For Ireland’s two main banks, the first half of 2024 was as good as they could have wished for. Rising profits offset higher costs and the stubbornly high European Central Bank interest rate providing greater interest income for the banks than they had forecast because rates were expected to fall. The buoyant economy meant lower risk of bad debt, and the ever-increasing demand for housing means a parallel increase in the demand for mortgages.
As house prices continue to rise and supply lags behind demand, mortgage lending is also secure for the banks. All of this means that for the first time since the financial crash, Bank of Ireland is paying an interim dividend to shareholders, while Allied Irish Bank is in a position to finance a further reduction in the Government’s share of the bank.
Tax boom
In the wider economy, 2024 has so far been a good year, as have recent years, despite the global pandemic and Russia invading Ukraine. These now seem minor speed bumps that have been easily navigated. In the first half of the year, the Government had a €3.1bn surplus with over €44bn collected in tax, a 9% increase on the first half of last year.
Corporation tax receipts were up over 15% on the first half of 2023 at €12.2bn and more people than ever are in work, with the unemployment rate at around 4% – which is considered full employment.
There is no doubt the Irish economy is now in a much more robust position than it was this time two decades ago, when the Celtic Tiger was approaching its peak.
On that occasion, the foundation was an unstable property boom which provided an abundance of taxation revenue for the Government while it lasted.
Of course it cost even more revenue to clear up the mess afterwards. This time round the concern is about our exposure to corporation tax from the technology and pharmaceutical sectors, which underpin the Irish economy.
Strong past v future performance
While these are long-established, successful businesses, their link to Ireland may be strong, but not unbreakable. We offer a well-educated population and a gateway to the EU, but our most attractive feature has been a favourable taxation rate.
US presidential candidate Donald Trump noted this during his previous term in office and it has been general US policy in the current administration as well, to bring US companies home. If a future US administration goes low with its corporation tax rate, then one of our major advantages will be gone.
The other question on the future of our corporation tax base is will the companies whose success has delivered this, continue to be as successful over the next decade as they were in the past? For example, Intel, for long one of the cornerstones of the Irish technology sector, has recently acknowledged its struggle to keep up with AI, and major global redundancies have been announced. Ireland, because of our integral position in the Intel Corporation, may miss the worst of these, but it is a warning.
Stock market wobble
Similarly, just this week we have had a major wobble in global stock markets, driven by a combination of fear of recession in the US and geopolitical instability, especially in the Middle-East, with the horror in Ukraine now almost priced into markets.
Ireland’s open economy is one of the most vulnerable to global shocks. In a time of global uncertainty, countries look to their indigenous industries as the back-stop to their economies.
The US has a broad basket of industry and energy resources, large European motor manufacture and white consumer goods.
The UK has the city of London financial centre and Australia has mining. In Ireland we have land and a climate among the most favourable in the world for livestock farming and a smaller, but significant, tillage sector.
Current policy means that Irish agriculture is destined to shrink over the coming years, as we are in the unique position of having to decrease production to deliver the reduction in emissions required by legislation.
This isn’t the case in either North America or South America, nor in Australia and New Zealand, the major exporting regions of the world for agri food. In fact, New Zealand recently reversed the policy of a previous government to include agriculture in its emissions trading scheme from next year.
Irish agriculture and the agri food industry will never relocate for a better deal elsewhere, because it is physically anchored in the fields of Ireland, but it is on course to be a lesser contributor to the economy that it needs be.