Cicero Policy Briefer

Issue 22, March 2008

Ireland: The Celtic Tiger

By Chris Jackson

In just over one generation, Ireland has developed from one of the poorest countries in Western Europe to one of the most successful. It has reversed the persistent emigration of its best and brightest and gained an enviable reputation for its thriving, knowledge-driven economy.

As a result of a sustained effort over many years, the past problems of a declining population, poor living standards and economic stagnation have been left behind. Ireland now has one of the highest gross domestic products (GDP) per capita within the European Union.

The reasons for this dramatic turnaround are the subject of some debate, but credit has been primarily given to the focus on free market capitalism: low corporate taxation; decades of investment in domestic higher education; low-cost skilled labour; a policy of restraint in government spending; EU membership; and a booming housing market.

However, with growth predicted to fall from 5.1 per cent to 2.1 per cent this year, which is respectable by European standards but the lowest for Ireland since the early 1990s. The Celtic Tiger is going to have to display signs of enterprise to fight back against the global slump. This is not a new issue for Ireland: it suffered, like many other countries, during the global downturn in 2002, and was specifically hit by the large reduction in investment in the worldwide information technology (IT) industry when the dot-com bubble burst.

In 2008, though, the key concern for the Irish government is that of house prices, which over the last few years have been the fuel for the booming economy. But last year, house prices in Ireland fell by 4.7 per cent, or 9 per cent with inflation taken into account. This is a significant problem, since house building has constituted a very large chunk of Ireland's surging economy and the industry has been a significant factor in lowering unemployment rates in the Emerald Isle. House building alone has been responsible for close to a third of the growth in economic output in the past four years, reaching a peak of 13 per cent of GDP in 2006—a figure which dwarves the respective percentages in the US (5 per cent) and the UK (4 per cent). Furthermore, the Irish government has made tax revenue significantly dependent on housing. So as house prices fall, so too will government revenue; and with growth slowing by 3 per cent, other tax revenues are also likely to fall. The coming months could therefore be tricky for the Irish government in maintaining the levels of growth that the population and businesses have come to expect from Ireland.

2007 also saw Ireland maintain low levels of unemployment, but whether this can be replicated in 2008 is uncertain. The boom years saw significant numbers of migrant labour heading to Ireland, but with a slowing economy, especially in the construction industry, 2008 may prove to be a more difficult year. Interestingly, there have been calls to rein in the Celtic Tiger: there are fears that the aggressive pursuit of economic growth is now beginning to erode traditional Irish values. Whether falling growth in Ireland during 2008 will provoke further economic measures that could further diminish these values will be an interesting development to watch during 2008.

Though the indications are that 2008 will be a year of challenges and problems for Ireland, what the country has demonstrated over the last couple of decades is that the essential recipe for success is simple: invest in education, cut taxes, pursue value for money in public expenditure, deregulate markets and support free trade. If Ireland can maintain such simplicity in its responses to the emerging economic issues that it faces, then the Tiger is likely to maintain its buoyant growth in years to come.

Chris Jackson can be contacted on +44 (0)20 7665 9530 or click here to email.