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Ireland: Prepare now for rising fiscal pressures, external risks

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Ireland needs to prepare itself to meet rising pressures on public finances from an ageing population and significant external risks such as new EU-UK trade barriers post Brexit. Another important development could be future changes to the international tax rules, according to a new OECD report. 

The latest OECD Economic Survey of Ireland projects Irish GDP growth at 6.2% in 2019, then at still solid rates of 3.6% in 2020 and 3.3% in 2021. Yet the risks to these forecasts are significant and Ireland’s high public debt and fragilities in the banking system could exacerbate any economic shock. The coming years will also be marked by rising health and pension costs, as the population ages, and a possible end to several years of tax windfalls.

The Survey recommends taking concrete steps to improve public spending efficiency and find new sources of revenue. It is also vital to maintain Ireland’s attractiveness as an investment hub for multinationals, for example through addressing skills shortages in the workforce, lowering barriers to competition such as complex licensing procedures, and ensuring good transport infrastructure and affordable housing in Dublin. Improving skills and the use of new technologies could also help to narrow the productivity gap between Irish and foreign firms.

“Ireland’s open economy has helped it emerge stronger from the crisis, yet the country is very exposed to external factors. Fiscal prudence will be vital with health and pension costs set to rise just as the economy faces disruption from Brexit and a potential drop in corporate tax receipts,” said OECD Chief Economist Laurence Boone. “This is a crucial time for Ireland and the focus for the incoming government should be to keep the economy on a solid track.”

Ireland has enjoyed windfall tax receipts as an investment hub for multinationals, but a planned overhaul of global tax rules is expected to lower related tax receipts by changing how and where corporate tax is paid. In recent years, Ireland has partly used one-off tax receipts to fund cost overruns in health and welfare. Future windfalls should go towards paying off debt or into the country’s strategic ‘rainy day’ investment fund, and cost overruns should be reined in through better budget planning.

Health spending per person is already high in Ireland. Ageing will push it higher, while reducing revenues from labour taxes. Simulations suggest that public health and pension costs could rise by 1.5% of GDP annually by 2030 and by 6.5% of GDP by 2060. Basic pension benefits have risen much faster than inflation in recent years; indexing future increases to consumer prices would produce budgetary savings.

New revenue sources could focus on property and consumption taxes, which are less distortive for economic activity than income tax. Property values should be regularly reassessed for calculating local property taxes – today’s are based on 2013 values – and VAT should be streamlined from five rates to three. Low-income households should be cushioned from any adverse impacts. Separately, efforts to increase housing supply should continue as a way to curb soaring property prices.

Ireland stands particularly exposed to Brexit risks. The United Kingdom is an important trading partner, particularly in agriculture and food, and a vital land bridge for the majority of Irish exports that are bound for Europe. Exports of machinery, equipment, chemicals and tourism to the UK have stagnated or fallen since the 2016 UK referendum on EU membership, and any re-imposition of customs and border controls would hurt flows of goods to EU destinations.

Such risks make it even more important that Ireland reap as much benefit as it can from the digital economy. Irish businesses have tended to embrace new technologies well, the special digital chapter shows, but the impact on firm-level productivity growth has been modest.

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COVID-19 crisis highlights widening regional disparities in healthcare and the economy

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The impact of the COVID-19 crisis on people and economies has highlighted widening regional disparities in access to healthcare and economic growth and persistent disparities in digitalisation over the past decade, according to a new OECD report.

Regions and Cities at a Glance 2020 says that at the onset of the pandemic, some regions were less well prepared to face the health emergency. With 10 beds for every 1000 inhabitants, regions close to metropolitan areas have almost twice as many beds as remote regions. Over the last decades, most regions in OECD countries have seen a significant reduction in the number of hospital beds available per inhabitant, with an average decline of 6% since 2000 and of 22% in remote areas.

The health impact of COVID-19 has been particularly hard in some areas within countries. For example, in some regions of Colombia, Italy and Spain, the number of deaths between February and June 2020 was at least 50% higher than the average over the same period in the 2 previous years.

Morbidity rates that make some places more vulnerable to health crises than others also vary widely. In some regions in Mexico, Chile and the United States, close to 40% or more of the population is obese, posing a higher risk in terms of fatal diseases. For example, due to higher obesity levels, in Mississippi the average likelihood to suffer severe symptoms if infected with COVID-19 is roughly 23% higher than in Colorado.

People living in large cities and capitals were also more able to quickly shift to remote working. Many rural areas still suffer from a lack of access to high-speed broadband, a lower share of jobs amenable to remote working and a less well-educated workforce. One in three households in rural areas does not have access to high-speed broadband, on average. Overall, only 7 out of 26 countries have succeeded in ensuring access to high-speed connection to more than 80% of households in rural regions. And in some regions in Italy, Portugal and Turkey, 25% or more of the population does not use the Internet or does not have a computer.

Some regions were also struggling economically before the crisis. After a period of decline in the early 2000s, gaps in GDP per capita across small regions in the OECD area have increased, reflecting a long-standing process of concentration of population and economic activities in metropolitan areas.

