Irish Economy and Public Finances


  • Macroeconomic outlook
      • Ireland’s economic recovery from the Covid shock was relatively strong. Modified domestic demand (MDD) increased by 5.8% last year. This was driven principally by personal consumption which grew 4.6% and investment which grew by 7.7%. The labour market is at full time employment with an unemployment rate of 4.3% as of August 2022, it’s lowest reading since 2005.
      • Recent Q2 data confirms that Ireland’s recovery has continued strongly. MDD grew 4.3% and consumption was up 1.8% in the second quarter of this year. Indigenous sector output grew by 0.9%. Domestic dominated sectors such as distribution, transport, hotels and restaurants and arts entertainment and other services grew by 1.5% and 10.5% respectively in Q2. Professional admin and support services fell by 0.3%.
      • The Industry (which is Pharma dominated) and ICT sectors have performed exceptionally over the past two years. This growth has continued into 2022 albeit with signs of slowing. In Q2 2022 quarterly growth was 5% in Industry and 4.9% in ICT.
      • Any domestic momentum will be slowed by the deteriorating external environment. Estimates for August inflation indicate Ireland was running at 9%. Energy and pandemic related costs are big drivers of the price pressures, but core inflation is also elevated at 6.2%. Nearly 50% of all items in the Irish consumer basket are seeing annual price increases of 5% or more. Irish consumer sentiment slid to a 14-year low of 42.1 on a marked downgrade of outlook for household finances. The IMF have revised down their global economic projections due to stronger inflation, the negative impact of Covid restrictions
      • The impact of the Russia-Ukraine conflict is set to be more indirect than direct but significant. Trade and direct energy linkages with Russia and the Ukraine are limited. Ireland relies heavily on gas and oil to meet its energy needs. The impact of the war, and associated sanctions is being transmitted to the Irish economy via price and confidence channels. The invasion will have a negative impact on global activity and further exacerbate inflation pressures which had already been accumulating.
      • The rising cost of living is partially offset by the improvement in household balance sheets seen over the past two years. Coming into the Covid crisis, Irish households were in a much better financial position than the last recession. Ireland had used the last ten years to repair private sector balance sheets. From 2014-2019, disposable income expanded in aggregate and debt levels declined. In 2013, the debt-to-income ratio for Irish households was 186%. In Q1 2022 this was down to 98%, the lowest ratio since the early 2000s. In aggregate, households now have substantial liquid assets because of forced savings during the pandemic. The average household savings ratio from Q4 2020-Q1 2022 was 24%. Gross household savings declined for the second consecutive quarter in Q1 2022.These savings may be run down faster than expected to offset the increase in the cost of living.
      • The Covid period more than most years highlighted the unique structure of the Irish economy. Ireland has a standard domestic retail/ services economy which is augmented by a highly productive and fast-growing multinational sector. The domestic side struggled with Covid while the multinational sector raced ahead. As ever, its structure means Ireland’s national accounts need to be parsed carefully. GDP grew by 13.6% in 2021: the best print in Europe. However, we know GDP overstates the wealth-generation of the Irish working-age population. Modified Domestic Demand (MDD) says Irelands economy shrunk by 4.9% in 2020. But 2021 has shown strong recovery (5.8%). Growth in 2022 is forecasted at 7.7% in the 2023 Budget. This path is driven largely by carry-over effects as consumption is estimated to fall as inflation hits in H2 2022. Growth in 2023 is expected to be more modest, c. 1%.
      • An important strength of the economy is that Ireland is living within its means. Current account data in Ireland is to be taken with extreme caution given the presence of multinationals. Indeed, the unadjusted current account recorded a surplus of 8.1% of GNI* in 2018 but then a deficit of 33.1% in 2019. In 2021 a deficit of 3.6% was recorded. The swings are due in part to the import of intellectual property into Ireland by multinational companies. A clear understanding of the current account is difficult in the face of these distortions. The CSO has released a modified current account (CA*) measure which aims to be consistent with its GNI* calculation. This CA* metric was in surplus from 2014-21 (between 0.5 and 11.2% of GNI*).
  • Key Economic Figures
    • 2020 2021 2022F 2023F 2024F 2025F
      Consumer spending (% chg vol) -10.4 4.6 5.5 1.8 4.6 4.2
      Government spending (% chg vol) 18 6.5 2.9 -1.5 -1.1 1.5
      Modified Investment (% chg vol) -8.7 8.2 17.7 2.2 3.8 4.1
      Exports (% chg vol) -7.2 14.1 12.5 5.5 3.9 4.4
      GDP (% chg vol) 5.9 13.6 10.0 4.7 3.3 3.8
      Modified Domestic Demand (% chg vol) -4.9 5.8 7.7 1.2 3.3 3.6
      Nominal GNI* (%chg vol) -3.4 12.3 11.6 5.3 5.4 5.5
      Nominal GDP (€bn) 372.9 426.3 499.2 545.8 575.7 608.8
      Employment (% chg) 2.3 11.0 18.3 1.2 1.6 1.8
      Unemployment rate (% labour force) 6.2 15.9 5.2 5.1 5.0 4.7
      HICP (% chg yoy) -1.0 2.5 8.5 7.1 2.4 1.8
      GDP Deflator (% chg yoy) -1.2 0.7 6.5 4.4 2.1 1.9
      General Government Balance (€bn) -19.1 -7.0 1.0 6.2 10.2 13.7
      General Government Balance (% GNI*) -9.2 -3.0 0.4 2.2 3.7 4.5
      Primary Government Balance (% GNI*) -7.3 -1.6 1.9 3.8 5.0 5.6
      General Government Debt (€bn) 217.9 235.6 225.3 224.1 226.7 223.8
      General Government Debt (% GDP) 58.4 55.3 45.1 41.1 39.4 36.8
      General Government Debt (% GNI*) 108.9 100.8 86.3 81.5 78.3 73.3
      Average interest rate on stock of GG debt 1.8 1.5 1.4 1.7 1.6 1.5

