Ireland is a relatively low-tax, low-spend country compared to its European peers, making it economically closer to Boston than Berlin, but this is driven not by ideology, but by demographics.
That’s according to a new report by the Irish Fiscal Advisory Council (Ifac).
It showed that general Government spending as a share of national income was about 40 per cent in the Republic compared to a European average of 49 per cent and a US average of just 38 per cent.
However, Ifac noted that “if Ireland had similar demographics to other high-income European countries, spending on health and old-age social protection would be higher”.
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Ireland has a relatively young population, with fewer people aged 65 and over, which means the Government here spends less on pensions and healthcare than it otherwise would.
“As Ireland’s population ages, spending in these areas is expected to rise. This demographic shift will gradually bring Ireland’s Government spending more in line with levels seen in other European countries,” it said.
The State was also found to have one of the lowest levels of Government tax revenue as a percentage of national income in Europe.
The Government here, on average, collects €2,600 less in tax per person than the European average, it said. When excess corporation tax is excluded, this gap increases to €4,700 per person.
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This again aligns the State with other low-tax jurisdictions while making it something of an outlier in Europe.
“At first glance, Ireland appears to be a low-tax, low-spend country relative to other high-income European countries,” Ifac’s report said.
“However, this is largely driven by Ireland’s relatively young population and strong economic growth. One area where Ireland is already a relatively high spender is healthcare.
“As the population ages, this is likely to rise further, making Ireland even more of an outlier compared to other countries. Education is another area of interest. Ireland spends less than the European average but delivers above-average results. This suggests strong efficiency in education spending,” it said.
Ifac noted that the recently introduced savings funds – the Future Ireland Fund and Infrastructure, Climate and Nature Fund – were a step in the right direction and could help “offset some of these future costs”.
“However, these funds alone will not be able to cover all future spending pressure,” it warned.
Central Bank of Ireland governor Gabriel Makhlouf recently warned that Government spending would need to increase by about €265 billion over the next 25 years to pay for an ageing population, more housing and cutting emissions.
Separately, the Organisation for Economic Co-operation and Development (OECD) has warned that weaker levels of business investment in advanced countries is now a big threat to global growth.
OECD statistics showed that Ireland was one of a host of countries where investment is still, as of 2024, below the trend seen in the pre-financial crisis and pre-pandemic periods.
The figures showed the State recorded the steepest drop-off in investment following the pandemic of any OECD country.
If corporate spending on new projects and facilities does not pick up, countries will “not be able to sustain growth”, Álvaro Pereira, outgoing chief economist at the Paris-based organisation, told the Financial Times.
