The latest quarterly report from the Economic and Social Research Institute (ESRI) takes a broadly positive view of the domestic economic outlook, but cuts its forecast for multinational exports sharply. Because of this, it now expects Gross Domestic Product (GDP) to grow by just 0.1 per cent this year , a big change from the strong figures of recent years, though these were driven in part by multinational accounting.
The domestic economy, however, remains robust and is expected to grow by 3.6 per cent this year and 4 per cent next year and unemployment is forecast to stay below 4 per cent in both years.
There are risks. In particular, the ESRI points to uncertainties about export trends as the world economy slows, notably illustrated by a fall in exports in recent months, mainly in the pharmaceutical sector. Following massive growth in exports from this sector in recent years, this may be a temporary blip, or it may be driven by changes relating to production which actually takes place elsewhere, with few implications for the Irish economy.
However, the point is that, as with the huge surge in corporation tax in recent years, there are factors here which are not fully understood and are thus very difficult to forecast. And they are of huge importance to the economy. Analysis by Prof John FitzGerald, published alongside the latest ESRI quarterly, estimates that around half the overall growth in the economy since 2013 has been driven by multinationals. As part of this, corporate profits tax has been a huge support to the exchequer and has enabled significant increases in government spending.
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Trends in the months ahead bear close watching. Tax figures for June, details of which will be published shortly, will give a clear pointer to corporation tax receipts this year. The ESRI points out that export figures from pharma companies also need to be monitored. With the tech sector also facing challenges, profitability – and thus hiring and tax revenue – could be affected. While Irish growth remains strong, a number of other big European economies, notably Germany, have slowed. And it is in these big markets where the big multinational players with their international headquarters in Ireland, generate a lot of their profits.
The Government is promising not to increase the vulnerability of the public finances by basing current spending increases on what may be temporary revenues. Delivering on this promise, in the face of huge political pressures, will be difficult. But it must happen. The other big political challenge is using some of the money to tackle the huge capacity shortages in areas like housing, energy infrastructure, hospitals and schools. Doing so without further fuelling inflation will be difficult. But it should not be impossible.