There are “fundamental weaknesses” in the Irish economy including a narrow tax base and a flatlining of employment growth, the new finance minister has been warned.
In a briefing for Simon Harris put together by senior officials, the Fine Gael leader was also warned about high levels of public spending and a lack of budgetary discipline.
Harris was warned that employment growth had effectively “flatlined” since last spring and that unemployment had ticked upwards, reaching 5 per cent in the third quarter of the year, up from 4.5 per cent in the first quarter.
He was told that the data appeared to suggest that an uncertain geopolitical environment was having an impact on labour demand, with firms delaying or reducing hiring in the face of economic uncertainty. “While employment has grown on an annual basis, there has been a significant moderation in employment growth in the last two quarters,” the briefing said. Employment is expected to expand by 1.5 per cent this year.
On President Trump’s tariffs, it was pointed out that the US is Ireland’s single largest trading partner in terms of goods exports, with about €74 billion exported to America in a year. Because of the tariffs, the level of employment would be about 60,000 lower compared with a scenario in which tariffs were not introduced by 2030.
Harris was also told that while the public finances seemed “relatively good” on the surface, below the surface there were “fundamental weaknesses” that persisted.
“The tax base is extremely narrow, with several tax expenditures contributing to the narrowness of the base. The headline fiscal position is heavily reliant on volatile ‘windfall’ corporation tax receipts, making the public finances highly vulnerable to a shock to the multinational sector.”
Ireland’s high proportion of exports to the US means it is especially vulnerable to the effects of Trump’s tariffs
BRENDAN SMIALOWSKI/AFP/GETTY IMAGES
Ten years ago corporation tax receipts amounted to about €4 billion or €5 billion a year, but they now exceed €30 billion. “A handful of large firms account for over half of this. The multinational sector also accounts for a significant proportion of income tax and VAT receipts: as such, any negative shock to the multinational sector would have implications for the public finances.”
In terms of corporation taxes, ten firms account for nearly €1 in every €6 that flow to the state.
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There are further pressures on the Irish tax system too. Beyond the near term, “fiscal headwinds are mounting”. Harris was told that structural change in the economy on demographics, decarbonisation, digitisation and deglobalisation would involve big challenges for the public finances. This will involve a large increase in public expenditure, which weights on tax revenue.
The tanaiste has also been warned about rising levels of public expenditure. That has increased from €67 billion from just before the pandemic to €118 billion for next year. “In-year spending drift has contributed to a lack of budgetary discipline,” Harris was told.