The Irish economy finds itself in a unique and challenging position. It has faced the turbulence of Brexit, the disruptive impact of the Covid-19 crisis, and is currently grappling with an energy price shock and a cost-of-living crisis. This has created a divide between winners and losers, with net household wealth reaching record levels and corporate profits remaining healthy, while deprivation rates are on the rise. Despite an underlying sense of perpetual crisis, the labour market is thriving, with total employment, the employment rate, and hours worked all reaching or approaching record highs, and the unemployment rate at an all-time low. However, real wages have declined over the past year, and inflation, although falling, remains high across most of the Eurozone. Concerns about core inflation becoming “sticky” have led policymakers at the European Central Bank to plan two interest rate hikes in 2022, with a gradual reduction in rates expected in 2024. The rise in interest rates may eventually weaken demand and growth across the Eurozone, including in Ireland, but for now, the economy is holding steady.
Understanding the stage of the economic cycle is crucial for effective budgetary policy and determining the appropriate fiscal stance. If the economy is in a downturn, it makes sense for the government to stimulate it in a Keynesian manner. Conversely, if the economy is overheating, a different approach is required. Unfortunately, Irish governments have a history of pro-cyclical budgets, and Budget 2024 is likely to continue this trend. The Irish Fiscal Advisory Council has already criticized the government for breaking its own spending rules and risking overheating. The Economic and Social Research Institute and the Central Bank have also cautioned against tax cuts. The current form of the budget will contribute modestly to overheating and inflation, with proposed income tax cuts disproportionately benefiting the better-off.
It is essential to protect low-income households from the pressures of the rising cost of living. This should not be done through one-off measures, as was done last year, but through structural improvements in working-age and old-age payments that are adequately benchmarked against wages and the cost of living. Additionally, the chronic issues of housing supply and affordability must be addressed, and sufficient resources allocated to support climate action. There are numerous pressing spending requirements, including reducing waiting lists, addressing chronic underfunding of mental health services, tackling large classroom sizes, alleviating high childcare costs, and improving public transport services. However, resources are not infinite. The Department of Finance has identified that approximately €12 billion in annual corporation tax receipts may be transitory. The state will need to increase investment in housing and make significant capital investments over the next 20 years to support the green transition. The Department of Finance proposes using the transitory funds to establish a state savings vehicle to partially cover future aging costs, a strategy that holds merit. However, there is also room to establish one or more infrastructure funds.
Crucially, the fiscal rules permit increased spending each year as long as there are offsetting measures to increase taxes. The Commission on Taxation and Welfare recommended just last year that government revenue as a proportion of national income must meaningfully increase over the medium term. Regardless of how the transitory funds are utilized, significant structural PRSI (Pay-Related Social Insurance) increases will still be necessary in the medium term to finance future aging costs.
In conclusion, the Irish economy faces a complex set of challenges, with both positive and negative indicators. The government must navigate these challenges carefully, avoiding pro-cyclical budgetary policies and ensuring that measures are in place to protect vulnerable households from the rising cost of living. Investments in housing, infrastructure, and climate action are essential, but fiscal discipline and careful planning are necessary to ensure long-term sustainability.