Is Ireland thriving? Ireland’s economy in 2023
A National Economic and Social Council (NESC) report poses the question: is Ireland thriving? Despite ranking highly in UN indices and an at-capacity labour market, pressures in the housing market and a tax base dependent on corporate tax make this a complicated question to answer.
Macroeconomic outlook
The UN’s Human Development Index, which covers living standards, life expectancy, and educational attainment, ranks Ireland eighth out of 191 states; the UN’s Social Progress Index, which covers social indicators and the environment, ranks Ireland 13th out of 169 states. These rankings point to a state that is, relative to the rest of the world at least, thriving, but as the NESC report states, there are “other indicators that point to pressures on current wellbeing in Ireland”. Housing is named as the “most obvious” of these.
The report was published in October 2023, the same month in which Ireland’s record for total homelessness was once again broken as 13,179 people were recorded accessing emergency accommodation. In December 2023, the Government ceased providing accommodation to male asylum seekers, instead providing them with €113.80 per week – a rate per month that does not cover half of the average monthly rent in any of the State’s 26 counties according to Daft.ie’s rental report for Q3 2023 – and a tent and sleeping bag, meaning that homeless numbers are unlikely to fall any time soon.
Other challenges illustrated within the NESC report are the high cost of living in Ireland, ongoing high unemployment among people with a disability, and low rates of pay that exceed the average for both the OECD and the EU. The report also notes that the State has the largest gap in trust in government between young and older people in the OECD; the OECD Trust Survey found in 2020 that 59 per cent of people aged 50 or over expressed trust in government, while just 28 per cent of those aged 18 to 34 expressed the same.
Despite these challenges, the macroeconomic outlook of Ireland can only be described as good in traditional terms. The Quarterly Economic Commentary published by the Economic and Social Research Institute (ESRI) for autumn 2023 states that the Irish economy “looks set to continue to grow in 2023 and into 2024”. However, this growth brings with it an expected contraction of GDP by 2.7 per cent in 2023, as stated in the ESRI’s winter 2023 Quarterly Economic Commentary. So often cited by government figures as an example of Ireland’s thriving economy, this will be the first episode of negative GDP growth in Ireland since 2012.
Modified domestic demand, a metric that captures consumption and modified investment that is typically regarded as a more reliable indicator of the economy at large, is set to increase by 0.6 per cent in 2023, with ESRI data showing demand for Q4 2023 to be 2 per cent above Q4 2022 but 3.1 per cent below levels reported in Q3 2023. As such, the ESRI states: “In the past, GDP has generally tended to overstate the degree of growth in the domestic economy, in the present case, however, it actually understates the degree of activity in the domestic economy.”
Ireland’s slowing GDP rates do not necessarily reflect a dip in the economic status of the State’s people, rather they show a slowdown in the activity of the multinationals that so disproportionately make up the State’s GDP. Central Statistics Office (CSO) figures released in December 2023 for the previous September showed a contraction of 1.9 per cent in GDP from Q2 2023 to Q3 2023 and an annual decrease of 5.8 per cent, meaning that the economy is technically in recession. Adjusted for seasonal factors, this means that GDP has fallen for four quarters in a row. Modified domestic demand showed an annual decrease of 0.4 per cent.
Labour market, inflation, and Budget 2024
Both the ESRI and the Nevin Economic Research Institute (NERI) state that the Irish economy is currently operating at full capacity, with unemployment having stabilised at 4 per cent over 2023, the ESRI points out that this is particularly felt in employment-intensive sectors such as construction.
NERI predicts that modified domestic demand will grow by “close to” 2.5 per cent in 2024 and that employment will increase by close to 1.5 per cent, meaning that the unemployment rate will remain close to 4 per cent and that the State will stay at full employment.
However, NERI states that this analysis is predicated on: no further tightening of monetary policy; modestly stimulatory fiscal policy; a return to real wage growth as price inflation tapers; and the support of domestic demand via higher consumption caused by growth in real disposable household income.
