To try to understand what happened to the Irish economy this year, it is useful, first, to look back to April and Donald Trump’s “Liberation Day” when he unveiled a series of planned tariffs on US trade partners. It was part of a series of threats which led to serious concern about US investment in Ireland, the downgrading of forecasts for jobs and growth and fears about Ireland’s corporate tax take. Crucially, it introduced new uncertainties which could damage investment and consumer spending.
Fast forward to the end of the year and the worst has not happened. Investment was hit for a period, as was consumer confidence. And there are signs that the jobs market has slowed, particularly due to some retrenchment in the technology sector. But the economy has had another strong year of growth, unemployment remains low and – perhaps most remarkably– IDA Ireland reported another record year of inward investment. Big US firms are continuing to invest here, it appears, even if – fearful of blowback from the White House – many are not saying much about it.
In turn, this strong growth rate has supported tax receipts, with another record year for corporation tax and income tax also performing well. Another sizeable budget surplus will be reported for this year, despite significant overspending. As Paschal Donohoe departed for the World Bank and Simon Harris installed himself as Minister for Finance, the exchequer finances remain in rude good health. Two questions suggest themselves: how long can this continue and can the Coalition shake off the lethargy of the early part of this term and the last part of the previous government and use the resources to make real progress on delivering housing and infrastructure and improving public services.
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While Fianna Fáil and Fine Gael can boast of strong economic figures, their record on delivery ranges from patchy in some areas to downright poor in others. Senior ministers spent much of the year atoning for mistakes made during the general election campaign and in an unrealistic programme for government.
Housing, of course, is central. Claims by the outgoing government that there would be close to 40,000 home completions last year, made repeatedly during the general election campaign, were proved wide of the mark when the final total emerged as being just over 30,300. Attempts by the two big parties to justify this electioneering were wholly unconvincing.
By late this year some energy appeared to finally be coming into addressing the housing issue, with a string of announcements and then an updated housing plan. But barriers remain to progress. And the political problem for the Coalition is that achieving sufficient progress before the next general election will be difficult. Its target of 300,000 new homes by then appears unrealistic , with the Central Bank generously saying that this goal looks “challenging.” There are some signs of progress in housing commencements, but big problems remain in apartment building.
Housing is, of course, part of a wider problem of Ireland’s creaking infrastructure, where development has fallen well behind population growth. A plan to accelerate infrastructure was published in December, promising significant measures to speed up major projects vital to house-building and to Ireland’s wider economic and social prospects.
Minister for Public Expenditure Jack Chambers has promised to push this forward, but the multi-faceted problems are going to take time to address, if indeed this can be achieved. Momentum is vital to send a clear message to the public service and more widely. If it is not achieved then there is a risk that, like so many plans and strategies before it, this, too, will run into the sand.
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Improving Ireland’s infrastructure and building more houses are vital to Ireland’s longer-term economic outlook. For now, the resources are there for the Coalition to spend. But will this continue and, in particular, will corporation tax continue to increase?
A new medium-term financial strategy published by Harris and Chambers this month highlights the risks, though it assumes that tax revenues will keep in rising. Telling calculations in the document show the impact on the public finances if corporate tax receipts fall, or even if they stop growing. A headline budget surplus could quickly disappear and in a worst-case scenario the exchequer could move into a significant deficit, requiring lower spending or higher taxes.
For now, the money is there and the Coalition is responding to the need for better infrastructure and services by spending a lot of it. But the risk of a fall-off in revenues is real, as well; even if corporate taxes rise again next year, what happens thereafter is unpredictable.
This means that the economic and political prospects of the Coalition remain uncomfortably reliant on the profits of a few big US companies and decisions made in their boardrooms. And this dependency is continuing to grow.