The evolution of regional economic disparities remains very heterogeneous across countries. Contrary to the OECD-wide trend, one-half of OECD countries experienced an increase in the gap between their richest and poorest regions. Trends in regional productivity follow similar patterns. Since 2008, only one-third of OECD countries have experienced an increase in productivity in all regions.

With more than 100 indicators, Regions and Cities at a Glance 2020 combines official statistics with new, modelled indicators based on less conventional data sources, analysing trends in health, well-being, economic growth, employment and the environment, as well as regions and cities’ preparedness to face global crises and adapt to megatrends.

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Cash flow the biggest problem facing business during COVID-19 crisis

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A new report  on the impact of the COVID-19 pandemic  on businesses shows that their greatest challenges have been insufficient cash flow to maintain staff and operations, supplier disruptions and access to raw materials.

With businesses already undergoing significant competitive pressure prior to the crisis, government restrictions, health challenges and the economic fall-out brought by COVID-19 further set back many enterprises.

Interrupted cash flow was the greatest problem, the survey found. More than 85 per cent reported the pandemic had a high or medium financial impact on their operations. Only a third said they had sufficient funding for recovery. Micro and small enterprises (those with 99 employees or fewer) were worst affected.

The survey, carried out by Employers and Business Membership Organizations (EBMOs), involved more than 4,500 enterprises in 45 countries worldwide. EBMOs gathered data from their enterprise members between March and June 2020. The businesses were asked about operational continuity, financial health, and their workforce.

At that time, 78 per cent of those surveyed reported that they had changed their operations to protect them from COVID-19, but three-quarters were able to continue operating in some form despite measures arising from government restrictions. Eighty-five per cent had already implemented measures to protect staff from the virus.

Nearly 80 per cent said they planned to retain their staff – larger companies were more likely to say this. However, around a quarter reported that they anticipated losing more than 40 per cent of their staff.

Looking into the future, preparing for unforeseen circumstances and mitigating risks associated with a disruption of business operations is needed. Fewer than half the enterprises surveyed had a business continuity plan (BCP) when the pandemic hit, with micro and small businesses the least likely to have made such preparations. Additionally, only 26 per cent of the enterprises who responded said they were fully insured and 54 per cent had no coverage at all. Medium-sized enterprises, (those with 100 to 250 employees), were most likely to have full or partial coverage.

Strengthening government support measures for enterprises are also vital for their recovery. Four out of ten enterprises said they had no funding to support business recovery while two-thirds said funding was insufficient. Of the sectors analysed, the tourism and hospitality sector, followed by retail and sales, were most likely to report funding issues.

The report production was facilitated by EBMOs who collected and shared the survey data with the Bureau for Employers’ Activities  (ACT/EMP) at the International Labour Organization. ACT/EMP is a specialized unit within the ILO Secretariat that maintains close and direct relations with employers’ constituents.

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Lithuania: COVID-19 crisis reinforces the need for reforms to drive growth and reduce inequality

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Effective containment measures, a well-functioning health system and swift public support to firms and households have helped Lithuania to weather the COVID-19 crisis to date. That said, the pandemic still carries significant economic risks, and the recent upsurge in infections is very concerning. Once a recovery is under way, Lithuania should aim to reform public companies, strengthen public finances, and ensure that growth benefits all people and regions, according to a new OECD report. 

The OECD’s latest Economic Survey of Lithuania says that prior to COVID-19, good economic management and an investment-friendly business climate were helping to lift average Lithuanian incomes closer to advanced country levels. While the recession provoked by the virus has been milder than elsewhere – with GDP projected to drop by 2% in 2020 before rebounding by 2.7% in 2021 – Lithuania’s small and open economy will be vulnerable to any prolonged disruption to world trade. Increasing public investment and improving governance at state-owned enterprises could help lift growth and productivity. Other reforms should focus on improving the effectiveness of spending and taxation. Over the longer term, Lithuania should establish a clear debt reduction path and a long-term debt target.

“Lithuania’s sound economic management of recent years, and its swift response to both the health and economic aspects of the pandemic, are helping the country to weather the COVID-19 crisis,” said OECD Secretary-General Angel Gurría. “It is now key to build on these achievements and restart the reform engine to ensure robust, sustainable and inclusive growth for the future.”

The pandemic has exposed high levels of income inequality in Lithuania, where relative poverty is high among the unemployed, the less educated, single parents and older people due to a tax-benefit system that is insufficiently redistributive. The Survey recommends Lithuania to continue providing temporary support to people and businesses hit by COVID-19, as well as to increase regular social support while retaining incentives to work.

In terms of support to the economy, the Survey notes that while Lithuania’s government spending has increased considerably over the past two years, it remains below the OECD average. Public investment also remains low. Given the importance of modernising infrastructure and stimulating crisis-hit demand, the Survey recommends maintaining or increasing current levels of investment and improving investment quality by carrying out rigorous cost-benefit analysis for individual projects. Increasing investment in rural areas, and giving local government more say in tax policy and spending, could help reduce regional disparities and promote inclusive growth.

The Survey also recommends phasing out environmentally damaging fossil fuel subsidies and increasing environmental taxation, which would benefit public finances while helping the shift to a lower-carbon economy.

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