Is the Irish economy growing too fast?

Ireland has an economic problem that many other EU countries would dearly wish for: it is probably growing too fast. From 2016 to 2022, according to the census, Ireland’s population grew by 9 per cent, an annual average of 1.5 per cent. From 2022 to 2023, the CSO estimates we had a further 1.9 per cent increase in those living here.
Key infrastructure, especially housing, is not able to keep up. The best answer to this is to build more. But that takes time, especially when the heavy hand of planning regulation gets in the way. We see serious house price inflation as a result, reflecting the severe shortage of places for our rapidly-growing population to live.
Last year the economy grew by about 5 per cent and employment grew by 3.3 per cent. Of the 90,000 additional jobs, 50,000 had to be filled by people coming from outside Ireland, as we are running short of people already living here to meet employers’ needs. Those 50,000 people, most of them in good jobs, had to find somewhere to live.
While Ireland’s rate of economic growth has slowed somewhat this year, employment in the first six months of 2024 was still up 2.3 per cent on the first half of last year, as the most recent Labour Force Survey shows. All of the additional jobs have been for graduates. Two-thirds of these additional jobs were filled by people coming from outside Ireland, whether returning emigrants or others.
The rapid growth in the economy is boosting the exceptional demand for housing. If we can’t fix the housing supply problem in the short term, then the only alternative is to slow down the pace of economic growth.
If the Government does nothing, economic growth may be eventually choked off by a shortage of workers, because incomers, and our own young people, would be unable to find an affordable place to live. However, to reach that point, would probably mean a further burst in house price inflation. Such sky-high property prices, however, would be vulnerable to fall sharply in the face of any slowdown caused by a future global recession, as we saw in 2008. While the wider economic effects would be less serious than 15 years ago, given the Central Bank has ensured a more prudent financial sector, a house price collapse would still cause serious dislocation.
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To slow the economy by letting property prices rise would also exacerbate inequality. Home-owners would benefit, those in secure council tenancies would be fine. But with private rents rising, the limited supply of such accommodation would, inevitably, go to those working in high-paying sectors, such as IT or financial services. Those on lower incomes who need to rent would be hit.
So, rather than letting house price growth be the mechanism to slow the economy, a better approach would be Government action to slow economic expansion to match the increase in the capacity of the country’s infrastructure.
That would mean this autumn’s budget, rather than stimulating the economy through giveaways, should take money out through a mix of higher taxes and slowing down public spending. This is not because the Government is short of money, but because the country is short of infrastructure.
For example, any growth in the health service will require more staff. Currently 45 per cent of those working in the health sector are returned emigrants or foreign-born workers. Any further expansion is likely to need to recruit health workers from abroad, who will need to be housed.
A tougher budget would not only slow down the public sector; it would slow growth in much of the rest of the economy. With less money in circulation, businesses supplying the home market would slow down, easing the growth in private sector employment.
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It may be unwise for the Government to try to directly slow the growth in employment in the multinational sector, which has played such an important role in the recovery from the financial crisis. However, next year no positive further encouragement or support to expand this sector should be given by Government.
Although there are good economic arguments why the autumn budget should be a tough one, it is clear that this won’t happen. With an election to follow, either immediately or within six months, and voters who are unlikely to welcome such a wise approach to economic policy, the best that can be hoped is that the budget is neutral, not adding to demand.
Within that budget, scarce resources should focus on tackling infrastructural constraints and protecting those on low incomes. Untargeted once-off supports for all households should be discontinued.