In a world of increasing political and economic uncertainty, making meaningful medium to long-term economic forecasts is difficult. Nevertheless, the Economic and Social Research Institute (ESRI) in publishing its outlook for the Irish economy has tried to chart a potential path for the domestic economy to 2025, and to identify some of the major policy challenges ahead.
The ESRI presents a relatively optimistic outlook. It regards a 3 per cent growth rate for the domestic economy as sustainable, underpinned by a growing labour force and an expanding working age population – bolstered by net immigration. Much, however, will depend on the growth in global trade and on what form – hard or soft – a Brexit agreement ultimately takes.
The institute’s second concern is how the introduction of a Common Consolidated Corporate Tax Base (CCTB) in the EU might affect foreign direct investment in Ireland, by hitting employment growth and tax revenue. The CCTB does not change Ireland’s 12.5 per cent corporate tax rate. Instead the tax payable by a company would reflect the location of its actual activities, and the profits earned there.
Since Ireland’s low rate would thereby apply to a smaller share of the profits of multinationals, the country would become a less attractive investment option to such companies; securing overseas investment would be harder, and corporate tax revenues would be depressed.
The ESRI suggests that under CCTB, which the Government opposes, economic output could decline by 1.5 per cent, foreign direct investment would drop by 5 per cent and revenues from corporation tax decline by a similar figure.
The British government’s aims to lower its corporate tax rate – now 20 per cent– to 15 per cent over time. President-elect Donald Trump is planning to lower the US rate to 15 per cent within months.
The ESRI identifies another concern: the likely inability of the banking sector to supply adequate mortgage finance to meet the rising demand for housing. An additional €50 billion may be needed by 2024, it suggests. Irish banks may be unable to provide the loans, creating the need for foreign banks to re-enter the market.