Irish Economy and Public Finances

Macroeconomic outlook
- - Ireland’s economy has slowed but is still growing at c.2%. GDP grew modestly in the second quarter of 2023 and potentially fell in Q3. However, Irish GDP is distorted by the presence of multinationals. Instead Modified Domestic Demand (MDD) is a more accurate measure of underlying domestic growth. MDD is now up 1.8% in the first half of 2023 versus last year and operating at full employment. The domestic side of the economy is still growing amid a weakening external environment, albeit at a much softer pace than last year.
  - The labour market has been in full employment for some time with an unemployment rate of 4.2% in September. Employment growth was strong in Q2 (3.5% y-on-y), the labour force has been growing and participation rates have been on the rise. The tight labour market has yet to translate fully into wage growth with real earnings growth still negative.
  - We are seeing signs of a slowdown in domestic momentum, driven by the moderating external environment. Headline inflation has eased from its most recent peak of 9.4%, as the effect of the spike in energy prices abates. Energy price levels, however, remain significantly higher than before the war and pandemic. This high inflation environment has dampened household consumption. While it grew 0.9% q-o-q in Q2 2023, the divergence between real and nominal spending (up 2.4% and 10% y-on-y respectively) has widened. Inflation is clearly impacting real consumption but households on aggregate are consuming more.
  - In the domestic dominated sectors, Domestic sector GVA grew 1.5% q-o-q in Q2 2023. Professional, admin and support services was up 6.9% and distribution, transport, hotels, and restaurants grew by 1.9% Construction and arts, entertainment and other services contracted by 2.2% and 0.9%.
  - Multinational sectors like Industry (which is Pharma dominated) and ICT performed exceptionally in 2020 and 2021, moderating in 2022. In Q2 2023, quarterly growth in ICT was 2.0% and 3.8% in Industry. This growth did not translate to exports in the quarter, which were down 4.1%, something to monitor in the second half of the year.
  - 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 previous 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 2023 this was down to 91%, the lowest ratio since the early 2000s.
  - Household balance sheets are not heavily indebted. Mortgage debt is fixed at low rates for the next few years. The household savings ratio has been falling since it’s second peak in Q1 2021 and was 12.0% in Q2 2023. The significant amount of savings accumulated during the pandemic makes the current decline a return to normality.
  - The last few years more than most have 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 9.4% in 2022: one of the best prints in Europe. However, we know GDP overstates the wealth-generation of the Irish working-age population. Modified Domestic Demand (MDD) says Ireland’s economy shrunk by 5.9% in 2020. But 2021 (7.3%) and 2022 (9.5%) have shown strong recovery. This path is driven largely by strong investment flows in 2022 and carry-over effects from Covid. Growth in 2023/2024 is expected to be more modest, c.2%.
  - 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 €16bn in 2018 but then a deficit of €70.8bn in 2019. In 2022 a surplus of €54.6bn 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 2014-22 (between 0.5 and 11.2% of GNI*).

Key Economic Figures

	2021	2022	2023F	2024F	2025F	2026F
Consumer spending (% chg vol)	4.6	6.6	3.9	3.8	3.4	3.4
Government spending (% chg vol)	6.5	0.7	0.5	0.8	2.0	1.5
Modified Investment (% chg vol)	8.2	19.8	-0.6	1.2	3.7	4.9
Exports (% chg vol)	14.1	15.0	7.8	4.9	5.4	4.7

GDP (% chg vol)	13.6	12.0	5.6	4.1	4.9	4.4
Modified Domestic Demand (% chg vol)	5.8	8.2	2.1	2.5	3.2	3.4
Nominal GNI* (%chg vol)	16.9	15.3	5.2	4.9	5.1	5.1
Nominal GDP (€bn)	426.3	502.6	551.9	587.8	629.9	671.8

Employment (% chg)	11.0	6.6	1.6	1.4	1.5	1.6
Unemployment rate (% labour force)	15.9	4.5	4.4	4.5	4.5	4.5

HICP (% chg yoy)	5.7	8.1	4.9	2.5	2.0	2.0
GDP Deflator (% chg yoy)	0.7	5.3	4.0	2.3	2.2	2.2

General Government Balance (€bn)	-6.8	8.0	10.0	16.2	18.1	20.8
General Government Balance (% GNI*)	-2.9	3.0	3.5	5.4	5.8	6.3
Primary Government Balance (% GNI*)	-1.5	4.2	4.7	6.6	6.8	7.4

General Government Debt (€bn)	236.1	224.8	223.5	224.4	220.2	215.0
General Government Debt (% GDP)	55.4	44.7	40.5	38.2	35.0	32.0
General Government Debt (% GNI*)	101.0	83.3	78.8	75.4	70.4	65.4
Average interest rate on stock of GG debt	1.5	1.4	1.5	1.6	1.5	1.5

Source: Department of Finance (SPU 2023).

