Irish Government Stability Programme Update

In their discussion, the Department of Finance highlight a number of key developments which are contributing to the improved macroeconomic conditions. Energy prices are projected to moderate as gas prices (and oil prices to a lesser extent) decline and this feeds through to consumers. Monetary policy including expected interest rates cuts will ease credit conditions through the middle of 2024, supporting greater economic activity. Growth will improve on a steady and modest trajectory into 2025 and beyond, and workers in tight labour markets will see real wage growth return in 2024, and continue in 2025, 2026, and 2027.

The national accounts look healthy albeit with the typical caveats surrounding the sustainability of the government finances. A general government surplus of €8.6 billion is projected for 2024, rising to €9.7 billion in 2025. However, adjusting for "windfall" corporate tax receipts a deficit of €2.7 billion is estimated in 2024, decreasing to €1.8 billion in 2025, highlighting the continued importance of corporate tax receipts to the government finances.

Commentary

The economy is in good shape and has weathered recent economic shocks well albeit with some underlying weaknesses. A number of developments are clearly positive for the health of the economy (lower financing costs, reduced inflation, and improvements in consumer spending and exports) while a number of protracted headwinds (tight labour markets, elevated cost of living, etc.) will need to be effectively managed to maximise the potential of the economy.

There are two comments which I think help to summarise where the economy currently is. The first is from the SPU Summary itself which describes "an economy that is in reasonable shape, at least in aggregate terms". The other is from Gerard Brady at IBEC who commented that his impression from the report was of an economy where "we don't have the capacity to do all that we can afford". I am inclined to agree with both characterisations.

The Irish economy is in good shape, but it has a number of ongoing and well-known challenges that need to be addressed. We are not in a bad position, and this is not a matter of "doing more with less". Rather, we are in a world of having "less than we would want, but almost all of what we need" as an economy to address our challenges. The question is how we use resources efficiently to solve the problems of today and tomorrow. For both business and government the key challenge will be to find investments that boost productivity and improve long-run growth potential while navigating the constraints of an economy with structural scarcity.

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