Key Challenges

Distortions in key economic statistics
Despite Ireland’s strong macroeconomic performance, there are a number of caveats to be applied to current developments, given the amount of “smoke and mirrors” phenomena that have appeared in Irish macroeconomic reporting in recent times. A couple of years ago, one of the main problems related to “contract manufacturing,” which artificially boosted both GDP and export statistics. More recently, the key phenomenon has been the on-shoring of intellectual property rights in Ireland, and the influence on-shoring has had on investment, import and GDP statistics. If one is to believe the macroeconomic statistics then investment expenditure fell by 31% in 2017 and by 6.3% in 2018. However, both of these reductions were caused by a decline in the transfer of intellectual property rights relative to the transfers that occurred in 2015 and 2016 – less on-shoring of intellectual property rights led to a reduction in imports and investment expenditure. Once adjustments are made for this exceptional item, it is clear that domestic investment expenditure increased in 2018. Similar effects may be seen in the fall in imports by 0.7% in 2018. The ESRI forecasts indicated that imports of research and development services produced the biggest annual decrease, falling by 42% in the first quarter of 2018.
GDP reporting is inflated
The knock-on effects of these problems for economic policy are considerable. Ireland’s GDP (€312 billion) in 2018 was significantly over-inflated by the activities of multinational companies with GDP over €60 billion greater than GNP. Similarly, export statistics were over-inflated by the activities of multinational companies. One major implication of the activities of multinational companies has been the way in which corporation tax increases have fed into the financing of increased public-sector expenditure. Economists at the central bank have estimated that, since 2014, 40% of increased taxation has come from buoyant corporate tax revenues.
Windfall taxation gains
Such a windfall gain in taxation is highly reminiscent of similar windfall gains from property-related taxes during the second phase of the Celtic Tiger between 2003 and 2007, which facilitated excessive public-sector expenditure leading to the fiscal crisis between 2008 and 2013. By October 2018, corporation tax receipts had reached a record of €6.7 billion (income tax receipts for the same period amounted to €16.3 billion), suggesting that total tax revenue from this source was €9 billion for the year. About 40% of corporate tax proceeds emanated from 10 major multinationals including Apple, Dell, Google, Microsoft and Oracle.
Future decline in corporate tax revenues likely
At some stage in the future, it is possible that there may be a considerable fall in corporate tax revenue resulting from changes in the taxation of corporates by the United States and/or the European Union. While the Irish government has established a “rainy day” fund to meet unforeseen contingencies, there is a strong argument for significantly increasing this fund because of the potential danger of a considerable reduction in corporate taxation in future years. In the 2019 Budget, while a €1.5 billion contribution from the Ireland Strategic Investment Fund was made to seed the newly established “rainy day” fund this merely represented a shifting of money between government accounts. Only €500 million was earmarked for the “rainy day” fund from the 2019 Budget – less than 1% of net current expenditure by the government.
Substantial dangers posed by hard Brexit
At the time of writing, there was still considerable uncertainty with respect to Brexit. Ireland is the only EU member state to share a land border with the United Kingdom. The dangers posed by a hard Brexit are twofold. At the political level, a hard Brexit would lead to the re-imposition of a land border that had de facto disappeared under the European Union in recent decades. The reintroduction of a land border could significantly undermine a peace process that remains fragile. Economically, the implications of a hard Brexit are equally serious as the United Kingdom accounts for a significant share of Ireland’s external trade. The bare trade statistics (14% of Irish exports go to the United Kingdom) appear to suggest that Ireland’s dependence on the United Kingdom has greatly reduced in recent years. However, this decline is largely the result of strong growth in high-tech and pharmaceutical exports from Ireland to countries other than the United Kingdom. The United Kingdom still accounts for over 40% of Ireland’s agricultural exports, with more than 50% of beef and pork, and 84% of poultry exports destined for the United Kingdom.
Housing market slow to respond to cyclical shifts
One of the most difficult cyclical phenomena to manage is that of housing and construction. Ireland’s housing and construction boom between 2002 and 2008 created a highly unstable banking and financial environment along with a fiscal system excessively dependent on taxes from this sector. The ensuing collapse led to an oversupply of housing marked by newly constructed ghost villages. Building and construction activity fell dramatically and many key workers in this sector emigrated. The return to economic growth from 2013 onwards has meant that the building and construction sector was ill-equipped to meet the increasing demand for new housing. Additional to this, several banks that had been badly affected during the previous period of expansion were loath to lend to builder developers. This meant that in 2013 only 4,575 new dwellings were completed, followed by 5,518 in 2014, 7,219 in 2015, 9,915 in 2016 and 14,446 in 2017.
Desperate need for new housing units
The number of housing completions has been desperately inadequate given the demand for housing resulting from the improved economic situation. Some forecasters believe that Ireland needs to build an average of 34,000 new units per year, with half of these required outside the Dublin area (see Initiative Ireland Housing 2031). The Housing Agency estimated that the total number of households that qualify for social housing amounted to nearly 72,000 in 2018. The inadequate flow of new housing relative to shifts in demand has had severe repercussions on the rental market. The average annual rent reported by the Census Report of 2011 was €10,395. This had risen to €14,724 per year by the end of 2017. For Dublin, the average annual rent is far higher at €21,226. On 4 October 2018, the Irish parliament passed a motion declaring housing and homelessness a national emergency.
The minority Fine Gael government, which has been in power since May 2016, must continue to address these diverse challenges.
For political events see: Michael Gallagher and Michael Marsh (2016, eds), How Ireland Voted 2016: The Election that Nobody Won. London: Palgrave Macmillan.
Summary of Social Housing Assessments, Housing Agency 2018
Irish Fiscal Advisory Council, Fiscal Assessment Report, November 2018
Initiative Ireland Housing 2031, February 2018

Party Polarization

Minority government with external support
The 2016 general election produced a minority Fine Gael-led government, which is very much dependent on a confidence-and-supply arrangement with the other major party, Fianna Fáil. Under the arrangement, Fianna Fáil will not oppose the passing of the government’s annual budgets. The confidence-and-supply arrangement was produced on the basis of an agreed range of policy principles. It remains to be seen whether the minority Fine Gael government will survive through 2019.
Brexit worries helping to sustain arrangement
Given the proposed Brexit timetable, there will not be an election prior to the United Kingdom and the European Union producing a new political/economic arrangement that will enable the United Kingdom to leave the European Union in March 2019. While the uncertainty surrounding Brexit is the strongest factor sustaining the confidence-and-supply arrangement, another contributory factor was the state of the political parties’ performance in recent opinion polls. In most polls (e.g., IPSOS-MORI polls published in The Irish Times), Fine Gael has consistently led Fianna Fáil (polling around 32% for Fine Gael and 27% for Fianna Fáil), with some minor oscillation, throughout most of 2017 and 2018. (Score: 6)
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