- Business Areas
- Funding and Debt Management
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- Irish Economy and Public Finances
Irish Economy and Public Finances
- Macroeconomic outlook
- Irelands economy has been performing strongly. The economy began to rebound from Covid-19 in 2021 and this has continued into 2022. Preliminary estimates indicate that modified domestic demand (MDD) increased by 6.5% last year. This was driven principally by personal consumption which showed strong year on year growth in the last quarters of 2021. Card spending data for Q1 2022 further supported this consumption story with spending returning to and even above 2019 levels in recent months. However, this demand may be dampened by an increase in the cost of living stemming from the Russia-Ukraine conflict.
- The indigenous economy showed strong signs of recovery in the second half of 2021. MDD was up 1% in 2021 when compared to 2019. If you compare MDD in the second half of 2021 versus 2019 a stronger domestic performance is clear. Comparing these metrics MDD was up 5% in 2021. Covid restrictions in the first half of the year impacted growth in domestic sectors. When the restrictions were lifted the economy rebounded strongly. This is clear in Q4 data too. In Q4 2021 Distribution, Transport, Hotels and Restaurants was up 2.6% and construction showed rebound growth of 6.2%.
- Industry (which is Pharma dominated) and ICT sectors have performed strongly over the past two years. Industry grew by 50.9% in 2021 versus 2019. ICT also performed remarkably in 2021 with growth of 29.9% when compared to 2019. Irelands business model is proving to be resilient once again.
- The domestic momentum will of course be slowed by the deteriorating external environment. The impact of the Russia-Ukraine conflict is likely to be more indirect than direct for Ireland. Trade and direct energy linkages with Russia and the Ukraine are limited. Ireland relies heavily on gas and oil to meet its energy needs so the effect of the conflict will be felt through price and confidence channels. The invasion will have a negative impact on global economic activity and further exacerbate inflation pressures which had already been accumulating.
- This 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 recovery period 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 2020 this was down to 114%, the lowest ratio since 2003. Households have a lower interest burden and increased savings after 2020 and 2021. In aggregate, households now have substantial liquid assets because of forced savings during the pandemic. The average household savings ratio from Q4 2020-Q4 2021 was 21.2%. 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 13.5% 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) focuses on the domestic side of the economy and understates multinational activity: MDD says Ireland’s economy shrunk by 4.9% in 2020 But 2021 has shown strong recovery (6.5%). Growth in 2022 is forecasted at 4.2% in the Government’s Stability Programme Update. This is a softer growth path for the economy than forecast in 2021 but accounts for the impact of the Russia-Ukraine crisis on the Irish economy.
- 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 2014-20 (between 0.5 and 11.2% of GNI*).
- Key Economic Figures
2020 2021 2022F 2023F 2024F 2025F Consumer spending (% chg vol) -10.4 5.7 6.0 3.6 3.5 3.4 Government spending (% chg vol) 10.9 5.3 -1.3 2 2.0 2.1 Modified Investment (% chg vol) -3.6 9.7 5.4 6.5 5.1 5.5 Exports (% chg vol) 9.5 16.6 7.5 5.2 4.8 4.7 GDP (% chg vol) 5.9 13.5 6.4 4.4 4.0 3.8 Modified Domestic Demand (% chg vol) -4.9 6.5 4.2 3.9 3.6 3.6 Nominal GNI* (%chg vol) -2.6 7.3 8.5 6.0 5.6 5.4 Nominal GDP (€bn) 372.9 421.525 467.1 498.5 528.1 557.6 Employment (% chg) -16.7 11.0 14.9 2.1 1.7 1.7 Unemployment rate (% labour force) 19.2 15.9 6.2 5.4 5.2 4.9 HICP (% chg yoy) -0.5 2.5 6.2 3.0 2.2 2.1 GDP Deflator (% chg yoy) -0.6 -0.4 4.1 2.2 1.9 1.7 General Government Balance (€bn) -18.4 -8.1 -2.0 1.2 6.4 7.6 General Government Balance (% GNI*) -8.8 -3.6 -0.8 0.5 2.4 2.7 Primary Government Balance (% GNI*) -7.0 -2.2 0.6 1.9 3.6 3.7 General Government Debt (€bn) 217.9 235.9 233.8 230.8 231.4 227 General Government Debt (% GDP) 58.4 56.0 50.1 46.3 89.6 40.7 General Government Debt (% GNI*) 104.7 105.6 96.5 89.9 85.4 79.4 Average interest rate on stock of GG debt 1.8 1.4 1.5 1.6 1.5 1.3
Source: Department of Finance (Draft SPU 2022, April 2022).