      Source: Department of Finance (Budget 2023).

  • Annual Public Finances
      • The General Government Balance (GGB) has been significantly impacted by Covid-19. Prior to 2020, Ireland’s GGB was in surplus for two consecutive years. The GGB was €1.1bn (0.5% of GNI*) for 2019 as corporation tax (CT) receipts again outperformed. In 2020, the GGB fell into a deficit of €19.1bn (9.2% of GNI*).
      • Despite major economic upheaval, revenues have been resilient during the Covid period. Corporate tax receipts actually grew in 2020 and 2021 which is related to the success of the multinationals. Income tax resilience is due in part to the progressive tax system that Ireland has but also the nature of the Covid shock. Those who have seen their employment affected by the Covid restrictions have tended to be lower-paid workers who pre-pandemic were already outside the tax net. Adding to income tax strength, the number of people employed is up 11% on pre-pandemic levels (Q2 2022). As a result, Ireland’s fiscal position improved significantly in 2021.The end year General Government deficit of €7bn was less than half the 2020 deficit.
      • A general government surplus of 0.4% of GNI* is projected for this year. This includes spending for cost-of-living measures and accommodation of Ukrainian refugees. The surplus is driven by strong tax revenue growth. General Government Revenues are expected to grow 14.4% in 2022. Tax revenue is 26.3% ahead of this time last year.
      • Covid-19’s impact necessitated a larger debt stock. Thankfully Ireland has used the recent economic cycle to repair its balance sheet. The debt stock was high heading into 2020 but it is far more sustainable. Gross Government debt peaked as a percentage of GDP in 2013 at 119.5%. Following rapid GDP growth and the MNC distortions the debt ratio fell to below 60% by end-2019. Given the GDP distortions, Debt-to-GNI* is a more useful metric for evaluating Ireland’s debt sustainability. It has fallen from close to 170% to 95% in 2019. At the same time, the weighted maturity of the debt stands above 10 years - one of the best in Europe. Ireland’s annual interest costs have fallen by 60% since 2013 to €3.3bn in 2021.
      • Debt metrics rose modestly in 2020 and moderated in 2021. At the end of 2020, debt to GNI* was 108.9% before decreasing to 100.8% last year. This is expected to fall to 86.3% (Budget 2023) in 2022.
      • The NTMA has issued €7bn in long-term bonds for the year, below the €10-14bn previously announced for 2022 and the 18.5bn issued in 2021. This was the result of the Exchequer’s strong cash position along with a forecasted surplus for 2022.
      • The GDP denominator issue means that other metrics of debt serviceability are required. Debt-to-GG Revenue (200.3% 2022f), interest as a percentage of revenue (2.9% 2022f) and the average interest rate on Ireland’s debt (1.4% 2022f) are more apt measures for comparison with other sovereigns regarding Ireland’s debt serviceability.
      • It should be noted however that Debt-to-GNI* understates the ability of Ireland to repay debt. GNI* excludes certain activities that the Irish State could possibly tax and hence excludes some part of its ability to repay. This means that the Debt-to-GNI* ratio is likely too high. With debt-to-GDP too low, it is fair to say the reality of Ireland’s “proper” debt ratio is somewhere in between.


