The performance of the Irish economy in 2014 surpassed the expectations of many, not least those of Minister of Finance Michael Noonan. When presenting the 2014 budget, Mr Noonan forecast a modest 2 per cent rate of GDP growth. Now Ireland, as Europe's fastest growing economy this year, is set to achieve a growth rate closer to 5 per cent. The pace of economic recovery has been stronger and faster than the Government had first estimated. The Coalition's problem, however, is that too few people have felt in their pockets the benefits of the economic turnaround. A rising tide has failed, as yet, to lift all boats, despite the many encouraging economic indicators – rapid growth, falling unemployment, increased consumer confidence and improved public finances.
At the same time, a good year for the economy has been a bad one – politically – for the Government. Its early success in exiting the EU/IMF bailout programme and regaining greater economic sovereignty – where, as Mr Noonan noted, Ireland was "handed back her own purse" – was not maintained. The Government hailed the end of austerity too soon. And in framing the 2015 Budget, it went on to defy the expert advice of many, including the Central Bank, Irish Fiscal Advisory Council, European Commission and Economic and Social Research Institute. All these institutions had favoured a greater (€2 billion) fiscal adjustment, partly as a cushion against unexpected shocks and partly through a concern at Ireland's high overall level of public debt. Instead, the Government delivered a modest €1 billion stimulus via tax cuts and spending increases.
Public finances
Nevertheless, the strong economic recovery has helped to transform the state of the public finances. Employment increased, rising by 1.5 per cent (27,700) on an annualised basis in the third quarter. And more people at work has meant larger than anticipated income tax receipts, while increased consumer spending has boosted VAT and excise duty returns. In November, the standardised rate of unemployment reached 10.7 per cent – below the euro area average and the 36th consecutive monthly decline. Lower unemployment has meant savings on welfare payments, which further helped to improve the fiscal balance. By November, tax receipts were €1.1 billion ahead of target, with the 2014 budget deficit (general government balance) now forecast at 3.7 per cent of GDP, and well positioned to leave the EU’s excessive deficit procedure in 2015.
A year ago the yield – or interest rate – on Ireland’s 10-year sovereign debt was 3.5 per cent. Since then the cost of Government borrowing has more than halved, dropping to under 1.3 per cent. The decline in yield has been helped by a number of positive developments: the economy’s rapid recovery, the restoration of Ireland’s public debt to investment grade status, and the sustained downward pressure on global interest rates which are now at historic lows. In addition, the Government secured agreement to refinance Ireland’s IMF loans (€18 billion) at lower rates, which will result in a significant saving in annual debt servicing costs.
The overall strong performance of the domestic economy occurred despite weak euro area activity. And its economy, which expanded by 0.2 per cent in the third quarter, remained close to entering recession for the third time in six years.
The tourism industry has had an impressive year, building on the success of The Gathering marketing campaign last year and raising visitor numbers to Ireland – up 9 per cent – this year. The sector recorded strong growth in 2014, helped by the retention of the low 9 per cent VAT rate, with overseas earnings expanding by €400 million, the biggest increase in a decade. A strong dollar and easier air transport access to Ireland have helped to boost the number of US visitors, with those from UK – who account for almost half of overseas tourists – and continental Europe also increasing.
Uncertainties
As the year ends, some uncertainties and concerns remain to cloud the 2015 horizon. Throughout 2014, Ireland's corporate tax laws came under increasing external threat, as the Organisation for Economic Co-operation and Development advanced proposals for a major reform of international tax rules. In June, the European Commission (EC) announced a formal state aid investigation into Apple's Irish tax affairs that could yet take years to conclude. And in September, the EC formed a "preliminary view" that Ireland had acted illegally, by giving Apple preferential tax treatment in 1991 and 2007.
The Government responded to growing international pressure and criticism and acted in October to phase out the "Double Irish", a tax avoidance mechanism used by multinational companies to minimise their tax bill. But with the UK going to the polls next May, and with British prime minister David Cameron, if re-elected, pledging to renegotiate the terms of the UK's membership of the EU, and to submit these for public acceptance or rejection in a referendum, this adds one further uncertainty for Ireland in 2015.