Conclusions

1.9.1 Employment, Income, Living Standards and Wealth

Up to 2007 the economy experienced continued strong employment growth, with annual employment growth of 3.3 per cent between 2000 and 2007. In 2008 there will be little net employment growth due to the fall in construction employment and possibly a substantial increase in unemployment.

There are numerous dimensions to income so this chapter considers a range of income measures. Here we focus on a few key measures. Median equivalised household disposable income – a comprehensive measure of household income that takes account of differences in household composition – has grown by an annual average of 2 per cent in real terms between 2000 and 2006. Over this period the incomes of the lower earning households exceeded the growth of the median so that the share of the population in households with below average income has fallen. This was mainly due to a fall in the share of older people with below average income.

The growth of real earnings peaked in 2001. In that year, real earnings after tax for a single person on average industrial earnings increased by over 7 per cent. Subsequent years were characterised by continuing real earnings growth at a more moderate rate. The past two years have seen slower real earnings growth, due to high inflation. Nominal earnings growth in this period, however, has continued to be high compared to other European countries. Tax reductions have continued to increase the real value of take-home pay and there were substantial increases in the value of mortgage interest relief in the 2007 and 2008 budgets to help compensate for the rise in mortgage costs.

Workers in the different sectors of the economy have had different experiences of earnings growth. The share of employees on low pay (below c10 per hour)

declined between 2003 and 2006 but is still substantial at 18 per cent. There is some evidence, of an increase in income share by those at the top of the income distribution. Further research on Ireland’s income tax data would be desirable to

74

clarify the extent to which the trends observed from the Revenue Commissioners’ data represent a real shift in the income distribution.

The higher inflation experienced in recent years is of concern. Over the past year energy and commodity prices have added to inflationary pressures. This disproportionately affects people on low incomes. Forecasters are projecting that Irish inflation will moderate in 2008 and 2009 due to the strength of the euro, lower economic growth and moderation of mortgage costs.

There are factors beyond earned income that affect real living standards. In terms of cash benefits, Irish households with children typically compare favourably to other EU countries due to the relatively high level of child benefits. Other advanced EU countries enjoy significantly higher levels of public services and infrastructure provision. For example, much of Ireland’s recent housing development has not facilitated satisfactory access to places of employment and public services. The cost of childcare in Ireland is relatively high which has a significant effect on some households. There is no overall measure that allows a comparison of a broadly defined social wage across countries.

Household debt has grown strongly but so have household assets. In 2005 household assets were worth more than five times household liabilities. A study produced by the World Institute of Development Economics Research (Davies et al., 2006) using data for 2000 placed Ireland as the tenth richest country in the world in terms of net wealth. This study does not take into account asset accumulation since then but may give a reasonable indication of the underlying position22_. 1.9.2 Costs and Competitiveness

The Irish economy has experienced a loss of cost competitiveness in recent years, substantially exacerbated by the strength of the euro in recent months It is clear from the material produced by the National Competitiveness Council that many general business costs are now relatively high in Ireland. Ireland’s wage costs (including social security costs) are comparable to some of the other advanced European countries; Irish labour costs are relatively lower in manufacturing. Some loss of cost competitiveness is not in itself a problem for the economy. Relatively strong wage growth in Ireland has increased living standards and underpinned growth in domestic demand and employment in the services sector. However future growth will need to have a stronger component of net exports so that further losses of cost competitiveness are likely to have more effects on the economy than the experience to date.

For several years the euro/sterling exchange rate was relatively stable. There has been a substantial appreciation of the euro in recent months: the euro/sterling rate went from 0.68 in August 2007 to 0.77 in March 2008 and reached a rate of 0.8 during April. This adds very significantly to competitiveness pressure on those exporting to the UK and competing with UK producers on the domestic market. This exchange rate is a particular burden for the indigenous manufacturing sector which sells the vast majority of its output on the Irish and UK markets.

22. The fact that this study does not take account of all of increase in Irish house prices since 2000 could be considered an advantage as the level of house prices in Ireland exaggerates the real level of Irish wealth. The level of house prices in Ireland is often higher than the corresponding levels in cities with comparable population and levels of development.

1.9.3 Migration

Migration is having a significant effect on Ireland’s economic and social development. In its study on migration, the Council judged that there has probably been some moderation of wage growth in certain areas. Despite the large scale of the inflow, overall earnings growth has continued, but at a slower pace than earlier years. As the Council has previously observed, there is uncertainty regarding many of the economic and social effects of migration and its future scale (NESC, 2006). The Council considers that it is important to improve the availability of data on migration.

1.9.4 The Public Finances

The public finances have been in surplus in recent years up to 2007, with both a large current account surplus and an overall surplus after taking account of capital expenditure. The public finances benefitted considerably from the property boom with increases in the share of taxation from stamp duty and capital gains taxes. The slowdown in economic growth poses significant challenges for the public finances.

Ireland’s public expenditure relative to GNP remains at a low level by EU standards. The various dimensions that contribute to this are explored in the chapter. The Council’s conclusions on the public finances are presented in Chapter 7.

1.9.5 Vulnerabilities

In addition to pressures of cost competitiveness, there are a number of emerging vulnerabilities facing the Irish economy:

s Turbulence in financial markets and US slowdown; s The adjustment in the housing market;

s Climate change policy; and s Global oil market.

The turbulence in financial markets and the associated slowdown in the US economy will affect Ireland’s economy. The performance of the Irish economy in previous periods of an adverse external environment has varied considerably. The role of a consistent policy approach in dealing with economic turbulence is explored in the next chapter.

The fall in housing output is having a large effect on economic growth in 2008. Some of those affected by the housing slowdown will migrate but some will need support in finding alternative opportunities in Ireland. Further reductions in house prices would be desirable as this would improve affordability.

Addressing climate change will have far reaching economic and social effects in the long run. The move to a low carbon economy will create many new economic opportunities and it is highly desirable that Ireland participates in what has been characterised as a ‘new industrial revolution’.

76

Ireland’s high reliance on fossil fuels poses another vulnerability. The International Energy Agency has warned that a continuation of current trends in oil supply and demand will lead to a ‘supply crunch’ within seven or eight years that could lead to substantially higher prices.

In identifying these vulnerabilities it is not intended to convey pessimism regarding Ireland’s economic prospects. The economy has underlying strengths. The single most important factor in economic performance is the skills and experience of the current and future workforce. One tangible indicator of the economy’s abilities in the international arena is the exceptionally strong growth of services exports in recent years.

Ireland’s population will expand in the years and decades ahead and it is vital to sustain investment to meet the needs of a growing population. There is a need to make more progress towards a sustainable and affordable pattern of housing development. In addition to a high level of investment in infrastructure and social housing this requires an integrated, long term approach to transport, land use and active land management. The vulnerabilities that are present should not distract attention from the policies and actions that matter most for well-being in the longer term.

Building on Shared Analysis