A new way of measuring the size of the economy has shown the legacy of debt from the crash is much higher than previously estimated, and will likely hem in government spending for years to come.
The new CSO figures were compiled under a measure called GNI (gross national income) which is designed to strip out some of the huge distortions caused by multinationals that led to the “Leprechaun Economics” jibe after revised figures published last summer showed GDP had surged by over 26% in 2015.
The economy grew by 5.1% in terms of GDP in 2016 — the fastest in the EU — and at an even faster pace under the new GNI measure.
Figures showing the economy contracted in the first quarter this year were dismissed by economists as volatile and not reflecting the momentum behind growth.
The new snapshot of the economy showed the economy last year was worth just over €189bn, almost a third lower than the €275.5bn value under the conventional GDP measure used across the world for international comparisons.
The implications of a smaller-sized economy means the State’s debt ratio was much higher too, at 106% of the GNI cake instead of 73% of GDP. Under EU rules, the size of the economy as measured in GDP is extremely important for Ireland in setting its debt targets in any single year, and also determines the size of the country’s contribution to the EU budget.
Member states in the coming years are likely to be asked to pay more to the EU budget to make up the huge shortfall when Britain exits the EU. But Finance Minister Paschal Donohoe has ruled out any chance of reclaiming the €300m payment to the EU caused by the artificially high economic growth figures in 2015.
Speaking in London in the wake of the CSO’s latest figures, Mr Donohoe told the Irish Examiner that the use of the new GNI model allows him to get a more accurate reading of the country’s true debt position.
“The CSO figures today underline what we have been talking about. While our economy shows progress, the GNI figures provide a more realistic appraisal of where we are in terms of our levels of national debt,” he said.
Ruling out any chance of a refund, he said: “The EU figures are and will continue to be calculated on a GDP basis. All we will be doing now is having a look at the figures the CSO have produced and see if that has any consequences and we will do that in the next few weeks.
“But GNI is really a measure for our own domestic economy and making sure we are making the right decisions. But the EU will continue to use the GDP. “GDP is the basis and that is not going to change.”
Ireland’s contribution to the EU budget is likely to be around €2bn for 2016. The contributions jumped to almost €1.95bn in 2015 from €1.68bn in the previous year, though receipts from the EU meant Ireland’s net contribution was much smaller, at €181m, in 2015.
Economists said the new figures show the Government’s debts are still substantial, but that the economy is picking up steam.
“The broad message would be that you hasten slowly and adopt a relatively cautious approach but be cognisant that the economy has the capacity to deliver improvements in living standards,” said Austin Hughes, chief economist at KBC Ireland.
Mr Donohoe faces a dilemma in that there is an “economy that is perceived as doing very well but a budget that is not going to be massively stimulative or going to spark a feel good factor among consumers”, Mr Hughes said.
Conall Mac Coille, chief economist at Davy Stockbrokers, said the new figures showed Ireland will need to take a conservative approach because of its debts.
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