The Irish Fiscal Advisory Council has said in a new report that Ireland’s “rapidly” ageing population is at the forefront of the many future challenges facing the State.
The report, published this week, says that the management of the ageing population will be difficult, pointing to how the population aged 66 and over is set to almost double over the next 30 years.
By contrast, the report outlines, the working age population is set to remain broadly stable.
It notes that as a result, the number of workers for every pensioner is likely to fall from 3.5 to 3 by 2030 and to continue falling towards 2 by 2050.
“Those in retirement are also expected to live longer,” authors state, stressing that despite these pressures, the Government opted not to increase the pension age.
“This transformation of the population is rapid by international standards,” the report warns, adding that it will put pressure on the state to provide more healthcare, long-term care and pension payments.
The report cautions that an older population will also mean slower growth in the economy, and hence in tax revenues. Under existing policies, it says this will push up Ireland’s debt ratio.
The report urges for “action sooner rather than later” because this will ultimately be less costly. It also points to research by the Fiscal Council which has shown that acting sooner to manage ageing challenges would cost less than 40% of what it would if actions were delayed.
The Fiscal Council refers to measures taken by the government, including the setting up of the Future Ireland Fund to save corporation tax windfalls, and gradual increases in Pay Related Social Insurance (PRSI) after deciding against increasing the pension age. However, it warns that “on their own, these measures will still not fully offset” costs associated with ageing.
“However, they are an important part of the solution to dealing with these costs, which will fall much more heavily on the next generation of taxpayers,” it points out.
Modelling by the Fiscal Council has suggested that the Future Ireland Fund could make a substantial dent in ageing costs, covering more than half of the rise in annual spending associated with ageing between 2023 and 2041 and a quarter by 2050.
The Council says that Ireland’s ‘climate transition’ is the second biggest budgetary challenge facing the State. It points to the €20 billion fine that the State may have to pay for failing to reduce emissions.
The Council says it estimates that reasonably manageable spending increases will be required to achieve the transition.
“These are of the order of 0.6% of GNI* per annum or €2 billion in today’s money — about one-eighth of the capital budget planned for 2025.
“A bigger challenge will be to replace the taxes likely to fall away as people shift to greener transport and energy. Today’s tax system would raise far less money in a future where electric vehicles and renewable energy become the norm. Replacing these taxes would not represent an increase in effective taxation. But it does require careful planning. The Council estimates that, if today’s tax system was left unchanged, the fall in annual revenues could rise to 1.6% of GNI*or €5 billion in today’s money. This is almost as much as the USC raises,” the report notes.
The report says that while the climate transition raises challenges, “doing nothing has substantial costs” as it refers to the hefty fine the State could pay for falling short of EU targets.
It adds that if Ireland fails to reduce its emissions, “as it currently looks set to by a wide margin, it may have to transfer large amounts of money to neighbouring countries.”
“This would be in the form of the government being required to purchase statistical transfers or credits — basically overperformances in other countries. A recent report by T&E (2024) suggests Ireland’s costs could be between €1.7 and €9.6 billion by 2030,” it adds.
“However, these estimates assume Ireland follows through on measures that it looks increasingly unlikely to implement. If these measures were not implemented, then the State would be further from its climate objectives and would face much higher compliance costs, potentially as high as €20 billion.”
Elsewhere in the December report, the Fiscal Council points to infrastructure deficits as another “major challenge” facing the government over the past decades.
It writes: “Ireland continues to lag other high-income European countries. Conroy and Timoney (2024) find that Ireland’s infrastructure is 20–25% behind its peers. The biggest shortfall is in housing, though continued investment in health, transport and energy will also be needed.”
It points out that Ireland’s public spending on housing is already high. Ireland has the second-highest government spend on housing out of high-income European countries, second only to Italy according to the Central Bank of Ireland (2024).
The report says that part of the challenge has been the limited capacity after Ireland’s last crisis.
“The financial crisis saw the number of construction workers in Ireland fall by two-thirds from 240,000 to just 80,000 in the space of five years. Since then, the sector has slowly built back up its capacity to about 170,000 workers. But investment in new technologies has lagged other countries. And the level of output per hour worked is a third less than in peers. This partly reflects the low uptake of modern methods of construction, such as off-site manufacturing.”
The Council says that Ireland will need to do three things to catch up. Firstly, it will need to sustain current high levels of investment in these areas, while in housing it will have to do more “depending on how much policy facilitates private sector delivery.”
This could be achieved by re-allocating more of current spending to capital spending, with Ireland’s overall spend on housing already the second highest in Europe (Figure No 22).
Second, it will need to boost productivity in the sector if it is to make the need for additional workers less acute, the report says.
Third, the planning and objection system will need to be streamlined. Delays and uncertainty created by the system are impacting projects, the Council warns, adding that while the new Planning and Development Act may help, it is too soon to tell.