Ireland’s Past and Future economic growth prospects

The Irish exchequer recorded a record surplus of €12.8 Billion in 2024, helped in no small measure by a one off receipt of €11 Billion in tax arrears from Apple following a ruling of the European Court of Justice. Even without that bonanza, corporate taxes increased by 18% to €28.1 Billion, Income Tax rose by 6.6% to €35.1 Billion, VAT receipts increased by 7.3% to €21.8 Billion, Excise duties were up 11.8% to €6.3 Billion and sundry other tax receipts were up by 6.9% to €5.8 Billion.

In total, tax receipts were up by 23% to €108 Billion with other sources of income bringing total revenue up to €129.2 billion (+19%) while total government expenditure was up 8.5% to €116.5 Billion thus yielding the aforementioned surplus of €12.8 Billion. This surplus was in addition to the €4 Billion transferred to the Future Ireland Fund as a hedge against increased costs in the future.

Current expenditure was up 11% on housing, 10% on health, and 8% on social protection, with a further 41% increase in capital spending on new housing reflecting the priorities of the outgoing government. The interest bill on the national debt of c. €220 Billion came to €3.1 Billion – down 5.2 % on last year – reflecting both a reduction in total Irish national debt and the relatively low interest rates we can currently borrow at.

So overall, it is clear that the Irish economy is in rude health, having grown by an estimated 5% over each of the past two years as measured by gross national income-star (GNI*), a measure of the domestic economy and excluding the distorting effects of our large multinational sector. This is expected to slow to about 2.7 per cent in 2025 as a much more uncertain international economic and political environment impacts on the Irish economy.

However, many words of caution are warranted: We have been here before. As the above chart shows our debt/GDP ratio was as low as 25% as recently as 2007 before it ballooned to over 120% due to the great financial crash, and it is still at close to 40% of GDP. In terms of the more realistic measure of the domestic Irish economy (GNI*) it grew from less than 30% of the size of the economy in 2007 to a peak of 166% in 2012/13. That figure is now down to about 65% but still more than double the 2007 level.

So, despite recent reductions the total Irish National debt figure of c. €220 Billion works out at roughly €42,000/per person which still one of the highest in the world even if the size of our economy makes it relatively affordable.

But borrowing isn’t all bad, especially if it is used for productive purposes and at affordable rates of interest. Figure 2, Chart A above shows that the vast bulk of our national debt is at 0 to 2% rates of interest which is at or below the current rate of inflation. This means that in real terms, we are actually paying back less than we borrowed. Chart B shows that the average effective interest on our total debt has been declining from 5.1% in 2008 to about 1.5% now, even as the cost of new borrowing has risen sharply from 0% during the Pandemic to 2.9% now. So, this is probably a good time to be paying off debts as they mature – if you can.

But there are storm clouds ahead, neatly summarised by the 4 D’s of Demographics (an aging workforce declining relative to the retired population), Digitalisation (AI and other technologies potentially displacing many jobs), Decarbonisation (huge investments in sustainable energy production and distribution required to meet our climate targets), and De-globalisation (tariff barriers increasing costs and reducing productivity and eroding Ireland’s ability of benefit from corporate taxes on globalised production).

I am not suggesting that another crash on the scale of the 2008 collapse is on the cards, but there are many structural factors which could make our current economic wellbeing much less sustainable into the future. There is a tilt in the global balance of economic power from the USA and Europe to the BRICs economies which the Trump administration is trying to address at Europe’s and quite specifically at Ireland’s expense. It remains to be seen how successful those efforts will be, but Ireland’s huge pharmaceutical exports to the USA and Ireland’s corporate tax bounty from US multi-nationals tax resident here are particularly at risk.

Looking on the bright side, we have built up quite a track record of managing the various adverse global impacts on our economy since the great crash of 2008/9. Brexit, the Pandemic, the Ukraine­­­ invasion, and the anaemic economic performance of our neighbours in the UK and EU have yet to halt the progress of the Irish economy.

Ireland’s GDP growth rate has been quite volatile due to the activities of the multi nationals here but has averaged 6% since 1996. (I am using the internationally standard GDP measure here as longer term trends for the domestic economy as measured by GNI* are not available. Also, while these exaggerate the total size of the Irish economy by as much as 40%, they are comparable year on year and give an indication of long term trends).

Just as the 24% growth in 2015 was largely due to the accounting practices of global corporates locating their Intellectual Property here and did not reflect the real domestic economy (Leprechaun Economics as Paul Krugman called it), the decline of 3.2% in GDP in 2023 was more a reflection of a temporary fall in the value added by the multi-national sector (-11%) and did not reflect the real domestic economy. Nevertheless, if sustained, it will ultimately have a huge effect on the Irish economy and demonstrates just how exposed we are to changes in the global economic environment.

