Ireland projection note OECD Economic Outlook November 2023

 83

Ireland GDP is set to contract by 0.6% in 2023, as heightened global uncertainties, a weaker outlook in main trading partners and high interest rates weigh on exports and investment. With price pressures subsiding, GDP growth is projected to pick up to 2.4% in 2024 and 2.9% in 2025. Modified domestic demand growth, which removes some distortions due to the high share of multinationals, will decline to 2.1% in 2023, before slowing further to 1.7% in 2024 and returning to 2.1% in 2025.

Although tax receipts are set to remain strong, ensuring long-term fiscal sustainability is needed to meet the investment-intensive ageing, housing and climate challenges. The announced move to allocate windfall corporate tax revenues to two new financial vehicles – a long-term savings fund and an investment fund – is thus welcome. Stricter adherence to the 5% spending rule will also be essential. Structural reforms to enhance SMEs’ financing would boost innovation and technology diffusion. Planning regulations should be eased to foster investment in housing and renewable electricity generation.

Falling exports have weakened growth momentum Household consumption continued to underpin activity in the first half of 2023, on the back of strong employment growth and lower saving rates. However, increased borrowing costs and still relatively high energy and input prices have weighed heavily on business and housing investment. On the external side, the slowdown in global demand triggered marked reductions in export volumes, adding to the post-pandemic contraction in exports of pharmaceutical and medical products. As a result, GDP contracted in the third quarter of 2023.

Ireland

1. Excludes large transactions of foreign corporations that do not have a big impact on the domestic economy.

2. The participation rate refers to the number of persons in the labour force aged 15 years and over as a percentage of the working-age population. The employment rate refers to the number of persons aged between 15 and 64 in employment as a share of working age population.

Source: OECD, National Accounts database; and Central Statistics Office.

StatLink 2 https://stat.link/shv2w1

OECD ECONOMIC OUTLOOK, VOLUME 2023 ISSUE 2: PRELIMINARY VERSION © OECD 2023

84 

Ireland: Demand, output and prices 2020

2021

GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding¹ Total domestic demand Exports of goods and services Imports of goods and services Net exports¹ Memorandum items Modified final domestic demand², volume GDP deflator Harmonised index of consumer prices Harmonised index of core inflation³ Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance⁴ (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition⁵ (% of GDP) Current account balance (% of GDP)

2023

2024

2025

Percentage changes, volume (2021 prices)

Current prices EUR billion

Ireland

2022

375.3 94.1 48.1 157.8 300.0 4.2 304.2 496.8 425.8 71.0

14.8 8.3 6.5 -39.8 -17.3 0.4 -17.1 14.9 -7.2 27.9

9.5 9.6 4.5 5.4 7.9 1.0 8.1 14.2 16.2 3.8

-0.6 3.6 1.6 -8.8 -1.3 1.9 1.2 -2.6 -0.2 -3.3

2.4 2.3 1.3 2.0 2.0 0.6 2.8 1.5 2.0 0.1

2.9 2.7 0.8 2.6 2.3 0.0 2.1 3.7 3.4 1.5

_ _ _ _ _ _ _ _ _ _

6.9 0.6 2.4 1.7 6.2 15.7 -1.5 64.5 54.5 13.7

9.7 6.6 8.1 4.6 4.5 7.7 1.7 46.4 44.4 10.8

2.1 3.6 5.3 4.6 4.4 5.2 1.3 44.4 42.4 9.8

1.7 2.3 3.1 3.4 4.7 5.4 1.0 42.4 40.4 9.4

2.1 2.5 2.6 2.6 4.6 5.7 1.2 40.0 38.0 10.3

1. Contributions to changes in real GDP, actual amount in the first column.

2. Excludes airplanes purchased by leasing companies in Ireland but then operated in other countries and investment in imported intellectual property by multinationals.

3. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

4. Includes the one-off impact of recapitalisations in the banking sector.

5. The Maastricht definition of general government debt includes only loans, debt securities, and currency and deposits, with debt at face value rather than market value.

Source: OECD Economic Outlook 114 database.

StatLink 2 https://stat.link/hf6c4w

Preliminary estimates suggest harmonised headline inflation slowed to 3.6% in October, driven by weaker energy prices, with electricity providers starting to pass lower generation costs onto consumers. Food price inflation slowed mildly, while high prices of services continued to feed into harmonised core inflation, which went up to 4.3%. To preserve the real income of vulnerable households, the government has announced its fourth cost-of-living package (0.5% of 2022 GDP;1.0% of GNI*, i.e., gross national income excluding the distortions from multinationals), which, on top of targeted lump-sum payments to recipients of specific welfare schemes, however, also includes untargeted electricity credits and one-off top-ups to child benefits.

The 5% spending rule will continue to be breached in 2024 Despite some recent easing in corporate tax receipts, total tax revenues are set to remain resilient and help attain a fiscal surplus of 1.3% of GDP in 2023 (2.3% of GNI*). The fiscal stance is expected to be broadly neutral in the next two years. The government’s 2024 budgetary package (2.8% of 2022 GDP; 5.0% of GNI*) mainly comprises spending measures, but there are also some tax changes, including personal income tax cuts, the extension of reduced energy VAT rates to end-October 2024, and the establishment of a one-year mortgage interest relief scheme. Higher permanent spending on welfare payments, public services, and infrastructure will reduce inequality and enhance productivity growth but also result in a breach of the 5% spending rule in 2024. Moreover, significant reliance on untargeted –

OECD ECONOMIC OUTLOOK, VOLUME 2023 ISSUE 2: PRELIMINARY VERSION © OECD 2023

 85 though temporary – income support measures may accentuate inflationary pressures. The fiscal impact of the new 15% statutory corporate rate, from early 2024, will be limited, with the budget surplus expected to be 1.0% of GDP (1.8% of GNI*) in 2024 and increase marginally in 2025, as public expenditure growth eases somewhat. Public debt is projected to fall close to 38% of GDP by 2025 (below 70% of GNI*).

Exposure to global risks is substantial Private consumption is set to remain supportive over the projection period, as widespread skill shortages will sustain wage growth, despite some easing in labour market conditions. Stronger real income gains, led by easing inflation and supply chain rebalancing, will then pave the way for a pick-up from mid-2024.

Higher interest rates will weigh on business investment, especially among SMEs. Further escalation of geopolitical tensions and heightened global uncertainty could lower exports and government revenues. On the upside, faster disinflation would boost business investment, and stronger-than-expected growth in the United States would increase exports.

Fiscal caution and structural reforms are key to long-term welfare gains Meeting the government’s investment-intensive reform agenda, which includes measures to aid the climate and digital transitions, as well as to support the provision of affordable quality housing and health services for a rapidly ageing population, will hinge on ensuring long-term fiscal sustainability and effective structural reforms. Long-term fiscal pressures will be sizeable, as age-related expenditures – on health, long-term care and pensions, for example, are estimated to increase by 8% of GNI* between 2019 and 2050. Hence, the decision to allocate windfall tax gains into a soon to be established long-term savings fund, as well as into a smaller investment fund aimed at – countercyclically – supporting capital spending on infrastructure and climate-related projects, is welcome. In this perspective, adherence to the 5% spending rule remains essential. Any additional public support to income to mitigate persistent inflationary pressures or renewed energy price shocks should be more effectively targeted to vulnerable low-income households, be temporary, and preserve price signals. Productivity-enhancing policies should prioritise the reform of planning regulations to support housing supply and investment in renewable generation, and measures to expand childcare capacity and flexible work arrangements to further strengthen female employment growth.

OECD ECONOMIC OUTLOOK, VOLUME 2023 ISSUE 2: PRELIMINARY VERSION © OECD 2023