  • Key Annual Public Finance Figures
    • Description European
      System of
      Accounts
      (ESA)
      Code
      2020 2021 2022f 2023F 2024F 2025F
      €bn €bn €bn €bn €bn €bn
      Revenue
      Taxes on production and imports D.2 24.2 29.6 31.7 33.6 36.1 38.1
      Current taxes on income, wealth D.5 37.6 45.7 55.1 58.7 60.5 64.2
      Capital taxes D.91 0.5 0.6 0.6 0.7 0.7 0.7
      Social contributions D.61 15.7 17.0 18.4 19.7 20.6 21.6
      Property Income D.4 1.2 0.5 0.5 0.8 0.7 0.7
      Other 5.4 5.5 6.2 6.1 5.6 5.6
      Total revenue TR 84.5 98.8 112.5 119.6 124.1 130.9
      Expenditure
      Compensation of employees D.1 26.6 26.6 28.3 29.5 30.8 32.0
      Intermediate consumption P.2 14.9 16.2 18.2 16.5 17.2 18.0
      Social payments D.6 38.1 37.6 38.3 39.4 38.8 39.4
      Interest expenditure EDP_D.41 3.8 3.3 3.3 3.8 3.7 3.3
      Subsidies D.3 6.1 6.9 2.7 2.0 1.6 1.6
      Gross fixed capital formation P.51 9.0 8.6 10.1 11.4 13.3 14.7
      Capital transfers D.9 2.2 1.8 4.6 1.9 2.3 2.2
      Other 2.4 4.9 5.4 5.7 5.8 6.0
      Resources not allocated (incl. TBESS) 0.0 0.0 0.6 3.3 0.0 0.0
      Total expenditure TE 103.3 105.8 111.5 113.4 113.4 117.3
      General Government Balance (GGB) B.9=TR-TE -19.1 -7.0 1.0 6.2 10.2 13.7
      GGB as % of GDP -5.0% -1.7% 0.2% 1.1% 1.9% 2.2%
      GGB as % of GNI* -9.2% -3.0% 0.4% 2.2% 3.7% 4.5%
      Primary Balance (PB) -4.8 -3.7 4.3 10.0 13.9 17.0
      Primary Balance as % of GNI* -7.3% -1.6% 1.9% 3.8% 5.0% 5.6%

      Source: Department of Finance (Budget 2023)

  • National Accounts Distortions
      • From 2015 onwards, Ireland’s national accounts are distorted by the reclassification of multinational companies and their assets as being resident in Ireland. Given the presence of such large distortions, GDP, GNP and even GNI have less information content when it comes to understanding Ireland’s “true” economic activity. That is, to understand the wealth and income generating capability of the Irish people we need to look to other metrics.
      • The reclassification of multinational companies’ activity as Ireland expanded the capital stock by c. €0.6trn over the course of 2015-2021. In some cases, whole companies re-domiciled in Ireland while in other cases multinationals moved assets (mostly intangibles) to their Irish-based subsidiary. The goods and services produced by the additional capital are mainly exported. This resulted in a step change in net exports in Q1 2015 and the large year-on-year increases in net exports since.
      • Often the goods produced using the intangible assets based in Ireland are produced through “contract manufacturing”. This is where an Irish based company contracts out manufacturing to another company (typically outside of Ireland). The result of contract manufacturing is a goods export is recorded in the Irish Balance of Payments even though it was never produced in Ireland. There is little or no employment effect in Ireland from this contract manufacturing.

