Cormac Devlin
Question:83. Deputy Cormac Devlin asked the Minister for Finance his response to recent European Commission forecasts for the Irish economy; and if he will make a statement on the matter. [51398/23]
View answerThursday, 23 November 2023
Questions (83, 121)
Pearse Doherty
Question:121. Deputy Pearse Doherty asked the Minister for Finance his assessment of the European Commission’s forecast of a 0.9 percentage point fall in GDP for 2023; the drivers of this revision; and his views on the outlook for the Irish economy and the labour market in the context of this downward revision. [51435/23]
View answerOral answers (9 contributions)
My question concerns the recent economic forecast from the Commission updating its projections on the Irish economy, in which it predicts a 0.9% fall in GDP this year. Notwithstanding the fact we know GDP has become essentially decoupled from the performance of the domestic economy as an accurate measure, will the Minister outline his assessment of the Commission’s latest projections, particularly in relation to corporation tax revenue and the performance of the Irish labour market?
I propose to take Questions Nos. 83 and 121 together.
In its autumn forecasts released earlier this month, the European Commission projected Irish GDP to decline by 0.9% this year and to grow by 3% next year. This represents a downward revision from forecasts published in May, amid developments in the multinational-dominated sectors and normalising domestic demand.
This negative GDP projection is consistent with weakness seen in the data over the last month, primarily relating to the activities of multinational corporations, including the third quarter flash GDP estimate and goods export figures. Pharmaceutical exports have driven the decline in exports and GDP, owing to a reversal in the so-called Covid dividend that significantly boosted export and GDP growth over the last year or so. This is happening against the backdrop of the Commission’s downward revised projection for GDP growth in the euro area – a key trading partner for Ireland – of just 0.6% for this year.
However, as is widely acknowledged, including by the Deputy, Irish GDP is notoriously volatile and is not useful in measuring the living standards of Irish residents. This is because it includes the globalised activities of large multinational enterprises such as contract manufacturing, essentially manufacturing outsourced to third party manufacturers in third counties. Modified domestic demand, my preferred measure of the domestic economy, is projected by the Commission to grow by approximately 2% this year and next year, broadly in line with my Department’s projections.
The Commission projected headline inflation of 5.3% for this year and 2.7% for next year, with core inflation to ease at a more gradual pace. Again, these projections are broadly in line with my Department’s assessment of the inflation outlook.
More broadly, the Commission’s forecasts suggest that the outlook for Ireland’s trading partners will remain subdued. The Commission also anticipates that global GDP growth will remain below pre-pandemic rates in 2023 and 2024, echoing the IMF’s recent outlook. Finally, the Commission highlights a number of key risks, noting that uncertainty and downside risks to the outlook have increased in recent months. As a small open economy, weak demand among trading partners has potential implications for the Irish economy. My Department will continue to monitor developments and advise accordingly.
In the past few minutes, the CSO will have published the most recent labour force survey data. The survey shows continued strong performance in employment terms so that can give us encouragement. Employment in this quarter is up by some 27,000, bringing us to a new all-time high of employment numbers in Ireland of more than 2.66 million people. The CSO puts the unemployment rate at 4.5%. There is much uncertainty and we are certainly facing clear headwinds in the Irish economy but against that backdrop, the performance of the domestic economy, and of the labour market in particular, remains particularly strong and is noteworthy.
Those results from the CSO are welcome in relation to some of the other measurements we have seen in recent times, in particular, the Commission's forecasting, which I am addressing in this question. We all know the growth rate in the domestic economy, which was always going to ease from its post-pandemic surge, is expected to slow further as we have capacity constraints that have become a wee bit more binding than people would have expected. We have also seen a 1.8% decline in GDP in the most recent quarter, with the European Commission now projecting a 0.9% fall in GDP for this year. As the Minister stated, the best measurement of the performance of the domestic economy is modified domestic demand. This has increased and is projected to rise by 2.2% this year and next. Despite this, we need to closely consider the forecast of the Commission. We know that the dominant reason for the fall in GDP is the reduction in export growth from the multinational sector. This is somewhat to be expected given the post-pandemic surge, particularly in the multinational and pharma sectors. Will the Minister outline an assessment of the revised GDP forecast and the impact that may have on corporation tax receipts next year and in the time ahead? Are there any needs or concerns within the Department at this stage regarding the forecasts that underpin budget projections for next year?
