To say that 2022 did not work out as expected would be an understatement. At the start of the year, expectations were of a temporary upward blip in inflation and the European Central Bank (ECB) was signalling that there might be no need to increase interest rates. By the end of the year, the annual inflation rate was around 9 per cent and, having increased borrowing costs five times, ECB president Christine Lagarde was clearly signalling that more was to come.
Of course the Russian invasion of Ukraine was a key factor changing the economic – as well as the political – course of the year. It turned an upward move in inflation into something much more serious, largely through its impact on energy prices and also food costs. And the geopolitical tremors hit confidence and caused new uncertainties just as the western world was emerging from Covid-19 lockdowns.
As a result, a tick upwards in inflation as economic growth restarted and supply chains struggled to catch up has turned into a full-scale cost of living crisis. Living standards for many will take the hardest hit since the financial crisis, even if the Government’s support programme late in the year will soften the blow for many, particularly the least well-off. As energy costs remain high, albeit off their peaks, supports for consumers and businesses may well have to be extended beyond their current Spring end dates.
In this way the Government is using the same play-book as it did during Covid – ready to extend supports if needed. The risk this time is that an end-point to the cost-of-living crisis is not clear. The huge jump in import prices has reduced Ireland’s standard of living and the only question is how the bill is divided.
A record year for the exchequer
While the economy showed signs of coming off the boil towards the end of the year, the exchequer finances were remarkably buoyant. November figures showed a record surplus of over €12 billion for the first 11 months of the year. The strong trend in corporate tax receipts continued, up over 50 per cent year on year. Income tax, and even VAT, were also strong. As the economy slows, tax revenue growth will slow with it, though in cash terms higher inflation will also boost returns in some areas.
The strong trends allowed budget ministers Paschal Donohoe and Michael McGrath to deliver an €11 billion budget package including cost-of-living supports, target a surplus for this year and next and also plan to salt away €6 billion in a new reserve fund.
Such was the buoyancy of the figures that only weeks later it became clear that the predictions underlying the budget were again too pessimistic. While the final budget surplus will be lower than the November figure, it will be well ahead of budget-day expectations. And so the outlook for 2023 will, in time, probably have to be revised too.
There is thus significant room for manoeuvre built into the figures for next year.
Warning signals for 2023
While the strong figures for the public finances were welcome, there were some warning signs as the year went on. The tech sector, a big employer and payer of taxes, has hit a rough spot and some of the major players are restructuring. In hindsight it is clear that the major expansions undertaken through Covid-19 were based on business predictions which were too optimistic.
The cost-of-living crisis has been a major factor here, affecting the market for online advertising, for example, a key factor for the big digital services companies. The share prices of many of the major players in the tech sector have fallen sharply all year and by October it started to become clear that some retrenchment was inevitable.
It is still difficult to judge how far this will go, but the prediction by Taoiseach Leo Varadkar that thousands rather than hundreds of jobs could be affected looks reasonable. Ireland will hope that this is a speed bump for the sector, but it is still one which is likely to take a year or two to work through. In the meantime tech companies will be hiring less, will be reducing headcount in some areas and will be pulling back on their plans for new investment and office space. All these will be important for the overall economy and also for the local economies where they operate.
There have also been other warning signs. Consumer spending is falling in real terms and this is affecting the domestic economy. Consumer and business confidence, while not collapsing, is clearly shaken. All the forecasts are for significantly slower economic growth next year.
This will bring new challenges for the Government. Many are predictable – the calls for supports for consumers and business in various ways, for example. These will have to be called on their merits. But one thing is clear. As this Government moves into the second half of its term, it needs to marry solid management of the public finances with much more convincing and speedier delivery. From housing, to climate action to the provision of green energy and water to the health services there have been more than enough strategies and plans. What is needed now is delivery.