The economic outlook for Ireland has become “increasingly uncertain” in recent months with the rise of protectionism and the tariff threats from the Trump administration now posing a significant risk, the Department of Finance has warned.
The heightened uncertainty prompted the department to tell Minister for Finance Paschal Donohoe as he took up his new portfolio that economic growth forecasts made in last October’s budget may have to be revised downwards.
And it pointed out that public expenditure has ballooned since just before the pandemic, adding that there is “no case” for universal once-off payments in the future.
“At the time of the budget, the domestic economy was projected to grow by around 3 per cent this year,” the briefing document published on Friday evening said.
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“However, the economic backdrop has become increasingly uncertain, with risks to the outlook now heavily tilted to the downside.”
It said the “most pressing risks are external in nature and relate, in particular, to the prospect of increased fragmentation of the global economy driven by an intensification of protectionism.”
The document prepared for Mr Donohoe warned that the external economic backdrop is one of increasing divergence in Ireland’s main trading partners.
It noted that while the US continues to perform strongly, the euro area and UK are “beset with underlying structural problems”.
It observed that domestic US policy is “highly consequential for Ireland’s economic model”, with about 20 per cent of all goods and services exported from Ireland going to the US and in the region of 220,000 people employed by US multinationals.
[ Ireland braced for impact from latest round of Trump tariff plansOpens in new window ]
It warned that tariffs “appear to be a key policy instrument for the [Trump] administration, with universal tariffs of 10-20 per cent a possibility”.
“Such an eventuality would impact on the competitiveness of Ireland’s exports and could potentially trigger reprisals from the EU and China, further impacting on Ireland,” the department said.
It also highlighted the possibility of the Trump administration lowering the US corporate tax rate while increasing corporate subsidies and said it “could have significant implications for investment in Ireland”.
The note pointed out that “highly mobile intellectual property assets could potentially be offshored relatively quickly, with implications for corporate tax revenues, while future waves of FDI may not materialise, with implications for both employment and tax revenues”.
Domestically, the Department of Finance stressed that a “key task will be to set a spending rule – as part of the Government’s new medium-term plan – and stick to it.”
The note said it would be “crucial” that overall budgetary policy should be conducted in a manner that ensures “spending growth is curtailed and that the spending rule is rigorously enforced”.
On a more positive note, the document pointed to the cost-of-living pressures which have “weighed heavily on the domestic economy over recent years have eased significantly” with a rate of inflation of just 1 per cent recorded in December.
“The easing in inflation has helped boost real incomes which has supported solid growth in consumption,” the briefing note says.
“This, in turn, has helped underpin robust growth in the domestic economy,” it continued, adding that the department “expects this trend to continue over the coming quarters, with consumer spending acting as the primary driver of growth in the domestic economy”.
It said that while “in headline terms the public finances are in reasonably good position”, with budgetary surplus recorded for the last three years and the debt to income ratio on a “solid downward trajectory”, the storm clouds are gathering.
Is noted how public expenditure had increased by more than 50 per cent since just before the pandemic. “These rates of increase cannot be sustained,” it said and made it clear that the Department of Finance believes there is “no case for a continuation of universal once-off payments” including energy credits and some social welfare payments.
