The spectacular growth in the real economy in 2023, shown in the figures published by the Central Statistics Office (CSO) last Friday, received little attention. Gross domestic product (GDP) is an unreliable barometer of Irish economic activity and this fell, but the big story is that the appropriate measure of real national income showed the economy expanded by 5 per cent.
By contrast, last year the UK did not grow at all, the EU economy grew by less than 0.5 per cent, and the US grew by 2.5 per cent. While Ireland’s 2023 results should not have come as a big surprise, as employment rose by 3.5 pre cent, its magnitude was not anticipated by official forecasters.
In the early years of recovery from the financial crash Ireland’s economy saw high growth as we rebounded. However, rapid progress has continued, with growth averaging 4 per cent a year between 2013 and 2023.
This contrasts with average growth over the last decade of 1.6 per cent in the EU and 2.2 per cent in the US. Within the EU only Malta has grown more rapidly than Ireland.
Ireland’s macroeconomic statistics provide a range of information which corroborate that this growth is no mirage. Our economy has not run out of steam because of two interlinked factors: the expansion of the multinational sector and the influx of skilled labour from abroad.
Over the last decade, about half of the growth in the economy has come from expansion by multinational firms.
Over the last decade about half of the growth in the economy has come from expansion by multinational firms. Unusually last year, however, two-thirds of the lift to the economy came from the domestic sector.
There was a slowdown in corporation tax receipts, where multinationals play an outsize role. Increases in employment and the wage bill in the multinational sector, rather than the tax paid by this sector, contributed the remaining third of growth.
Some of the growth in 2023 was still due to a recovery from the pandemic. The figures for the first quarter of 2024 suggest that the economy this year will grow more slowly than last year. Nonetheless, growth still seems likely to exceed current official forecasts.
The Department of Finance and other analysts previously expected growth to slow to 2 per cent to 2.5 per cent a year over the period to 2027. Having seriously underestimated 2023′s growth, the medium-term forecasts from the Department of Finance and the Central Bank are also likely to fall short of what we will achieve.
For the economy to immediately slow to 2 per cent would require a dramatic turnaround in the multinational sector and a drying up of the influx of skilled labour from abroad. There are no signs of either of these happening this year.
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This economic success has obviously brought many benefits for the people of Ireland. For example, living standards for the population as a whole have significantly improved over the last decade, and a healthy economy has helped us achieve a big reduction in poverty.
The expenditure rule, set in 2021, to limit the net rise in public spending to 5 per cent a year merits reconsideration in the light of the pace of economic growth. Last year public spending rose by 7.5 per cent, well above the rule. However, as national income at current prices rose slightly faster than public expenditure, the share of public spending in the economy actually fell.
This year, once again, national income is likely to rise by over 5 per cent. That probably warrants higher growth in public expenditure even if the Government’s latest plans may be a little excessive. A more appropriate guide for fiscal policy is needed that will ensure fiscal policy operates to balance demand and supply in the economy.
Scaling up infrastructure investment needs to start now. The main obstacles are a workforce shortage, and a sclerotic planning system, rather than money.
Rapid economic growth brings other challenges. In recent years, as forecasts undershot what the economy actually achieved, investment in infrastructure has lagged behind what our bigger economy and population require.
High growth increases the urgency of expanding Ireland’s infrastructure – public and private housing, water and wastewater treatment, and public transport, including a metro for Dublin. We’ve also underinvested in tackling climate change.
The ESRI’s recent estimates of the number of new homes needed is much higher than previously anticipated. We’ve had an 8 per cent increase in population between 2016 and 2022, and net migration continues to be high. Redirecting resources to deliver the extra homes will be challenging in an economy already at full employment.
Scaling up infrastructure investment needs to start now. The main obstacles are a workforce shortage and a sclerotic planning system rather than money.
It remains to be seen whether the new Planning and Development Bill, when enacted, will be effective in streamlining the planning system, delivering final decisions in a timely way, and offer greater certainty to those planning new infrastructure projects.
