Table of Contents

  • The Irish economy expanded rapidly in recent years, driven by domestic demand, but activity is now easing. In particular, the housing market has cooled: house prices are falling and fewer houses are being built. Despite the slowdown, growth could remain above the euro area average, although downside risks prevail in the short run. Economic fundamentals remain strong, however, with a skilled workforce, a flexible labour market, moderate taxation, a business-friendly regulatory environment and a still sound fiscal position. Following many years of a booming economy, slowing economic activity will test the resilience of the drivers of economic growth, and the fiscal, financial and macroeconomic frameworks. At the same time, the physical infrastructure and public services need to be improved further. Ireland should also ensure that social progress is sustainable in the long term, particularly as the population ages.

  • Strong economic activity has been maintained and economic fundamentals remain sound. The end of the long housing expansion will, however, slow growth and presents more difficult challenges than in recent years. In the short run, the economy must adjust to lower housing activity and the risks the slowdown creates. In the long term, maintaining high rates of productivity growth is the key challenge. It is important that Ireland remains internationally competitive. Policy can support productivity growth through achieving stronger competition, improved infrastructure, more innovation, increased human capital and higher labour market participation. Ireland should ensure the stability and sustainability of its economic and social gains. A more efficient housing market would contribute to greater stability and recent international financial market turmoil highlights the need to continue to prepare for financial shocks. Maintaining a prudent fiscal policy as revenue growth slows will help to promote stability, although this will require more efforts to improve efficiency if services are to be improved. Ageing will eventually pose significant challenges that can be reduced if action is taken now to prepare the pensions system. Successful long-term integration will help to ensure that immigration is a success.

  • After many years of sustained growth, the housing market has slowed: house prices are falling and there has been a sharp reduction in the number of new homes being built. The exceptional rise in property values in recent years was largely driven by higher income and demographics, but did appear to overshoot the sustainable level. House prices may ease further and could even fall below their long-run value. Residential investment is experiencing a sharp slowdown. This will have some effect on wider economic activity. If a more severe slowdown occurs, the housing market could pose risks for economic growth and the financial system. Phasing out policies that distort the housing market could help to dampen future housing cycles and maintain the competitiveness of the economy.

  • Lending has been strong, with debt ratios reaching very high levels. The Central Bank and Financial Services Authority of Ireland (CBFSAI) had clearly identified the major vulnerabilities and taken action to mitigate them. The Irish banks are wellcapitalised and profitable, which provides a cushion to weather the more difficult times ahead. This chapter reviews financial market developments, the actions by the CBFSAI and the new policy issues that have come to the fore with the financial market turmoil.

  • Softening economic growth and the slowdown in the housing market mark a turning point for fiscal policy. Strong revenue growth in earlier years financed a sustained expansion of government spending and some cuts in tax rates, while still allowing the government to run a substantial fiscal surplus. This left the public finances in a healthy state with net government debt declining to a very low level. But this benign picture is changing as growth slows and tax receipts increase more slowly. Public spending growth needs to slow. The challenge is to improve public services further without large increases in resources. In these circumstances, it will be even more important to get better value from public spending and to accelerate public management reforms.

  • Ireland currently has a relatively young population but faces similar, if more distant, long-term pressures from population ageing as other countries. The pension system is founded on a basic state pension but relies heavily on private saving to provide adequate replacement incomes in retirement. Large increases in the state pension have reduced poverty, although many pensioners still have low incomes. There is a large retirement savings gap for many households between the close to flat-rate state pension and a reasonable replacement income in retirement. Private pensions saving may be too limited to close this gap for many low- and middleincome earners. There are large tax incentives to save for retirement, but these are poorly targeted and the overall effect on saving is likely to be limited. Against the background of the pressures that ageing will eventually impose on public finances and the wider economy, this chapter outlines options for pension reform.

  • Immigration has soared in recent years. The immigrants tend to be young, well educated and work. But they often work in basic jobs. Immigration policy should thus focus on better integration. This chapter reviews Irish immigration policy in the light of international experience. It also highlights the uncertainties about future migration flows and the challenges they pose for infrastructure planning.