The health of the domestic economy is more accurately reflected in the number of people employed in the Irish economy, which has doubled since the late 1990’s to 2.8 million currently. (It was less than 1 million people in the 1960’s and 1970’s).

Irish labour productivity has also increased remarkably over the past 30 years with an acceleration post 2015 and during the Pandemic followed by a slight decline since 2022. Again, their may be some distortion in these figures due to the relocation of multi-national Intellectual Property to Ireland post 2015, and more recently with what looks like a temporary decline in Multinational added value. This is not necessarily about people working harder or more efficiently, but of the greater preponderance of high tech jobs in the economy over the past 30 years producing more added value.

This sustained growth in labour productivity is also reflected in Ireland’s average weekly earnings growing ever more rapidly, if inconsistently, with average weekly Average weekly earnings rising by 5.3% year-on-year to €955.5 in the third quarter of 2024, and probably reaching €1,000 p/w. by year end.

Irish Inflation since the 1980’s.

Irish Inflation, by way of contrast, has been much more volatile than wage rates, spiking at 9% post Pandemic in 2022. However, Inflation has generally been significantly below the rate of wage growth, which is now, at 1%, once again significantly below wage growth of 5%+. This is in stark contrast to inflation in the Irish Púnt in the 1980’s when it peaked at 23% and wages could never keep up. In more recent years there was a minor spike in inflation to 7% in 2000 as the Euro was being introduced, but since then it has generally been below 5%, with two significant periods of dis-inflation in 2009/10 post-crash, and again during the Pandemic in 2020. Average weekly earnings, by way of contrast, have risen steadily since 2015 even during periods of disinflation.

According to Central Bank figures, all of this economic, productivity, employment and wage growth has resulted in a more than doubling of accumulated Irish household wealth over the past 10 years, which stood at just over a Trillion Euro at the beginning of 2022. However there hasn’t been a significant re-distribution of wealth, with the top 5% of households still owning about 40% of total wealth, much as before. The Irish economy has succeeded in growing the economic cake for all, but the wealthy still take, proportionately, the largest slices.

The picture for disposable incomes, as opposed to accumulated wealth, is slightly more positive, however, with the GINI coefficient showing a significant decline since 2014, meaning that Ireland has become a somewhat more equal society in recent years. This should have an impact on accumulated wealth in the years to come, probably mostly embedded in housing values.

Conclusions

Even when one factors in the great crash of the 2008/10 period and the austerity which followed, the Irish economic story has been one of almost unparalleled success in recent decades despite a number of significant headwinds. This success has been driven mainly by our membership of the EU, Eurozone, and Single Market, and our ability to continue to attract high value leading edge global (mainly US) corporates to these shores. Our infrastructure and housing stock is still scarred by the austerity which followed that crash, but the government has been gradually ramping up the level of investment in both – hampered by a lack of capacity in the building industry and planning process.

But there are major changes in the global environment underway, which threaten the continued success of that model. De-globalisation is now well under way, with the incoming Trump administration targeting not only China, but Europe, and particularly Ireland’s large share of pharmaceutical exports to the US and the profits of US multinationals located here. The BRIC alliance is growing all the time in size, scope, and intensity, and leaving an anaemic Europe in its wake. The Draghi report identified many of the challenges facing Europe, but many of its recommendations seem little more than pious aspirations, given the political landscape of Europe at the present time.

No one imagines that Ireland can maintain the same level of success we have achieved since the 1990’s in the current, much more hostile environment. But at the same time, we should not underestimate the ingenuity, innovation, and entrepreneurship of a growing cadre of leaders with significant experience of high level positions in leading edge companies. We are well positioned in terms of our economic and political stability, but these positions can be quickly eroded if we do not manage our finances astutely – as we failed to do in the run up to the 2008 crash.

There are worrying signs that the incoming government has forgotten some of those lessons and is planning to splash the cash without regard to the efficiency and sustainability of our planning, project management, and investment processes. We have lost a whole generation of experienced political leaders and the quality of the incoming new intake has yet to be proven. I welcome the fact that there is much grown up debate in our polity – not generally given to tribal polemics or simplistic dichotomies – but fact driven exercises in practical cooperative policy making. But I also have a feeling that the next decade will present us with challenges of an entirely different order, which will challenge our societal cohesion and political leadership to its limits.

What we have seen to date are but the opening skirmishes of a generational divide between the have houses and have nots; between established and more recent immigrants; between the need for accelerated development and the NIMBYism of those comfortable with just how things are now. I hope the next generation of our political and economic leaders are up to the task of keeping Ireland progressing in an ever more difficult environment.

Sources:

Irish Government Exchequer returns

Department of Finance annual report on Public Debt in Ireland 2023

Central Bank: The evolution of Household Wealth in Ireland

Trading economics for graphs.