Ireland’s economic performance puts debt to GDP on downward path
Ireland’s remarkable economic performance during the Covid-19 pandemic has helped to place government debt-to-GDP on a firm downward trajectory, Fitch Ratings says in a new report.
Rapid growth has boosted revenue, helping the country to accommodate support measures and increased spending, but this economic expansion has been driven by the foreign multinational enterprise (MNE) sector, highlighting the disconnection between GDP and underlying national income.
Fitch doubled its 2021 Irish real GDP growth forecast in September to 14.9%. Ireland will post faster growth than any other Fitch-rated sovereign in 2019-2021, owing to spillover from the foreign MNE sector and large direct government support. Growth is fuelling a strong increase in Exchequer revenue, which grew 25% from January-September this year compared to 2019.
The government increased its tax revenue projections by 1% of GDP for both this year and next in its 2022 budget. Fitch’s and the government’s fiscal forecasts point to rapid deficit reduction, leading to a broadly balanced budget in 2023, with debt/GDP falling below the ‘A’ category median of 56.7% at end-2021.
However, this ratio is flattered by artificially high GDP levels from MNE activities. The 2020 government debt-to-revenue ratio of 258% – more than 1.7x the ‘A’ category median – indicates that Ireland’s public debt burden is still higher than rating peers, while the ratio of debt to national income is not falling.
Our Sovereign Rating Model uses GDP-based measures to ensure consistency across our ratings, but we address their shortcomings as measures of Ireland’s economic and fiscal position by adjusting the model output downwards by two notches.
The Irish economy’s reliance on corporate income tax revenue from a few foreign-owned MNEs exposes the sovereign to proposed changes to the global corporate tax framework. Lack of detail makes it too early to fully assess the impact, but the changes could cause revenue to fall and FDI inflows to slow.
