Opening Statement by Dr Robert Kelly, Director of Economics & Statistics at the Oireachtas Select Committee on Budgetary Oversight

Chair and committee members, thank you for the opportunity to address you today. 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.

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 per cent 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 (MNEs): 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 MNEs, where US-owned firms account for most employment and investment, are particularly vulnerable to trade tariffs and US policy changes.

However, Ireland’s MNE export base is expected to remain relatively resilient, thanks to its role as a pharmaceutical export platform for both the EU and US¹, the specialised nature of its products, and potentially the ability of firms to absorb some tariff costs 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 activity².

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 per cent growth this year to just over 2 per cent in the coming years³.

Medium-to-long term scenario analysis indicates an economy one per cent smaller relative to a tariff-free scenario. Lower investment is the main driver, with diverted exports to markets outside the US, partially offsetting the direct impact of the tariffs⁴. 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 shocks⁵.

Managing Short-run Risks

The immediate fiscal risk lies in corporation tax receipts, which increased four-fold 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 justice⁶.

While the central expectation is for continued growth in corporation tax⁷, declining export profits for multinational enterprises may still lead to a reduction in receipts. A particularly concerning aspect is that a large share of this revenue, often referred to as ‘excess’, is not dependent on domestic economic performance, making it susceptible to 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 those receipts would turn the current headline surplus into a multi-billion-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 aging 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, broaden the tax base as recommended by the Commission on Taxation and Welfare Report⁸. There are many choices available to government in achieving this resilience-building step, including through reforming tax reliefs, property taxes, consumption taxes, and social-insurance contributions.

Second, implement a credible fiscal anchor that keeps government expenditure growth on a sustainable path. This would allow for effective counter-cyclical fiscal policy, for example, by linking net-spending growth (expenditure growth adjusted for tax changes) to the economy’s potential growth rate and a 2 per cent inflation target. This would suggest annual overall net-spending growth of around 4-5 per cent.

The Summer Economic Statement proposes an additional €3 billion in spending for this year compared to Budget 2025, implying annual net spending growth exceeding 8 per cent 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 (3.7 per cent of national income⁹) 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 tariffs and weaker external demand will undoubtedly present challenges for some 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, policy should prioritise leveraging existing State agencies to help indigenous exporters that are exposed to the US 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 frictions.

Supporting long-term prosperity

Looking to the medium term, maintaining Ireland's attractiveness for foreign 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 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 diverse 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 competitiveness¹⁰.

Beyond domestic measures, strengthening the EU Single Market through more integrated payments landscape and progress towards a Savings and Investment Union, which offers the twin benefits of generating increasing 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 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.

Thank you for your attention; we welcome your questions.