What is the Government’s ‘annual progress report’?
Under the EU rules, the Government is required to publish its economic and fiscal projections for the year ahead in a report known as the “annual progress report”. It used to be called the stability programme update. Usually, it contains the Department of Finance‘s growth projections for the economy and the financial resources it hopes to have for the upcoming budget. This year’s report is several weeks later than normal because of the uncertainty posed by US tariffs. Unsurprisingly, the threat to Ireland’s economy and public finances from these measures dominate.
So what does the report say?
US president Donald Trump‘s on-off tariffs have made forecasting difficult, so the department assesses the risks under two possible scenarios. The first involves the EU and the US failing to reach a trade deal and a continuation of the existing US tariffs of 10 per cent (plus EU retaliatory measures). In this scenario, growth, as measured by modified domestic demand, slows to 2 per cent this year and 1.75 per cent next year. This scenario would also see 25,000 fewer jobs created against a non-tariff baseline.
In the other more benign scenario, the 10 per cent tariffs are removed and the domestic economy here grows by 2.5 per cent, a rate that is still lower than previously expected because of the current disruption to global trade.
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Are these forecasts likely to need revising?
The report is littered with qualifications and caveats. The department warns that it may have to revisit these forecasts given the high level of uncertainty coursing through the global economy. “It is important to stress that the confidence intervals around these estimates are particularly large in the current environment,” it said.
An even bigger elephant in the room is the fact that the department’s report does not model the likely impact of US tariffs on pharmaceuticals, Ireland’s biggest goods export. Multinationals have been stockpiling produce in the US ahead of a possible announcement, with Trump promising to reshore pharmaceutical manufacturing in a bid to correct the country’s huge trade imbalance. A major hit to the pharma sector here could result in a technical recession in gross domestic product (GDP) terms.
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And what about the impact on tax receipts?
Department officials warned that even before the impact of tariffs, they expected corporation tax to be down by €2 billion this year, with several big firms signalling a reduced level of profitability. The report was published as exchequer returns for April showed the Government has collected €28.6 billion in tax so far this year. This was €3.8 billion (15.3 per cent) ahead of the same period last year. April is not a key month for corporation tax, with just €147 million collected. The impact of tariffs on the business tax, a key risk ahead of the budget, may not materialise for several months.
What else?
According to the department, the domestic economy is in the grip of two opposing forces. On the plus side, higher levels of employment and real earnings are underpinning household income growth. But “even in the absence of any further tariffs, the exceptionally high levels of uncertainty are likely to prompt households and firms to delay, or even postpone, discretionary or large spending decisions”, it says.
The next few months will tell us which force is more powerful.
