did not need them to help pay their bills. And the sugar rush quickly faded. The Taoiseach has said more fundamental measures are under consideration this time, such as how much of the upgrade to the energy network is paid for through energy bills and how much by taxpayers, and how to permanently support less well-off households. The risk is that this kind of structural change all gets blown away by a demand for another round of universal energy credits. The only public output of a committee of civil servants looking at all this for months now has been one report, which analyses the problem but is short on solutions.
No one can guarantee that the economy will continue to outperform just about everywhere else in growth terms. Let’s hope it does – and the resilience of recent years has been impressive. But the Government needs to act with an urgency born of the risk that ongoing corporate tax growth is far from guaranteed. Just look around.
Wars in the Middle East and Ukraine continue. The EU is in semi-permanent crisis mode. Ireland remains reliant on three big corporate taxpayers, one of which, Apple, has a new chief executive, and another of which, Microsoft, has announced a round of global job cuts, as has another big Irish employer, Meta. The State remains reliant on the success of these companies and in how they arrange their tax planning – and on US tax laws. And it has little influence over any of these factors.
If Ireland is lucky, come budget time, the economic forecasts may still be encouraging. But luck is not a strategy. And Ireland’s economic exceptionalism, while providing opportunities now, is facing clear threats over the next few years.
