This article is from our October 2021 edition of MarketWatch.
11th November, 2021
Once again Ireland’s Gross Domestic Product (GDP) figures have beaten expectations. The Central Bank of Ireland and Department of Finance now both expect GDP growth to exceed 15% in 2021. However, the underlying story is a familiar one. The multinational sector, dominated by technology, med-tech, and pharmaceutical firms saw output up 23% in the first half of 2021, exhibiting no apparent disruption from COVID-19. In contrast, indigenous sector output was still 6% below pre-pandemic levels in the second quarter, gradually recovering following the end of the third lockdown early in the year.
There is no doubt that the rebound has continued through the summer. The number of Pandemic Unemployment Payment (PUP) claimants had declined from 228,000 at end-June to 101,000 by end-October. As in other countries labour shortages are now being felt, despite high numbers of workers from the construction (9,500), hotels/restaurants (17,300) and wholesale/retail (16,100) sectors still claiming the PUP. The overall picture indicates an incomplete recovery and many firms will face a testing time in 2022 as supports such as the wage subsidy scheme are withdrawn.
Now that Ireland is emerging from the COVID-19 pandemic, housing has once again become the touchstone political issue. In September, the Irish government launched its new ‘Housing for All’ strategy, involving funding for up to 16,000 social/ affordable homes per annum. However, the plans will require approved housing bodies, the Land Development Agency (LDA) and local authorities to deliver, in the context of growing evidence of capacity constraints in the construction sector. The other key initiative is the equity loan scheme. This provides a 20% equity loan, on top of the existing 10% tax rebate available under the Help to-Buy scheme. Remarkably, this means the government could soon be providing €100,000 of funding for newly built houses in the Dublin commuter belt – where the price cap for the loan scheme is set at €350,000. The intention here is to improve viability for housing development, but the obvious critique is that the scheme may prove inflationary.
One good news story has been the performance of the public finances in 2021. Tax revenues in the first nine months of 2021 were €46bn, up 16% on 2020 and well ahead of the Department of Finance’s forecast for 10% growth. The upshot is that the deficit this year will be close to €15bn, or 3.5% of GDP, one of the smallest expected in the OECD. So the Government faces an easier task in Budget 2022, under less pressure to rein in the public finances.
Ireland now looks set to agree to the OECD reforms on corporate taxation. Firms with revenues exceeding €750m will eventually face a higher corporate tax rate of 15%. However, this shouldn’t be a threat to Ireland’s competitiveness. Our main competitor for Foreign Direct Investment (FDI), the United Kingdom is now outside the EU single market and plans to raise its rate to 25% from April 2023. Perhaps more pressing are the infrastructural deficits and lack of housing, which could increasingly impede FDI if not addressed.