Annual Public Finances
- - The General Government Balance (GGB) has returned to surplus after Covid-induced deficits. In 2020, GGB fell into a deficit of €18.7bn (9.1% of GNI*). By 2021 this had more than halved to €6.6bn. The strong economic growth – particularly in the multinational sectors - recorded in 2022 resulted in a general government surplus of 3.1% of GNI* (€8.5bn) for the year.
  - Despite major economic upheaval, revenues were resilient during the Covid period. Corporate tax receipts grew exponentially from 2020-2022, which is related to the success of the multinationals. Income tax resilience was due in part to the progressive tax system that Ireland has but also the nature of the Covid shock. Those who saw their employment affected by the Covid restrictions 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 12% on pre-pandemic levels (Q2 2023). As a result, Ireland’s fiscal position improved significantly over the past three years.
  - General Government Revenues in 2022 were up €14.2bn versus 2021 at the end of the year. About half of the increase in revenue is due to corporate tax which grew 47.8% in 2022. There was strong growth in other revenue sources as income tax grew by 15% and VAT was up 20.5% year on year.
  - Further large surpluses are expected in 2023-2026 (between 2.7-4.4% of GNI* each year). The figures published in the Budget point to continued strong corporate tax receipts, The Department of Finance has forecast that ‘windfall’ or excess corporation tax receipts will amount to €10.8bn in 2023. Excluding this excess tax, the underlying GGB is expected to be in a small deficit in 2023 (-€2.0bn, 0.7% GNI*) and a surplus of €2.5bn in 2025.
  - Due to this fortunate position, the Government has announced two new long-term investment funds- the Future Ireland Fund (FIF) and the Infrastructure, Climate and Nature Fund (ICNF) to ring-fence strong, but volatile corporate tax receipts. The FIF will be used to meet the Exchequer costs in the decades to come (e.g., an ageing population and the digital and climate transitions). Each year 0.8% of GDP will be transfer to the FIF (€4-€6bn). The ICNF will be capitalised with €2bn a year from 2025 until it reaches €14bn. The fund will be more counter-cyclical and will ensure future Government’s ability to continue capital spending even during an economic downturn. It will also have a climate and nature component to help achieve carbon budgets through capital projects if carbon targets are unmet. Both funds will be seeded with the €6bn which currently resides in the National Reserve Fund.
  - Ireland has more than reversed the impact Covid-19 had on the debt position. Pre-Covid debt-to-GDP was 57%. Following rapid GDP growth (amid continuing MNC distortions) the debt ratio fell to c.45% by end-2022.
  - Given the long-standing GDP distortions, Debt-to-GNI* is a more useful metric for evaluating Ireland’s debt sustainability. It has fallen from close to 170% in 2013 to 82.3% in 2022. 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 c. 60% since 2013 to €3.3bn in 2022.
  - Debt metrics rose in 2020 and moderated in 2021. At the end of 2020, debt to GNI* was 108.9% before decreasing to 100.8% in 2021. This fell to 82.3% in 2022. It is expected to fall further to 76.1% in 2023 (Budget 2024).
  - The NTMA has completed its issuance for the year with €7bn of debt in 2023. The lower than usual issuance level is the result of modest redemptions this year, the Exchequer’s strong cash position along with a sizeable fiscal surplus for 2022 and 2023.
  - The GDP denominator issue means that other metrics of debt serviceability are required. Debt-to-GG Revenue (178% 2023f), interest as a percentage of revenue (2.7% 2023f) and the average interest rate on Ireland’s debt (1.5% 2023f) 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	2021	2022	2023F	2024F	2025F	2026F




