Editorials

The Irish Times view on the economy in 2021: A year of resilience and uncertainty

The extraordinary spread of the Omicron variant has hit consumer and business confidence and put question marks against forecasts for 2022

Much of the economy has powered ahead, with strong performances in sectors such as tech, pharma and digital services. Photograph: Dara Mac Dónaill

Wed Dec 29 2021 - 06:00

For the economy, the year ends as it started, with restrictions in place and concerns about the outlook. The extraordinary spread of the Omicron variant of Covid-19 has torn up plans to phase out State supports to businesses, hit consumer and business confidence and put question marks against forecasts for 2022.

The resilience of the economy was one of the stories of 2021. While headline GDP figures are best ignored because of the impact of multinational accounting, the domestic economy looks set to have grown by around 6 per cent. Much of the economy has powered ahead, with strong performances in sectors such as tech, pharma and digital services. Meanwhile the unemployment rate and the numbers on the Pandemic Unemployment Payment (PUP) had fallen rapidly, though both will rise again now with the latest restrictions.

The relatively solid position of the public finances – despite a big rise in the national debt over the past two years – provides some reassurance

In broad terms the strength of the parts of the economy which could continue to operate has helped to pay for the supports for those which have had to open and close. So has the ability to borrow at rock-bottom interest rates, with the market supported by the European Central Bank for the second year in a row. The State does, however, have financial leeway moving into 2022, with significant money set aside for contingencies in the budget sums for next year. Unfortunately at least some of this may be needed in the early months of the year, with the likelihood that supports to businesses will have to be extended at least into the spring.

Beyond that, meanwhile, it remains to be seen what supports the domestic sector will need to restart successfully and to deal with the ongoing presence of Covid-19. The successful reopening of many businesses this year does give some cause for hope. However, the hard hit from Omicron has damaged confidence and led to longer-term questions. How we can live with Covid – and its longer-term impact on consumer behaviour and spending patterns – remain open and uncertain questions.

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The relatively solid position of the public finances – despite a big rise in the national debt over the past two years – provides some reassurance. The Government deficit this year, on the EU measure, is likely to come in at less than €10 billion, compared to forecasts at the start of the year of €20 billion. Taxes have been stronger across the board, with the bounceback in the jobs market helping income taxes, and higher spending later in the year boosting VAT. But the star performer again has been corporation tax, where receipts have again surged way beyond expectations and could exceed €14 billion this year. Back in 2014, before the surge started, these taxes brought in less than €5 billion annually.

The rise in corporation tax revenue has been a boon for the exchequer, helping to pay for higher spending from 2015 to 2019 and then supporting the public finances through the Covid crisis. However, experience has taught us the dangers of relying on potentially volatile taxes. And with more than half of all corporation tax receipts accounted for by just 10 companies, Ireland is exposed to the decisions made in a small number of US boardrooms.

Nor are the corporate tax rules going to stay as they are. A major OECD reform programme plans changes, posing some danger to Irish tax revenues and introducing a new minimum corporate tax rate. Minister for Finance Paschal Donohoe navigated tricky waters here this year as the OECD deal came together, winning a commitment that the new rate would be 15 per cent and not "at least" 15 per cent as was in the original text. The concept of some level of tax competition is now accepted, even in the EU.

The interest rate cycle has turned and much focus will now be on what happens to inflation

But as the year ended, new uncertainty faces the OECD deal as US president Joe Biden struggles to get his Build Back Better legislation – including the US end of the 15 per cent minimum tax deal – through the US Senate. The EU may decide to move ahead anyway, but for a country with a high level of US investment, the indecision in Washington is unwelcome for Ireland.

The other source of uncertainty next year will be the likely trend in inflation. 2021 saw inflation come roaring back to 20-year highs, driven by higher energy prices, supply chain problems and comparisons with the lockdown months in early 2020. Early hope that this would be transitory is now in question; the Bank of England has already increased interest rates and the Federal Reserve Board, the US central bank, is expected to follow in the first half of 2022. European Central Bank rates may be slower to rise, but the interest rate cycle has turned and much focus will now be on what happens to inflation.

For Ireland and other euro zone states, low borrowing costs and ECB bond-buying in the market have been a vital support over the last two years. Now, while borrowing costs may remain low by historical standards, they look set to start edging higher. It is just another factor which makes the outlook for 2022 deeply uncertain.

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