Real GDP growth is set to reach 3.7% in 2025 and 3.5% in 2026, as volatility from the multinational sector subsides, financial conditions improve and goods exports recover. Growth of modified domestic demand, which controls for the major distortions arising from the activity of multinationals, is projected to be around 3% as easing inflationary pressures and a resilient labour market bolster households’ real incomes and consumption.

Despite continued revenue buoyancy, with the economy at or close to full employment, there is a need for fiscal prudence, productivity-enhancing reforms and spending efficiency gains. Careful sequencing of investment projects will be key to effectively addressing costly infrastructure deficits in various areas, without adding to inflation. Sustained adherence to the 5% spending rule is needed to ensure the long-term sustainability of public finances. Continuing to support training and apprenticeships in sectors where labour shortages are high should be prioritised.

Supported by the resilience of the services sector and net inward migration, employment reached a record high in mid-2024. The unemployment rate remained around historical lows in the third quarter. Job vacancy rates have declined since late 2022 but remain above their long-term average, with persistent labour shortages in some sectors, such as health care. Consumer spending has continued to grow, albeit more moderately, driven by higher wages and rapidly declining inflation. Sharp drops in energy prices pushed harmonised headline consumer price inflation down to 0.1% in October. Core inflation slowed to 1.6%, driven by a decline in non-energy goods prices and an easing in services inflation, which nevertheless remains persistent at over 3%.

Significant swings in investment and exports, mostly driven by the multinational sector, led to volatility in GDP in the first three quarters of 2024. Such volatility, however, masked renewed strength in pharmaceutical exports, following their post-COVID rebalancing.

The overall fiscal stance is projected to be broadly neutral over the projection horizon. Underpinned by continued revenue strength, the budget surplus is projected at 4.5% of GDP (7.5% of GNI*) in 2024, partly due to a one-off increase in revenues related to the September 2024 tax ruling of the Court of Justice of the European Union (EUR 14.1 billion), before stabilising around 1.7% (2.7% of GNI*) over the next two years. Budget 2025 features a EUR 10.5 billion (2.1% of 2023 GDP; 3.6% of GNI*) package, with around two-thirds consisting of permanent spending measures, largely aimed at preserving the existing level of public services, against the backdrop of a larger-than-assumed population, and a need to sustain infrastructure spending. The budget also includes permanent tax measures to offset tax threshold effects and new cost-of-living initiatives (EUR 2.2 billion). The latter includes one-off lump sums paid to welfare recipients, untargeted additional child benefit payments, EUR 250 energy credits, the extension of mortgage interest relief and an additional payment of the rental tax credit. The reduced VAT rates on electricity and gas are also extended until April 2025, despite lower energy inflation. The 5% net spending rule will be breached again, potentially lowering the credibility of the fiscal framework.

As volatility from the multinational sector subsides, strong GDP growth is projected at 3.7% in 2025 and 3.5% in 2026. Robust real income growth, combined with a relatively tight labour market, improving financial conditions and the cost-of-living measures included in Budget 2025 will underpin household consumption. Further interest rate reductions and additional public investment, especially in the residential sector, will support aggregate investment. Modified domestic demand growth is projected to be 3% in 2025 and 2.7% in 2026. As Ireland’s export base remains highly concentrated, a downturn in multinational-dominated sectors could reduce net exports. On the upside, higher-than-expected inward migration could boost labour supply, employment and output.

Large investment needs in housing, transport and energy face capacity constraints, especially in terms of labour and skills. Effective prioritisation and sequencing of projects are needed to balance potential short-run inflationary impacts and the long-run benefits of enhanced public investment. Fiscal policy will do well to focus on improving spending efficiency and adherence to the 5% net spending rule. Despite well-established reskilling systems, participation in lifelong learning is relatively low for the low-skilled and unemployed. While apprenticeships have been rising, there is room to strengthen work-based learning in secondary schools and improve the attractiveness of vocational career pathways, particularly in construction to meet ambitious housing and climate targets and ease labour shortages. Further improving access to affordable childcare and enhancing work incentives in the tax and benefit system can further raise female labour market participation.