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The Celtic Tiger roars again
The Irish economy outstripped all the other members of the single currency bloc last year.
In 2010, Ireland almost went bust after the state was forced to prop up a bankrupt banking sector. Now, only two years after exiting an IMF/EU bailout package, it has become the eurozone's star performer.
The Irish economy outstripped all the other members of the single currency bloc last year and that trend is set to continue. GDP is predicted to grow about 6% this year, and another 4.3% in 2016. This rapid growth is allowing Ireland to reduce its debt burden: the debt-to-GDP ratio has fallen from a peak of 125% of GDP to just 108%, and should soon edge below 100%.
Ireland is extremely dependent on exports, so the euro's large fall in recent years has given the economy a major boost. Britain and America are the country's main trading partners, jointly accounting for 40% of foreign sales, so their relatively healthy economies have provided momentum. Now the government's latest budget is designed to keep the recovery going.
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The finance minister, Michael Noonan, has announced €1.5bn of stimulus measures, including a cut in the corporate tax rate from 12.5% to 6.25%. To qualify for the new tax rate, companies must demonstrate that their earnings are dependent on intellectual property created in Ireland.
Noonan will also cut income tax from 50% to 49.5% for those earning above €70,000 a year and raise the entry threshold from €12,012 to €13,000. An unpopular emergency tax introduced in 2010 to help cover the €64bn bill for bailing out the banking system has also been cut by 1.5%, while capital gains tax will be slashed from 33% to 20%.
Is this too much of a good thing? "When you have such a strong and broadly based recovery", there's "no compelling case for the government to stimulate more activity", says Kieran McQuinn, associate research professor at the Economic and Social Research Institute. It would be best to "leave [the economy] well alone". Central Bank of Ireland head Gabriel Fagan also thinks the government measures are excessive, and likely to "add fuel to the fire when the fire is already burning very hot".
High levels of growth could worsen bottlenecks that already exist in the Irish economy demand for housing, for example, far outstrips supply. It should soon become clear whether Ireland is overheating. But only a few years after near-bankruptcy, this is a nice problem to have.
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Mischa graduated from New College, Oxford in 2014 with a BA in English Language and Literature. He joined MoneyWeek as an editor in 2014, and has worked on many of MoneyWeek’s financial newsletters. He also writes for MoneyWeek magazine and MoneyWeek.com.
