Executive Summary

New leaders, but parties remain in power
The year 2017 was marked by a major change in the political leadership of Ireland. In June 2017, both the Taoiseach (prime minister), Enda Kenny, and the Minister for Finance, Michael Noonan, resigned. Kenny was replaced by Leo Varadakar and Noonan’s successor became Paschal Donohoe. Despite this change in leadership, the Confidence and Supply agreement between the Fine Gael party and the main opposition party, Fianna Fáil, negotiated after the 2016 General Election, remained in place. This empowered Donohoe, who assumed the dual roles of Minister for Finance and Minister for Public Expenditure and Reform, to introduce the 2018 Budget on 10 October 2017.
Strong economic performance.
Consumption, investment driving growth.
Brexit helps keep inflation down
In 2017, the Irish economy once again recorded very strong economic performance. The major indicators – GDP, consumption expenditure, investment expenditure, exports and employment – were strongly positive. GDP grew by over 5% in 2017, similar to the 5.1% growth rate of 2016. Employment greatly benefited from this strong expansionary economic phase with unemployment falling from 7.9% in 2016 to 6.2% in 2017. Unemployment, which stood at 15% in 2012, has fallen and is expected to fall further to 5.4% in 2018. The main drivers of this impressive economic performance are consumption and investment expenditure. These factors are a stark contrast to the 2015 “leprechaun” growth statistics, which were artificially inflated by alterations to statistical reporting procedures as well as the on-shoring effects of multinational corporations transferring intangible assets to Ireland and the increase in aircraft leasing by companies in the International Financial Services Center. Uncharacteristically, this recent economic growth has taken place within an inflation free environment. Over the last three years, the Harmonized Index of Consumer Prices (HICP) moved from zero inflation (2015) to negative inflation (-0.2%) in 2016 and to just 0.3% in 2017. In 2017, Ireland had the lowest inflation in the EU. Part of the catalyst for the recently very positive non-inflationary environment has been the weakness of pound sterling (GBP) caused by the challenges associated with Brexit. The appreciation in the euro relative to pound sterling has enabled goods price inflation to remain persistently negative in Ireland, helping counterbalance higher prices for services.
Debt falling, credit
rating rising
Consistent with the underlying growth of the economy there has been considerable improvement in Ireland’s overall debt position and, consequently, the country’s international credit ratings. During the Irish economic crisis, government debt reached a high 120% of GDP in 2012. In 2016, it had fallen to 75% of GDP against a euro zone average of 89.2%. This improvement continued in 2017 with the debt-to-GDP ratio falling to 66%.
Multinationals obscure true debt levels
In the case of Ireland, it may be more accurate to use a more relevant denominator for debt, namely the Modified Gross National Income (GNI*). GNI* more accurately reflects the income standards of Irish residents than GDP. It differs from standard GNI in that it excludes, inter alia, the depreciation of foreign-owned, but Irish resident capital assets (chiefly intellectual property and aircraft leasing assets) and the undistributed profits of firms that have re-domiciled in Ireland. The debt/GNI* ratio was 160% in 2012. It fell to 102% in 2016, indicating that there has been a considerable improvement in the Irish debt burden. Nevertheless, the burden of debt faced by domestic residents remains high when the activities of the multinationals are removed from the national income statistics.
Sound policies boosted by good environment
Overall, Ireland’s improved economic performance is attributable to sound policy decisions and favorable external conditions, including strong growth in the U.S. economy, a return to growth in the euro zone, the persistence of historically low interest rates, and a strong inflow of foreign direct investment.
Budget 2018 – Economic and Fiscal Outlook incorporating the Department of Finance’s Autumn Outlook. 18
ESRI Quarterly Economic Commentary Winter 2017 by Kieran McQuinn, Conor O’Toole, Philip Economides and Teresa Monteiro.
Central Bank of Ireland Quarterly Bulletin October 2017 No. 4.
Tim Callan, Maxime Bercholz, Karina Doorley, Claire Keane, Mark Regan, Michael Savage, John R. Walsh ‘Distributional Impace of Tax and Welfare Policies: Budget 2018. ESRI Quarterly Commentary, Winter 2017.
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