- 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 the second consecutive year. 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 €18.4bn (8.8% 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 in Ireland. 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.
- 2020 expenditure was up 19% above 2019 levels. The majority of the increased spending relates to the income support schemes. Health spending is also a large contributor. Interest cost dropped compared with 2019. This is despite the increased funding need for Covid-19 related spending.
- Ireland’s fiscal position improved significantly in 2021. The end year General Government deficit of €8.1bn was less than half the 2020 deficit. Strong economic performance drove tax revenues which came in 20% higher than 2020. On the expenditure side there was an underspend of at €1.4bn, mainly as a consequence of public health restrictions imposed throughout the year.
- A general government deficit of €2bn (0.8% GNI*) is projected for this year. This includes spending for Ukrainian refugees and strong tax revenue growth.
- Covid-19’s impact necessitates 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 reversed course in 2020 and rose modestly in 2021. At the end of 2020 debt to GNI* was 104.8% and increased to 105.6% in 2021. This is expected to fall to 96.5% in 2022. Given the necessary borrowing to enact the appropriate fiscal response to the current crisis and to fund essential government services, the NTMA announced its funding range to €10-14bn for 2022, a reduction on the 18.5bn issued in 2021. The lower range is a result of better than expected fiscal position in 2021.
- The GDP denominator issue means that other metrics of debt serviceability are required. Debt-to-GG Revenue (221% 2022f), interest as a percentage of revenue (3.4% 2022f) and the average interest rate on Ireland’s debt (1.5% 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
Annual Public Finances on EU-Comparable general Government basis
2020 2021F 2022f 2023F 2024F 2025F €bn €bn €bn €bn €bn €bn Revenue Taxes on production and imports D.2 24.2 28.7 30.9 32.9 34.5 35.8 Current taxes on income, wealth D.5 37.6 45.6 50.0 52.4 55.3 58.3 Capital taxes D.91 0.5 0.6 0.6 0.7 0.7 0.7 Social contributions D.61 15.0 16.1 17.0 18.2 19.0 19.5 Property Income D.4 1.1 0.5 0.7 0.6 1.0 0.8 Other 5.2 5.5 6.4 6.3 5.6 5.6 Total revenue TR 83.6 97.0 105.8 111.0 116.0 120.7 Expenditure Compensation of employees D.1 24.5 26.0 27.2 28.3 29.5 30.6 Intermediate consumption P.2 14.9 16.2 16.5 16.9 17.3 17.5 Social payments D.6 38.5 37.4 36.4 36.8 37.1 38.2 Interest expenditure EDP_D.41 3.8 3.3 3.6 3.7 3.4 3.0 Subsidies D.3 5.7 6.9 2.3 1.7 1.7 1.7 Gross fixed capital formation P.51 8.8 8.5 10.6 11.8 12.7 13.8 Capital transfers D.9 1.7 1.8 2.2 2.3 2.4 2.4 Other 4.1 4.9 5.3 5.3 5.5 5.8 Resources not allocated 0.0 0.0 3.7 3.0 0.0 0.0 Total expenditure TE 102.0 105.1 107.8 109.8 109.6 113.0 General Government Balance (GGB) B.9=TR-TE -18.4 -8.1 -2.0 1.2 6.4 7.6 GGB as % of GDP -4.9% -1.9% -0.4% 0.2% 1.2% 1.4% GGB as % of GNI* -8.8% -3.6% -0.8% 0.5% 2.4% 2.7% Primary Balance (PB) -14.6 -4.8 1.6 4.9 9.9 10.6 Primary Balance as % of GNI* -7.0% -2.2% 0.6% 1.9% 3.6% 3.7%
NOTES & SOURCES
Source: Department of Finance (SPU 2022, April 2022)
- 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 and GNP have less information content in regards to Ireland’s economic activity.
- The reclassification of multinational companies’ activity as Irish expanded the capital stock in 2015 by c. €300bn or c. 40%. In some cases, whole companies re-domiciled in Ireland while in others multinationals moved assets (mostly intangibles) to their Irish-based subsidiary. The goods produced by the additional capital were mainly exported. This resulted in a step change in net exports Q1 2015. Net exports grew by over 100% in 2015. Complicating matters, the goods were produced through “contract manufacturing”. 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 Accounts Distortions - Data Table
National Account – Current Prices
(Euro, y-o-y growth rates)
Gross Domestic Product (GDP)
minus Net Factor Income
= Gross National Product (GNP)
add EU subsidies minus EU taxes
= Gross National Income (GNI)
minus retained earnings of re-domiciled firms
minus depreciation on foreign owned IP assets
minus depreciation on aircraft leasing
- 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.