Dr. Robert Kelly:

I thank the Chair and committee members for the opportunity to address the committee today. Dr. Martin O’Brien, head of Irish economic analysis, joins me. In my opening statement, I will outline how the changing external environment is reshaping Ireland’s economic outlook and how policy can respond by mitigating short-term risks and supporting longer term prosperity.

With regard to the economic outlook in a period of global change, driven by the recent shift in US trade policy, Ireland faces a significant challenge from the current environment of heightened global trade uncertainty. The recently implemented transatlantic agreement, which includes a 15% tariff on EU goods entering the US, provides a measure of stability, although full implementation remains outstanding.

Ireland’s economy presents varied risks across different sectors. A key factor is the structure of Irish multinational enterprises. Roughly half serve the domestic market and are less directly exposed to trade tensions, while the other half, concentrated in export-oriented sectors like pharmaceuticals and ICT, rely heavily on global value chains. These export-focused multinationals, where US-owned firms account for most employment and investment, are particularly vulnerable to trade tariffs and US policy changes. However, Ireland’s multinational export base is expected to remain resilient thanks to its role as a pharmaceutical export platform to the EU and the US, the specialised nature of its products and, potentially, the ability of firms to absorb some of the tariffs through their relatively higher profit margins. Indigenous firms, by contrast, primarily focus on the EU and UK markets. Those exporting to the US tend to be larger, more productive and more geographically diversified, increasing their ability to adapt to the tariff shock. They employ over 120,000 workers, with close to 10,000 tied to US export activity.

This sectoral breakdown informs the current economic outlook. The first half of the year demonstrated resilience with robust consumption and investment, but headwinds persist. Current projections anticipate a slowdown from 2.9% growth this year to just over 2% in the coming years. Medium- to long-term scenario analysis indicates an economy 1% smaller relative to a tariff-free scenario. Lower investment is the main driver, with diverted exports to markets outside the US potentially offsetting the direct impact of the tariffs. We also anticipate a moderate structural shift with reduced manufacturing activity and increased service sector growth as resources are reallocated in response to these global shocks.

With respect to managing short-run risks, the immediate fiscal risk lies in corporation tax receipts, which have increased fourfold since 2015. A decade ago, these receipts would have covered three quarters of Government education spending. Last year, they equalled the combined Government spending on education, housing, transport and justice. While the central expectation is for continued growth in corporation tax, declining export profits for multinational enterprises may still lead to a reduction in receipts. A particularly concerning aspect is the large share of this revenue, often referred to as "excess", that is not dependent on domestic economic performance, making it susceptible to a sudden reduction from broader US policy changes or corporate structure decisions by a small number of multinational companies. The summer economic statement clearly identifies excess corporation tax as a key fiscal vulnerability, warning that a loss of these receipts would turn the current headline surplus into a multibillion euro deficit.

Directing excess corporation tax receipts into the Future Ireland Fund is a welcome step towards strengthening public finances. The fund will help address long-term challenges, particularly those related to an ageing population and associated increased spending. However, even with this fund, the Government will need to secure additional revenue to keep the public finances on a sustainable path. To safeguard Ireland’s public finances, there are two key priorities. First, the tax base should be broadened as recommended by the Commission on Taxation and Welfare report. There are many choices available to Government in achieving this resilience-building step, including the reform of tax reliefs, property taxes, consumption taxes and social insurance contributions. Second, a credible fiscal anchor should be implemented that keeps Government expenditure growth on a sustainable path. This would allow for effective countercyclical fiscal policy, for example, by linking net spending growth, that is, expenditure growth adjusted for tax changes, to the economy’s potential growth rate and a 2% inflation target. This would suggest annual overall net spending growth of around 4% to 5%.

The summer economic statement proposes an additional €3 billion in spending this year compared with budget 2025, implying annual net spending growth exceeding 8% this year. Our analysis of planned spending indicates a significant increase in Ireland's underlying budget deficit, projected to rise from €6.6 billion to €13.9 billion, or 3.7% of national income, by 2027. Maintaining this expansionary fiscal policy during a period of economic growth limits our flexibility to respond with budgetary support during a future economic downturn.

Higher taxes and weaker external demand will undoubtedly present challenges for exposed firms. However, reflecting the vulnerability of corporation tax revenue and the need to contain spending growth, untargeted and widespread fiscal support is neither necessary nor appropriate for responding to the current challenges. Instead, policies should prioritise leveraging existing State agencies to help indigenous exporters that are exposed to the US to develop new networks and markets. The EU, representing our extended home market, holds considerable untapped potential which we should seek to realise through minimising trade friction.

On supporting long-term prosperity, looking to the medium term, maintaining Ireland's attractiveness for foreign direct investment remains essential. Key infrastructure gaps in water, energy, transport and housing are significant constraints on Ireland's medium-term sustainable growth. Closing these gaps is crucial to keep Ireland not only attractive for foreign direct investment but also to curb cost-of-living pressures and to unlock the productivity needed for a more diversified export base. Guided by a credible fiscal anchor, capital spending should be prioritised over current spending increases or tax cuts.

To maximise the return on capital spending, we must cultivate a thriving local business sector. This includes encouraging entrepreneurship and supporting skills development. A more diversified funding ecosystem offering tailored financing and equity will be crucial for supporting high potential indigenous firms. Timely and effective implementation of the recently published action plan on competitiveness and productivity will contribute to achieving these goals and ensuring Ireland's future competitiveness.

Beyond domestic measures, strengthening the EU Single Market through a more integrated payments landscape and progress towards a savings and investment union, which offers the twin benefits of generating increased returns for household savings and creating a robust investor base for businesses across the EU.

Ultimately, Ireland's economic resilience hinges on our ability to adapt to a changing global landscape and to leverage the opportunities presented by deeper European integration. While addressing the immediate vulnerabilities, it is crucial to avoid broad short-term fiscal support and instead prioritise investment and delivery of critical infrastructure and a robust fiscal framework, all of which will be essential for sustaining growth and enhancing our economic competitiveness. I thank the committee for its attention and we welcome its questions.