Ireland’s budget watchdog has warned that the State is facing major spending pressures owing to its ageing population in a new paper published on Wednesday.
Research published by The Irish Fiscal Advisory Council (Ifac) today suggests that Ireland is a relatively low-tax, low-spend country compared to other European peers, owing to demographics. The report, ‘Boston or Berlin’ claims that this makes Ireland economically closer to Boston than Berlin. However, it stresses this is driven by demographics over ideology, and mainly because of our “relatively young population and strong economic growth.”
A younger population means that the Government presently spends less on pensions and healthcare, however as the population ages, spending in these areas is expected to shoot up.
The Fiscal Council, which is responsible for providing an honest and independent assessment of how the Government is managing public finances and the economy, noted: “At the moment, the public finances in Ireland are benefitting from Ireland having an extremely young population. This means lower spending on pensions and healthcare than would otherwise be the case.”
The report notes that Ireland has fewer older people at present, with 15.5 per cent of the population aged 65 and over, compared to 20.9 being the European average.
“This younger population largely explains why Ireland has a lower level of government spending than other European countries,” authors note.
Ireland spends less than other European peers on old-age social protection payments or pensions due to having fewer older people (4.2 per cent less than European average).
Ireland also collects a lower level of government revenue than other high-income European countries. This is despite Ireland collecting huge amounts of corporation tax.
Government revenue, on the other hand, is low in Ireland compared to other European neighbours (Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands, Portugal, Spain and Sweden). This, the fiscal body points out, is “mainly because Ireland collects less revenue from employment taxes than other high-income European countries”; This gap is equivalent to €2,600 per person in Ireland.
However, the IFAC highlights that as the population ages, this will lead to increased demand for pensions and healthcare. The Government’s recently established savings funds will help address these costs, it says, but the funds alone “will not be enough. So, the government will need to raise additional revenue or reallocate existing spending.”
Niall Conroy, author of the report, said:
“Ireland has a relatively young population, with fewer people aged 65 and over. A younger population means the government currently spends less on pensions and healthcare than it otherwise would. As Ireland’s population ages, spending in these areas is expected to rise. This demographic shift will gradually bring Ireland’s government spending more in line with levels seen in other European countries.
“Ireland’s strong economy also helps explain why its government is currently spending less as a proportion of its national income than other European countries. After adjusting for these two factors, Ireland spends 3.3% of national income less than other European countries (€1,800 per person).
“One area where Ireland is already a relatively high spender is healthcare. As the population ages, this is likely to rise further, making Ireland even more of an outlier.”
Mr Conroy also said it is the case that Ireland collects a lower level of government revenue than most other high- income European countries; equivalent to 4.7% of national income, or €2,600 per person.
“When excess corporation tax is excluded, the gap increases to 8.6% of national income, equivalent to €4,700 per person. This is mostly due to social contributions. Both employers and employees pay fewer social contributions than in most European countries. At the same time, Ireland collects a very high level of corporation tax. This is partly due to the large number of multinationals based in Ireland.
“Looking ahead, Ireland faces major spending pressures from both an ageing population and climate change. The recently introduced savings funds are a step in the right direction and can help offset some of these future costs. However, these funds alone will not be able to cover all future spending pressures. As a result, additional revenue will need to be raised, or some existing spending will need to be reallocated. The more the government saves today, the smaller the fiscal adjustments required in the decades to come.”