I know there have been challenges but I have great faith in the Minister. He has found a good balance and while there have been huge challenges, he is finding the best way forward. My understanding is that the planning and development Bill landed with the committee this week. That is a very welcome move, by the way. I will ask the Minister about capital projects and, as the Minister knows, I would not come here without asking about my town and county. What are the forecasts for the capital plan for the foreseeable future? Are the following projects in the plan: the southern relief road, the injury clinic, the Holy Angels care centre building, the CDNT and the library? I could stay here all day but those are a few I mention offhand. It is important that projects in the capital plans, including the ambulance base, are delivered. Carlow is now a university town and county. The most recent census showed that the population of the county grew by 9%, one of the highest growth rates in the country. I ask that funding keeps coming to us.
I thank both Deputies for their contributions. I will start with Deputy Doherty's questions. We are in a period of lower growth and we are forecasting broadly 2% growth in the domestic economy for next year, which is in line with what the Commission has forecast. When we compare last year's outturn, both in modified domestic demand and GDP which was almost 10%, we will feel the effects of lower growth. It is primarily because of the external environment. Monetary policy is certainly having an impact. Political instability, geopolitical tensions and conflict create an air of uncertainty and instability and make investment decisions more difficult. All of that is having an impact but we are still in a position where we are forecasting growth. I take heart and comfort from the labour force numbers but there are no grounds to be complacent.
On the public finance front, November is a key month in terms of the Exchequer returns. Last year, we collected approximately €13.6 billion in November, including €5 billion in corporation tax. We will learn what the data will be in that respect over the next week or so.
Regarding Deputy Murnane O'Connor, we just had a great example of bringing the macro and translating it into the local and what that means.
I have been found out.
It is all local. I assure the Deputy that the Government will continue to maintain a high level of public capital investment. It will be more than €13 billion next year. I hope, with the support of the House, we will have the new infrastructure, climate and nature fund which will help to ensure that over the years ahead, come what may economically, we will be able to sustain a high level of public capital investment. I look forward to continuing to work with the Deputy on a number of those very important public projects for Carlow.
It is important that none of us become complacent. We understand the likely fall-off in GDP and GDP projections is in large part due to the reduction in pharmaceutical exports since the pandemic. Obviously, we had a surge and a bonanza during the pandemic as regards that sector and it played into our receipts. That was obviously going to drop off and return to a more normal level. We have also seen volatility in the tech and ICT sectors. Foreign direct investment will continue to play a vital role in our economy both in terms of employment spillover effects and tax revenue. Sinn Féin is committed to supporting and seeing that investment continue and grow.
What is the Minister's assessment of the labour market in the time ahead given what is happening? He mentioned the reasons we are seeing some contraction and fiscal tightening, such as geopolitical issues, conflict and the level of uncertainty that is now gripping different parts of the world. Where does he see employment being next year? Obviously, the CSO figures are robust and that is to be welcomed. Employment has remained robust throughout, despite the pandemic and recent challenges. Is it the Minister's view that GDP projections are no longer a suitable anchor for assessing the labour market and that we should be looking more at modified domestic demand in that regard?
My assessment is that the labour market will continue to be tight. We will experience some softening over the period ahead but we remain confident in the outlook overall. We stand by the projections we made on the fiscal side and the macroeconomic side in the budget just a few short weeks ago. The next opportunity to update those projections will be in the stability programme update which will be published next April.
I will not deny that the external environment has deteriorated. As a small, open economy, that has a direct impact on Ireland. Many of our main trading partners will not experience any growth this year or perhaps next year, and that has knock-on consequences for us.
Regarding corporation tax receipts, we had a weakness for the past three months relative to the same months last year. That trend may not necessarily continue in the current month, November. That remains to be seen and we will find out in the coming week or so as the information comes through. However, we stand by the forecasts and we will update them in the coming months as part of the stability programme update. The external environment is one that is characterised by uncertainty and instability. That does have an impact and it makes it all the more important that we manage the domestic levers as well as possible, remain competitive and keep an eye on our cost base.
There are absolutely no grounds for complacency in terms of the strength of the labour market. It is not necessarily a predictor of future activity, so we need to continue to invest in that regard. There are capacity constraints. We have discussed the labour market on many occasions. We have also discussed the housing market, which is also a constraint, as I have acknowledged. We have to continue with the reform programme, including, for example, in the planning system. We need continued investment in renewable energy, ensuring energy security, and in education, skills and research.
All of these, as well as our income tax system, are competitive factors when it comes to Ireland's relative position on international investment decisions. We heard a reminder of this again today from the American Chamber of Commerce survey of multinational enterprises in Ireland. It is quite positive despite the challenging backdrop. It highlighted all of these issues as ones the Government needs to focus on.