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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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65% of Adults Think Race, Ethnicity or National Origin Affects Job Opportunities

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A recent Ipsos-World Economic Forum survey has found that 65% of all adults believe that, in their country, someone’s race, ethnicity, or national origin influences their employment opportunities. When considering their own race, ethnicity, or national origin, more than one-third say it has impacted their personal employment opportunities.

The online survey was conducted between 22 January and 5 February 2021, among more than 20,000 adults in 27 countries. It also reveals that 60% of adults think that someone’s race, ethnicity, or national origin plays a role in education opportunities, access to housing, and access to social services.

As Black History Month in the United States draws to a close, awareness of the impacts of race, ethnicity and national origin on opportunities in life is exceptionally high. It follows a tumultuous year when the pandemic put inequality into the spotlight, and events in the US sparked international protests as long-simmering, systemic racial inequities came to the forefront.

Of those surveyed, 46% say the events of the past year have increased differences in opportunities as well as access to housing, education, employment and/or social services in their country. In comparison, 43% say the events have had no impact on differences and 12% say they have decreased differences.

About 60% of respondents in Latin America, Spain and South Africa, and nearly half in France, Italy, Malaysia, Japan, Sweden, Belgium and the US say recent events have increased race, ethnicity, or national origin-based differences in opportunities in their country, compared to only about one in three in Germany, Poland and Saudi Arabia, one in four in China, and one in seven in Russia.

Perceptions versus the reported personal experience of inequality also vary significantly in countries. Compared with the 27-country average for all four types of opportunities measured, several countries stand out.

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‘Industry 4.0’ tech for post-COVID world, is driving inequality

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Developing countries must embrace ground-breaking technologies that have been a critical tool in tackling the COVID-19 pandemic, or else face even greater inequalities than before, UN economic development  experts at UNCTAD said on Thursday.

“Very few countries create the technologies that drive this revolution – most of them are created in China and the US – but all countries will be affected by it”, said UNCTAD’s Shamika Sirimanne, head of Division on Technology and Logistics. “Almost none of the developing countries we studied is prepared for the consequences.”

The appeal, which is highlighted in a new UNCTAD report, relates to all things digital and connective, so-called “Industry 4.0” or “frontier technologies”, that include artificial intelligence, big data, blockchain, 5G, 3D printing, robotics, drones, nanotechnology and solar energy.

Gene editing, another fast-evolving sector, has demonstrated its worth in the last year, with the accelerated development of new coronavirus vaccines.

Drone aid

In developing countries, digital tools can be used to monitor ground water contamination, deliver medical supplies to remote communities via drones, or track diseases using big data, said UNCTAD’s Sirimanne.

But “most of these examples remain at pilot level, without ever being scaled-up to reach those most in need: the poor. To be successful, technology deployment must fulfil the five As: availability, affordability, awareness, accessibility, and the ability for effective use.”

Income gap widening

With an estimated market value of $350 billion today, the array of emerging digital solutions for life after COVID is likely to be worth over $3 trillion by 2025 – hence the need for developing countries to invest in training and infrastructure to be part of it, Sirimanne maintained.

“Most Industry 4.0 technologies that are being deployed in developed countries save labour in routine tasks affecting mid-level skill jobs. They reward digital skills and capital”, she said, pointing to the significant increase in the market value of the world’s leading digital platforms during the pandemic.

Innovation dividends

“The largest gains have been made by Amazon, Apple and Tencent,” Sirimanne continued. “This is not surprising given that a very small number of very large firms provided most of the digital solutions that we have used to cope with various lockdowns and travel restrictions.”

Expressing optimism about the potential for developing countries to be carried along with the new wave of digitalisation rather than be swamped by it, the UNCTAD economist downplayed concerns that increasing workforce automation risked putting people in poorer countries out of a job.

This is because “not all tasks in a job are automated, and, most importantly, that new products, tasks, professions, and economic activities are created throughout the economy”, Sirimanne said.

‘Job polarization’

“The low wages …for skills in developing countries plus the demographic trends will not create economic incentives to replace labour in manufacturing – not yet.”

According to UNCTAD, over the past two decades, the expansion in high and low-wage jobs – a phenomenon known as “job polarization” – has led to only a single-digit reduction in medium-skilled jobs in developed and developing countries (of four and six per cent respectively).

“So, it is expected that low and lower-middle income developing countries will be less exposed to potential negative effects of AI and robots on job polarization”, Sirimanne explained.

Nonetheless, the UN trade and development body cautioned that there appeared to be little sign of galloping inequality slowing down in the new digital age, pointing to data indicating that the income gap between developed and developing countries is $40,749 in real terms today, up from $17,000 in 1970.

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Greater Innovation Critical to Driving Sustained Economic Recovery in East Asia

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Innovation is critical to productivity growth and economic progress in developing East Asia in a rapidly changing world, according to a new World Bank report launched today.

Countries in developing East Asia have an impressive record of sustained growth and poverty reduction.  But slowing productivity growth, uncertainties in global trade, and technological advances are increasing the need to transition to new and better modes of production to sustain economic performance.

To support policy makers in meeting this challenge, The Innovation Imperative for Developing East Asia examines the state of innovation in the region, analyzes the key constraints firms face in innovating, and lays out an agenda for action to spur innovation-led growth.

A large body of evidence links innovation to higher productivity,” said Victoria Kwakwa, World Bank Vice President for East Asia and Pacific. “The COVID-19 pandemic, climate change, along with the fast-evolving global environment, have raised urgency for governments in the region to promote greater innovation through better policies.

While developing East Asia is home to several high-profile innovators, data presented in the report show that most countries in the region (except China) innovate less than would be expected given their per capita income levels. Most firms operate far from the technological frontier. And the region is falling behind the advanced economies in the breadth and intensity of new technology use.

“Aside from some noteworthy examples, the vast majority of firms in developing East Asia are currently not innovating,” said Xavier Cirera, a lead author of the report. “A broad-based model of innovation is thus needed – that supports a large mass of firms in adopting new technologies, while also enabling more-sophisticated firms to undertake projects at the cutting edge.”

The report identifies several factors that impede innovation in the region, including inadequate information on new technologies, uncertainty about returns to innovation projects, weak firm capabilities, insufficient staff skills, and limited financing options. Moreover, countries’ innovation policies and institutions are often not aligned with firms’ capabilities and needs.

To spur innovation, the report argues that countries need to reorient policy to promote diffusion of existing technologies, not just invention; support innovation in the services sectors, not just manufacturing; and strengthen firms’ innovation capabilities. Taking this broader view of innovation policy will be critical to enabling productivity gains among a broader swath of firms in the region.

“It is important for governments in the region to support innovation in services, given their rising importance in these economies – not only for better service quality but increasingly as key inputs for manufacturing,” said Andrew Mason, also a lead author of the report.

Countries also need to strengthen key complementary factors for innovation, including workers’ skills and instruments to finance innovation projects. Building stronger links between national research institutions and firms will also be critical to fostering innovation-led growth in the region.

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