Perhaps unaware of the loaded nature of the term in Ireland, the International Monetary Fund in its recent review on the economy said it believed it was heading for a “soft landing.” Similar reassurances were given to the Irish public before the financial crash. Fortunately, there is no reason to expect history to repeat itself, even if economic prediction has been largely worthless over the last few years given the series of unexpected shocks which have hit.
After Covid-19 and its aftermath and the war in Ukraine, 2023 did see a return to stability of a kind. The war in Gaza caused some nervousness late in the year, though the geographically contained nature of the conflict meant its economic impact has been limited to date. That said, geopolitical factors continue to loom large in economic forecasting.
Economic growth in Ireland has slowed as the year went on due to two main factors. One was the ongoing – if easing – cost-of-living crisis and the rise in interest rates,which hit household income.The second was a fall-off in exports from some multinational industries, notably the pharma sector. This appears to be largely due to an unwinding of a big boost in exports from this sector during the Covid-19 pandemic.
This drop in exports was the primary reason why Ireland’s Gross Domestic Product fell, pushing the economy into what was called a “technical recession”. This term is used due to the distortion to Ireland’s economic statistics caused by multinational activity.T he domestic economy has continued to grow compared to 2022. However, falling business investment levels meant that the domestic economy has stalled in recent months, though consumer spending has continued to rise – albeit more slowly.
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So while the recession may be technical, the slowdown is real. And one thing is clear amidst all the data – the extraordinary economic bounce seen after the ending of the Covid-19 lockdowns is well and truly over, both internationally and in Ireland.
Still, the Irish jobs market has held up, with employment numbers at a record level. Total employment in Ireland has risen from just over 2.2 million in 2018 to 2.64 million now. The unemployment rate, while has ticked up in recent months, remains comfortably under 5 per cent. There have been some signs in recent data that the level of total employment has started to top out. Notably, annual figures from IDA Ireland showed a small decline in employment this year among its client companies. Figures from the Central Statistics Office suggest that employment across the economy has been effectively stable in recent months.
In terms of managing the economy, the Government got some good news in November, when corporation tax returns surged after three months during which weaker figures had raised some worries. This indicates that the Government will more or less meet its revised target for the year of around ¤23.5 billion from this tax and in turn the overall budget surplus figures should be met.
However, the episode underlined a key point. It is the reliance on a small number of companies to pay a large amount of corporation tax – the Fiscal Advisory Council calculates that three big firms may be responsible for more than one third of total receipts. The volatility during the Autumn appeared to relate to lower 2023 payments from a couple of big companies – Apple and Pfizer – and this underlines the risks Ireland faces here. It is also worth noting that while this year’s figures look set to come in on target, it will be the first year for some time when the corporate tax take has not surged well ahead of expectations.
The Government has dealt with this influx of funding over the last few years by putting some cash aside in a special fund. It plans to formalise this now, establishing two special vehicles for what it defines as excess corporate tax receipts, one to support investment and climate spending and the other as a longer-term fund to support future funding pressures. For useful amounts of money to end up in these funds, the flood of corporate tax money needs to continue.
With the exchequer in strong surplus and Ireland’s national debt burden easing, the Government will head into what may be a general election year saying that it can be trusted with the State finances. It did receive a firm rap on the knuckles from the Fiscal Advisory Council late in the years, which accused it of “gimmickry” in some of its budget manoeuvres. This mainly relates to the split between temporary and permanent spending.
But a key focus of the general election debate will be on using the resources available – particularly for housing, but also in areas such as health and education. The Government will claim it is making some progress here; the Opposition will argue it should be doing much better. The polls have suggested that Sinn Féin’s campaign on housing, in particular, has gained traction. A spiky election debate lies ahead.