The ESRI states that “additional domestic pressures are likely to feed through to prices in the short term”, but that “targeting expenditure towards addressing infrastructure bottlenecks and improving the productive capacity of the economy can alleviate capacity constraints in the medium term”.
It remains to be seen if the financial package delivered by the Government in Budget 2024 will bring about the scenario both the ESRI and NERI state is necessary to maintain levels of employment. The ESRI predicts inflation in Ireland to come in at 6.4 per cent for the year 2023 – an upwards revision of its previous predictions – and the International Monetary Fund predicts 5.3 per cent, while the ESRI predicts 2.9 per cent and the IMF predicts 3.2 per cent for 2024. In this context, the 8 per cent increase in core capital expenditure to €12.6 billion in Budget 2024 should go some way towards delivering the infrastructure bottlenecks and stimulatory fiscal policy.
However, gross voted current expenditure across the ministerial groups tells a different story: just three departments (Children, Equality, Disability, Integration and Youth; Environment, Climate and Communications; and Rural and Community Development) received funding increases from the Mid-Year Expenditure Report 2023 to Budget 2024 that outstrip the rate of inflation for 2023 predicted by the ESRI. Two more (Housing, Local Government and Heritage; and Transport) received an increase greater than the IMF-predicted rate but lower than the ESRI prediction.
Inflation is perhaps the key metric in understanding why popular sentiment in Ireland, particularly that of younger people who typically do not own their homes, is not aligning with rates of economic growth. The rate of 6.4 per cent as predicted by the ESRI represents an increase on previously forecast rates and comes with an admission that “inflation rates have not declined as rapidly as we previously expected”.
The average wage in Ireland in 2022 was €40,283, a 56 per cent increase from 1991’s level of €25,811; in the same period, the average house price in the State increased by 466 per cent, from €66,914 to €311,514.
While house prices are not the most indicative metric of economic success, they are emblematic of the challenges Ireland’s economy. The rate of prices far outstripping the growth in wages while the number of dwellings owned without loans or mortgages increased by 11 per cent from Census 2016 to Census 2022 perhaps sums up an economy where wealth has concentrated upwards, posting impressive growth numbers while leaving those in the middle classes and below on the losing side.
The nature of Ireland’s housing market means that its stats will always outstrip that of general inflation, but the CSO’s Consumer Price Index shows that inflation of 84.6 per cent occurred between April 1991 and April 2022, the month in which Census 2022 statistics were recorded.
Corporation tax
Underpinning current unease within the economy is Ireland’s dependency on corporate tax receipts: this was most acutely felt in autumn 2023, when September saw the State collect €1.8 billion in corporate tax, a 12.4 per cent decrease on September 2022 and the second month in a row that the amount declined significantly. With corporation tax down 23 per cent annually in Q3 2023, Department of Finance chief economist John McCarthy admitted that tax revenue would “undershoot” projections set out in spring 2023.
With corporate tax accounting for 27.5 per cent of tax revenue in 2022, it is key to Irish exchequer funds, a fact which has been consistently criticised as an unsound foundation for an economy repeatedly by both international and domestic economic commentators. After three months of revenue falls, November 2023 saw Ireland collect a record €6.3 billion in corporation tax, easing fears around its falling levels but once again emphasising its disproportionate importance in the Irish economy.
Conclusion
Against the backdrop of record corporation tax incomes in November 2023 and a full employment market, Ireland still struggles with homelessness while there are over 166,000 vacant dwellings in the State and CSO preliminary findings for Q3 2023 show average weekly earnings to have had an annual increase of 4.6 per cent, which fails to keep pace with either the IMF or ESRI’s predictions for 2023 inflation. Meanwhile, residential property prices continued to increase throughout 2023, record an annual increase of 2.3 per cent in October.
Over 3,000 people queued up from 4am outside Dublin’s Capuchin day centre on December 13 in order to access tickets entitling them to Christmas food vouchers. If the question is ‘Is Ireland thriving?’, the answer is that it depends on who you ask.