      National Account – Current Prices (€ bln)

      2015

      2016

      2017

      2018

      2019

      2020

      2021

      Gross Domestic Product (GDP)

      263.0

      270.2

      297.8

      326.6

      356.7

      372.8

      426.3

      minus Net Factor Income

      -61.8

      -50.8

      -62.0

      -74.5

      -80.8

      -93.3

      -103.6

      = Gross National Product (GNP)

      201.2

      219.4

      235.7

      252.2

      275.9

      279.6

      322.7

      add EU subsidies minus EU taxes

      1.2

      1.0

      1.1

      1.1

      1.1

      1.1

      0.8

      = Gross National Income (GNI)

      202.4

      220.4

      236.8

      253.3

      277.0

      280.7

      323.5

      minus factor income of re-domiciled companies

      -4.7

      -5.8

      -4.5

      -4.9

      -4.9

      -4.3

      -10.0

      minus depreciation on foreign owned IP assets

      -31.3

      -37.5

      -44.2

      -47.9

      -52.8

      -66.7

      -69.8

      minus depreciation on aircraft leasing

      -4.6

      -4.9

      -5.2

      -6.5

      -8.6

      -9.7

      -9.8

      = Nominal GNI*

      161.9

      172.2

      -183.0

      194.0

      210.7

      200.0

      233.9

      GNI* (y-o-y growth)

      6.4

      6.2

      6.0

      8.6

      -5.1

      16.9

      Real GNI*

      178.2

      186.6

      195.3

      204.0

      209.7

      200.0

      230.7

      Real GNI* (y-o-y growth)

      4.7

      4.7

      4.4

      2.8

      -4.6

      15.4

      • Contract manufacturing (CM) has occurred in Ireland prior to 2015 but did not have a significant net impact on GDP since the company engaged in CM would send royalties back to its parent as a royalty import. However now that the parent/intangible asset is here, there is no royalty import and Ireland’s GDP is artificially inflated. This scale of contract manufacturing is unprecedented.
      • But not all intangible assets in Ireland are utilised like this. On the services side, large amounts of intellectual property are now based in Ireland, mostly relating to companies in the ICT sector. Accordingly, we have seen Computer Services exports increase dramatically. Theses exports are booked as Irish as are the resulting profits. Such profits are repatriated in time and should not be considered income for Irish households.
      • Complicating matters further, there are subsidiary companies who exports computer services out of Ireland but also pay royalties back to parent companies (a royalty import). These flows will offset mostly but will push up both imports and exports in Ireland balance of payments.
      • Lastly, the presence of aircraft leasing companies and redomiciled PLCs in Ireland can skew the national account figures to a smaller but still significant amount. In adjusting for globalisation effects, these distortions need to be considered.
      • The upshot of all of this is that Ireland’s investment, exports and imports are heavily skewed by multinational companies’ activity. However, there is clearly real activity occurring in Ireland. Employment in multinational sectors has increased dramatically and make up 11% of employment, and 18% of the country’s wage bill. Lastly, the corporate tax paid in Ireland from these companies has grown exceptionally strongly.
      • In response to the distortions, the CSO have worked to provide indicators and detailed datasets that give a better understanding of Ireland’s highly globalised economy. New supplementary indicators include one closely related to Gross National Income (known as GNI*) and another is a modified version of domestic demand (MDD).
      • For GNI*, Gross National Income is stripped of the profits of redomiciled companies, depreciation on R&D/ IP assets and depreciation on aircraft leasing. On a nominal basis, GNI* amounted to €233bn in 2021 compared with €426bn for Gross Domestic Product (GDP). This figure suggests the Irish economy is about 45% smaller than GDP would indicate.
      • Of note, GNI* rose by an incredible 16.9% in nominal terms in 2021. This growth was much larger than expected, even growing faster than GDP. Adjusting for prices, GNI* grew by 15.4%. The GNI* figure for 2021 likely overstates the growth of the Irish economy. The unexpected jump highlights how volatile the Irish National Accounts can be and how there is a need for a suite of indicators to best capture trends.
      • Modified final domestic demand (MDD for short) is proving to be a useful metric. This measure is domestically focussed and is constructed to be largely unaffected by the activities of multinational companies. The measure includes private consumption, government consumption and a modified metric for investment. Importantly, MDD ignores the net exports channel altogether where much of the distortions occur. Another plus point for MDD is that it is released quarterly (versus the annual GNI* release). It can thus give us a more-timely gauge of the real economy.
      • MDD (which excludes inventories) fell in real terms -4.9% y-o-y in 2020 but rebounded by 5.8% in 2021. A solid rebound, but not the rebound suggested by GNI*.