		€bn	€bn	€bn	€bn	€bn	€bn
Revenue
Taxes on production and imports	D.2	29.4	31.6	33.3	35.8	37.7	39.6
Current taxes on income, wealth	D.5	44.7	56.7	60.7	63.6	66.3	70.4
Capital taxes	D.91	0.6	0.6	0.6	0.7	0.7	0.7
Social contributions	D.61	17.0	19.8	21.1	22.7	24.0	25.1
Property Income	D.4	0.5	0.6	1.4	0.7	0.8	0.8
Other		5.8	6.1	6.3	5.6	5.5	5.6
Total revenue	TR	98.9	115.5	123.4	129.2	135.0	142.1

Expenditure
Compensation of employees	D.1	26.6	28.9	29.8	30.9	32.0	33.3
Intermediate consumption	P.2	16.3	17.8	18.3	18.2	18.6	19.2
Social payments	D.6	37.3	37.1	38.6	38.4	39.5	40.8
Interest expenditure	EDP_D.41	3.3	3.3	3.4	3.5	3.3	3.4
Subsidies	D.3	7.2	3.3	2.8	2.2	2.2	2.2
Gross fixed capital formation	P.51	8.7	10.0	11.0	12.1	13.2	14.3
Capital transfers	D.9	1.6	1.9	2.3	2.4	2.4	2.3
Other		4.9	5.3	6.0	5.4	5.7	5.9
Resources not allocated		0.0	0.0	1.2	0.0	0.0	0.0
Total expenditure	TE	105.7	107.5	113.4	113.0	116.8	121.3

General Government Balance (GGB)	B.9=TR-TE	-6.8	8.0	10.0	16.2	18.1	20.8
Underlying GGB (excl. CT windfalls)		-14.8	-2.8	-1.8	4.4	6.7	8.4
GGB as % of GNI*		-2.9%	3.0%	3.5%	5.4%	5.8%	6.3%
Primary Balance (PB)		-3.5	11.3	13.4	19.7	21.4	24.2
Primary Balance as % of GNI*		-1.5%	4.2%	4.7%	6.6%	6.8%	7.4%

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. €0.65trn 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 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 (€ bn)	2015	2016	2017	2018	2019	2020	2021	2022
National Account – Current Prices (€ bn)	2015	2016	2017	2018	2019	2020	2021	2022
Gross Domestic Product (GDP)	263.5	269.7	298.5	327.4	356.4	375.2	434.1	506.3
minus Net Factor Income	-61.8	-50.8	-62.0	-74.5	-80.8	-92.3	-110.8	-143.4
= Gross National Product (GNP)	201.7	218.9	236.5	253.0	275.6	282.9	323.3	362.9
add EU subsidies minus EU taxes	1.2	1.0	1.1	1.1	1.1	1.1	0.8	0.7
= Gross National Income (GNI)	203.0	219.9	237.6	254.1	276.7	284.0	324.1	363.6
minus factor income of re-domiciled companies	-4.7	-5.8	-4.5	-4.9	-4.9	-4.3	-10.3	-5.0
minus depreciation on foreign owned IP assets	-31.3	-37.5	-44.2	-47.9	-52.8	-66.8	-70.0	-74.8
minus depreciation on aircraft leasing	-4.6	-4.9	-5.2	-6.5	-8.6	-10.1	-10.5	-10.7
= Nominal GNI*	163.4	171.6	183.7	194.8	210.4	202.9	233.3	273.1
*GNI (y-o-y growth)**		6.4	6.2	6	8	-3.6	15	17.1
Real GNI*	181.1	188.9	198.6	207.3	212.6	204.9	233.3	248.9
*Real GNI (y-o-y growth)**		4.3	5.1	4.4	2.8	-4.6	15.4	6.7

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 12% of employment, and 19% 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 €273bn in 2022 compared with €506bn for Gross Domestic Product (GDP). This figure suggests the Irish economy is approximately half the size of what GDP would indicate.
Of note, GNI* rose by an incredible 15.3% 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 but one with its own limitations. This measure is domestically focussed and is constructed to be less affected 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. The downside here is that domestic net exports is ignored too. A 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 -5.9% y-o-y in 2020 but rebounded by 7.3% in 2021 and a further 9.5% in 2022.

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.

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Irish Economy and Public Finances