Ireland

A key reason behind the sizeable presence of multinationals in Ireland has been its attractive low tax environment, which has lured substantial foreign investment. However, in 2022, Ireland introduced changes to the international corporate tax framework. These changes included the reallocation of profits of multinational companies across different states and an increase in the tax rate for very large companies from 12.5% to 15%. This could mean that higher taxes on the domestic economy are needed as corporate tax revenue is the second-largest single source of revenue, standing at more than half of the increase in total revenue since the Covid-19 crisis. On the positive side, the external account is strong: the current account surplus should continue to stay above 5%, thanks to the recovery in global trade, which should strengthen Ireland’s net exporter position.

In the medium run, Ireland’s trade structure remains a vulnerability in terms of the dependency on pharmaceuticals and computer services. In addition, in terms of destinations, export concentration is high as the US and the UK represent around 40% of total Irish exports. The very strong presence of the multinational sector makes Ireland appear very vulnerable in terms of external debt but being part of the Eurozone makes it manageable. In addition, the rapid and strong global tightening in monetary policy has led to a correction in house prices as of mid-2023 which should continue into 2024 on the back of lower housing affordability and less support from the multinational sector.

The banking sector in Ireland is in good health with profitability being boosted by rising net interest margins and a strong deposit base. The net interest margin is close to 3% compared to 2% pre-pandemic. The NPL ratio stands below 3% compared to close to 5% pre-pandemic, but an increasing trend is expected due to deteriorating households’ and firms’ balance sheets and higher borrowing costs. Household debt stands at 108% of net disposable income, above US levels, but 40pps below UK levels. Business insolvencies have returned to pre-pandemic levels and should increase by +12% in 2024, to 760, the highest level since 2018.

The fiscal balance should continue to register a small surplus in the coming two years. Additionally, public debt has been largely kept under control, decreasing from pandemic peaks of 58% of GDP to around 43% in 2024, presenting an overall strong fiscal position. In an effort to further stabilize future public finances against the volatility of corporate tax receipts, the government is in the process of establishing a sovereign wealth fund. This fund aims to strategically invest the windfall revenues generated from corporate tax revenues. The size of the fund is expected at EUR100bn by 2035, with a rate of return of close to 4%. A second fund of EUR14bn is planned, which intends to finance green infrastructure but also support the catch-up on targets to cut greenhouse gas emissions.