  • National Accounts Distortions - Data Table
    • National Account – Current Prices

      (Euro, y-o-y growth rates)

      2015

      2016

      2017

      2018

      2019

      2020

      Gross Domestic Product (GDP)

      262.8bn

      (34.8%)

      270.8bn

      (2.8%)

      296.9.4bn

      (9.9%)

      326bn

      (9.8%)

      356.5bn

      (9.3%)

      372.9bn

      (4.6%)

      minus Net Factor Income

      62bn

      51.1bn

      62.3bn

      74.7bn

      80.9bn

      90.2bn

      = Gross National Product (GNP)

      200.8bn

      (22.8%)

      219bn

      (9.1%)

      234.7bn

      (7.2%)

      251.4bn

      (7.1%)

      275.6bn

      (9.6%)

      282.6bn

      (2.6%)

      add EU subsidies minus EU taxes

      1.2bn

      1.0bn

      1.1bn

      1.1bn

      1.1bn

      1.1bn

      = Gross National Income (GNI)

      202.0bn

      (22.7%)

      220bn

      (8.9%)

      235.7bn

      (7.2%)

      252.5bn

      (7.1%)

      276.8bn

      (9.6%)

      283.7bn

      (2.5%)

      minus retained earnings of re-domiciled firms

      -4.7bn

      -5.8bn

      -4.5bn

      -5.0bn

      -4.9bn

      -4.5bn

      minus depreciation on foreign owned IP assets

      -30.1bn

      -34.5bn

      -40.9bn

      -43.2bn

      -47.6bn

      -61.3bn

      minus depreciation on aircraft leasing

      -4.6bn

      -4.9bn

      -5.2n

      6.6bn

      -8.7bn

      -9.8bn

      = GNI*

      162.6bn

      (9.2%)

      174.7bn

      (7.5%)

      185.1bn

      (5.9%)

      198bn

      (6.9%)

      215.6bn

      (9%)

      208.2bn

      (-3.4%)

      • Contract manufacturing (CM) has occurred in Ireland in the past but did not have a significant net impact on GDP since the company engaged in CM would send royalties back to its parent as a royalty import. However now that the parent/intangible asset is here, there is no royalty import and Ireland’s GDP is artificially inflated. This scale of contract manufacturing is unprecedented.
      • Further to these distortions, the continued import of intellectual property by firms in Ireland gives a misleading picture on the drivers within Irish growth. When a firm moves IP into Ireland it is recorded as an import and also as investment. These two net out so overall GDP is not affected however the net exports and investment figures are distorted. Adjusting for this provides a better picture of the drivers of Irish growth.
      • Lastly, with large amounts of intellectual property now based in Ireland, we have seen Computer Services exports increase dramatically. Theses exports are booked as Irish as are the resulting profits. Such profits will be repatriated in time and should not be considered income for Irish households.
      • In response to the distortions, the CSO convened the Economic Statistics Review Group (ESRG) to identify indicators that would provide a better understanding of Ireland’s highly globalised economy. In February 2017, the ESRG released its recommendations. The CSO has agreed to implement these recommendations.
      • Among the main proposals were the publication of two new supplementary indicators, one closely related to Gross National Income (known as GNI*) and another is a modified version of domestic demand.
      • For GNI*, Gross National Income is stripped of the profits of redomiciled companies, depreciation on R&D/ IP assets and depreciation on aircraft leasing. On a nominal basis, GNI* amounted to €208.2bn in 2020 compared with €367bn for Gross Domestic Product (GDP). GNI* fell by 3.4% in nominal terms in 2020.
      • GNI* is released on an annual basis. Modified final domestic demand can give us a more-timely gauge of the real economy in the quarters ahead. Modified final domestic demand (which excludes inventories) fell in real terms 4.9% y-o-y in 2020 but could rebound c. 5% in 2021. This measure is domestically focussed and is constructed to be largely unaffected by the activities of multinational companies. The measure includes private consumption, government consumption and elements of investment.