Ireland: Structural reforms are needed to ease long-term pressures on public finances


14/12/2022 - Ireland’s economy weathered the COVID-19 pandemic well, emerging with solid GDP growth and a strong fiscal position. Yet rising inflation and global economic uncertainty over Russia’s war of aggression against Ukraine will dent the pace of the recovery, according to a new OECD report.

The latest OECD Economic Survey of Ireland says Ireland’s budget position is expected to return to balance in 2022, thanks mainly to extraordinary corporate tax receipts. However, the government will need to address long-term fiscal risks arising from the health and pension costs of an ageing population. Moreover, major investments will be required to ensure an adequate supply of affordable housing and meet greenhouse gas emission reduction targets.

“Ireland has made impressive progress in developing its economy and raising living standards,” OECD Secretary-General Mathias Cormann said. “Structural reform efforts should now be stepped up so that Ireland can maintain these socio-economic gains in the face of long-term fiscal risks from rising costs related to ageing and the need to increase resilience to future shocks.”

© OECD Economic Surveys: Ireland 2022 - Robust exports continue to support economic growthThe Survey recommends accompanying investments to boost housing supply and speed up the low-carbon transition with reforms to reduce regulatory and legal hurdles, as a way to reduce uncertainty and transaction costs in both areas. It welcomes a decision to place EUR 6 billion of 2022-23 windfall tax receipts in the National Reserve Fund and suggests this policy could be continued. The country’s new spending rule, limiting permanent spending increases to 5% per year, will improve resilience to future shocks, and Ireland could consider strengthening the rule by giving it legislative status.

Ireland’s real GDP growth was 13.4% in 2021, boosted by exports from multinationals based in Ireland, and is projected to be around 10% in 2022. Modified domestic demand, a national indicator that excludes volatile components of investment spending by multinational firms, fell by 4.8% in 2020 but returned to pre-pandemic levels in the third quarter of 2021.

While Ireland has limited direct trade exposure to Russia and Ukraine, disruption in global commodity markets is driving up food and energy prices. Headline inflation reached 9% in November, driven mainly by a 43% rise in energy prices. With price pressures broadening, the Survey projects that falling real incomes and low consumer confidence will slow modified domestic demand growth to 0.9% in 2023, which should rebound to 3.1% in 2024. As exports in multinational-dominated sectors, though moderating, will remain supportive, GDP is projected to grow by 3.8% in 2023 and 3.3% in 2024. With inflationary pressures putting price stability at risk, it is important that any additional fiscal support be temporary and targeted.

The resilience of Ireland’s economy to the dual shock of COVID-19 and Russia’s war of aggression against Ukraine is the fruit of the country’s progress of recent decades in developing its economy and raising living standards. A highly redistributive tax and transfer system means poverty rates and the gap between highest and lowest incomes are among the smallest in the OECD. Life expectancy at birth has risen dramatically to among the highest in the OECD. A high-quality education system has built a well-educated workforce that is a magnet for foreign investment.

The Survey’s recommended focus on structural reforms and preparing for future fiscal pressures is a way to ensure these gains are sustained for a society grappling with an undersupply of affordable housing and expected to age more rapidly than in most other OECD countries. To improve housing supply, which is constrained by high construction costs, skills shortages and burdensome regulations, the Survey formulates several recommendations. These include the importance of streamlining planning and review processes, making sure local planning authorities have sufficient resources, and prioritising supply-side policies in Housing for All, the government’s ambitious 2021 initiative to improve planning, land availability, zoning, and social housing provision.

The government has also launched a major reform of the health sector, which suffers from legacy issues such as past underinvestment, centralised decision-making and long waiting lists that will be difficult to resolve quickly. Health spending has increased and is now high relative to other OECD countries at around 20% of government spending. Moving from a largely hospital-based system, which does not offer universal coverage of primary care, to one that better integrates primary, community and long-term care could help to enhance access and efficiency. So could improving data availability, financial reporting, and management.  


See an Overview of the Survey with key findings and charts (this link can be included in media articles).


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