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Could the economy be on track to overheat?

Higher taxes could lie ahead as policy adjusts

On Monday the Central Statistics Office published the first estimate of growth in the economy for 2022, showing a tentative headline increase of more than 12 per cent. This figure is based on an early count of estimated output for the final quarter of last year, but it doesn’t tell us about what’s happening to national income that stays in the State, for which such growth would be implausibly high. The CSO published this new “quick” estimate because the European statistical agency needs figures for all European Union countries, to produce a preliminary growth rate for both the EU and the euro area. The European Central Bank considers such euro-area trends in determining its interest rate policy.

If a more realistic figure for the Republic were included, the euro-area growth rate for quarter four of 2022, instead of being +0.1 per cent, might have shown a small fall. The problems in interpreting the Irish national accounts are big enough to marginally affect aggregates for the euro area.

To understand what is really going on in the economy, you have to use a range of other CSO statistics such as GNI* and modified domestic demand that strip out distortions from multinational activity. This information takes more time to produce but it provides a detailed picture of how the economy is doing. Since the recovery from the recession years that began in 2013, GNI* shows our national income over the period 2013 to 2021 grew by an average 4.3 per cent a year. When final figures for 2022 are available, it is likely that average growth since 2013 will be slightly higher.

While our growth was well below what headline GDP suggests, Ireland still grew at a multiple of the corresponding EU rate, which since 2013 has averaged below 1.5 per cent a year. Underpinning the rise in output in the Republic was very vigorous employment growth of 2.7 per cent a year. As average hours worked per person fell slightly, this suggests that output per hour worked rose by 2 per cent a year.


That’s a very big increase in productivity. This was a key ingredient in raising living standards for us all. Wage rates, adjusted for inflation, rose by about 2 per cent a year over the same period. This compares very favourably with our neighbours, where real wages have been at standstill or even falling for a long period, leading to increasing dissatisfaction and unrest.

Allowing for the fact that the after-tax profits of multinationals operating in Ireland flow back out of the economy, over the period 2013-2021 the fastest income growth occurred in the IT sector. Surprisingly, the second-fastest growth was in the agricultural sector, which saw a truly exceptional increase in farmers’ incomes averaging 7 per cent a year, including a 30 per cent rise in 2022. Professional services and manufacturing were other sectors that experienced high growth since 2013.

The detailed CSO data allows us to break down the contribution to growth coming from multinational enterprises (MNEs) and domestic firms. Over the eight years to 2021, MNEs, through their rising wage bill and corporation tax payments, accounted for about half our growth, with the rest of the increase coming from the domestic sector. By 2021, a third of total wages were paid to MNE employees, reflecting the much higher average pay rates in many foreign-owned firms.

This data highlights the important contribution of foreign firms in the success of the Irish economy in recent years. Domestic firms played a somewhat bigger role in the early years of the recovery than in the last three years. MNEs were less affected by the pandemic than domestic firms because of the sectors they operate in.

There was an exceptional growth in the corporation tax paid by MNEs in 2022, contributing a rise of more than 2 per cent in national income. However, as the Department of Finance has repeatedly pointed out, this income is insecure, and factors outside the Government’s control could at some stage seriously dent this bonanza.

The acute pressures in the housing market, and the difficulties in recruiting staff across many areas, suggest the Irish economy is overheating. Higher ECB interest rates may slow down housing inflation, but not by enough. If Ireland had an independent monetary policy, we might need to set rates of interest even higher to dampen the price of housing and other infrastructure. As we don’t have the option to set our own interest rates, the next budget may need to tighten fiscal policy through raising taxation, unless we begin to see supply coming on stream at a pace to ease housing costs.