Anthony Foley: Home truths for Ireland and the economy this year

The Government's Housing for All plan envisages housing output to be 24,600 in 2022, 29,000 units this year, and then 33,450 in 2024. Picture: Andrew Matthews/PA Wire

Despite the ravages of the Ukraine war, continuing supply chain disruptions, high inflation, increased interest rates, and recession in several major economies, the Irish economy will perform reasonably well in 2023 and should avoid a recession. 

However, 2023 will fall well short of the excellent 2022 performance: GDP growth in 2023 will be about 3% compared to over 10% in 2022; modified domestic demand will grow by 2.2% in 2023 compared to over 8% in 2022; and export growth will drop from 13.5% in 2022 to 5.2% in 2023. 

However, inflation will remain stubbornly high in 2023 at 7.1% compared to just under 8% in 2022.

The labour market will hold up well and is a source of good news, with the average unemployment staying at a low rate of 4.3%, compared to 4.9% in 2022, and employment will continue to grow, to 2.53 million in 2023. 

Despite significant short-term pressures, the 2023 public finances look good and will be in surplus. The surplus will be about €6.5bn in 2023, or over 1% of GDP, which is the standard international indicator, compared to about €3.5bn in 2022. All-in-all, compared to other EU and developed countries, the 2023 Irish economic situation will be favourable.

Economic performance

The strength of the economy is shown by the recent employment growth. However, despite the relatively strong economic performance in both 2022 and 2023, major economic issues and problems exist which will continue into and far beyond 2023.

These economic issues include the structure of tax revenue, housing cost and availability, the quality of public health care, climate and environmental issues, worsening business models of some sectors, the dependence on foreign direct investment, the scarcity of skilled labour and other physical productive resources, and the overall efficiency of some public services.

These economic and social problems will not be fixed in the short-term. They require effective medium and long-term planning and relentless implementation of what will often be unpopular measures. The Irish Fiscal Advisory Council has noted that the three-year forecasting period of Budget 2023 is too short and that public financial planning should be extended to five years.  

Of course, the Government also has various other longer-term plans and analyses such as Project Ireland 2040, the National Development Plan 2021-2030, the National Planning Framework, the Housing for All plan, and the Climate Action Plan. However, their detailed implementation are not fully integrated into policy. 

Public expenditure

The first home truth to be acknowledged when dealing with the medium-term future is that the public finances are not as strong as indicated by the usual international indicators. This matters because the solution to many of the medium and long-term problems involves higher public expenditure. 

Tax revenue is underpinned by large corporation tax receipts from a small number of multinational companies and much of this may not be sustained over the long term. Budget 2023 estimated that for 2022, about €9bn in corporation tax receipts could be treated as “windfall” or transitory revenues.   

Modified Gross National Income, or GNI modified, is a more accurate measure of the size of the Irish economy than GDP. Excluding excess corporation tax receipts, the Government in its budget forecast a 2022 deficit of 3.1% of GNI modified. 

Housing

The issues of housing rental and purchase costs, and availability, are well known. The Government's Housing for All plan envisages housing output to be 24,600 in 2022, 29,000 units this year, and then 33,450 in 2024. By 2030, it sees output at 40,500 units. 

It is reasonable to expect that increased supply would have a negative impact on purchase prices and rent levels but the official expectations in this regard are unclear. 

The Economic and Social Research Institute estimated that the average house price was overvalued by about 7% at the end of 2021, which means that prices were €341,000 instead of €319,000. 

While any reduction is desirable, it is unlikely that there will be substantial reductions quickly in house prices unless there is a major recession. 

The unfortunate truth is that the price of houses will remain relatively high compared to average incomes even as supply increases. While the rate of price increase will slow, decreases are less likely. 

Of course, Government policy is focused on ensuring that supply continues to increase. My expectation is that the Government will have to directly provide an increased share of output to offset the lower-than-desired activity of the private market. 

In addition, it is likely that circumstances will require increased focus on affordable and social housing as large numbers of the population remain priced out of the private market. It is also difficult to see a significant reduction in rental levels over the next few years arising from market forces. Reform of the planning system is needed to improve efficiency.

Public healthcare

The quality of public healthcare continues to be a major problem with long, waiting lists, insufficient physical capacity and staff shortages. A third home truth is that on present policies it is difficult to see any quick solution to these problems. Even with substantial additional financing it takes time to build physical capacity and skilled staff are in short supply.

Elements of our basic infrastructure need substantial and early investment to achieve necessary quality and capacity. These include water and sewage facilities and power generation capacity.

A huge effort, extensive policies, large expenditures, and iron determination will be needed to implement the many elements of the climate action plan. This has to begin immediately as opposed to being left on the long finger.

The Government will have to find large financial resources through both judicial borrowing and increased tax revenues over the next few years. But money will not be sufficient to solve our problems. We are encountering shortages of physical and labour resources. 

For example, can the construction industry provide sufficient capacity to build the houses, health facilities, infrastructure, and other projects? If not, unpleasant choices will have to be made, for example by directing more of the available construction resources to house-building at the expense of other sectors.

The Irish economy performed very well in 2022, and will perform better than most EU countries this year. However, we have many ongoing problems which will continue over the next several years. 

Quick fixes are not available but we can speed up the implementation of solutions to some extent and at least provide some light. The fundamental home truth is that unpleasant decisions will be needed, and taxes will have to be increased, if we are serious about solving our problems. 

Anthony Foley at the DCU Business School