The ‘four Ds’: Ireland’s chief economist spells out the major challenges governments face
At the Global Government Finance Summit, Ireland’s chief economist John McCarthy listed the ‘four Ds’: the structural challenges weakening growth and public finances both in Ireland and in other advanced European and American economies. Matt Ross reports on the hard realities facing national governments
“We have various cyclical forces at the moment, and they are intersecting with structural forces – and I think that’s a new phenomenon that raises challenges for us as civil servants,” said John McCarthy, the chief economist of Ireland’s Department of Finance. Speaking to an audience of senior finance department leaders from around the world at the Global Government Finance Summit, hosted this year by his government in Dublin, McCarthy went on to analyse how Ireland’s tidal economic cycle of recession and boom is intersecting with the “slower-moving, structural changes in the economy: the ‘four Ds’ of demographic change, deglobalisation, decarbonisation and digitalisation.”
McCarthy’s dissection of the forces acting on his country’s economy had lessons for most nations in the rich world, whose leaders face similar decisions in their work to protect the public finances, meet citizens’ needs and foster economic growth. The ‘four Ds’ are affecting advanced economies everywhere, as are the cyclical forces tied to global events – particularly the 2008 financial crisis and the pandemic, both of which ramped up public deficits and debts around the world.
A positive picture
Ireland’s “weird” economy – which features “a large number of what you might call global superstar firms, who use Ireland as a platform to export to the European single market” – distorts standard GDP statistics, McCarthy explained, but a metric named ‘modified domestic demand’ provides an effective proxy. This shows a “rapid rebound” in growth after the pandemic, suggesting that government’s work to “support firms and households limited scarring effects” – averting a long-term rise in unemployment or insolvencies.
Meanwhile, he continued, high inflation and weaker investment has slowed the growth in household disposable incomes. Nonetheless, consumer spending has continued to rise strongly. People had been saving up to 25% of their income during the pandemic, McCarthy explained, but this figure has now fallen back to a more normal 12% – pushing more money into household spending. Inflation is now falling rapidly, with the headline rate collapsing from 9.6% to 1.9% over the two years to April 2024, while “second round effects have been fairly contained”: Ireland appears to have avoided a wage-price spiral.
Read more: The Celtic tiger awakens: lessons from Ireland’s ‘weird economy’
Demographics
So Ireland is recovering well from the shock of the pandemic. The ‘four Ds’, however, raise long-term questions over the sustainability of its public finances and its ability to meet rising demand for public services. On demographics, for example, McCarthy pointed out that the average Irish woman now has 1.8 children. Among the advanced economies, he added, “I know of one country – Israel – in which the fertility rate is above 2.1: that’s the number needed to maintain the population without immigration. In South Korea, it’s down at 0.9.”
Meanwhile, life expectancy is rising, with the result that “the Irish population pyramid, in line with that of many other countries, is set to invert over the next two or three decades”. Rather than a large number of younger people supporting a smaller elderly population, a small working age cohort will need to find the money to provide pensions and public services to a larger number of pensioners. High rates of immigration have so far met the labour market’s needs as the number of Irish 20-40 year-olds falls, McCarthy explained, but the long-term picture is troubling.
“There are currently four people of working age supporting each retiree. That’s set to become three by the mid-part of the next decade, and two by the mid-part of the century,” he said. “Labour supply is set to dry up.” So just as demand for public services rises – with pension costs alone growing by four percentage points of national income over the next 25 years – the underlying growth rate of the Irish economy is expected to fall from 2-3% to 1% over the same period.
Decarbonisation
The decarbonisation agenda introduces a second set of structural challenges, McCarthy continued. Ireland’s workforce will need to reskill and retool in order to hit the government’s goal of becoming carbon neutral by 2050, requiring major investments in education and training, and risking the creation of “stranded assets” – carbon-intensive plant and infrastructure rendered worthless by the shift to a green economy.
Meanwhile, he said, the government will have to “mobilise additional revenue streams” to replace the €5.3bn it receives each year – 7-8% of government revenues – from fossil fuel levies such as the carbon tax and motor fuel VAT.
Digitalisation
Next up was digitalisation. The emergence of artificial intelligence, McCarthy pointed out, extends the centuries-long process of automation from the physical into the mental world. “We used to have machines replacing hands,” he said. “We now, potentially, have machines replacing heads.” This raises a host of macroeconomic questions: “Will skilled labour benefit more than unskilled labour, or vice versa? Will the gains all be captured by the owners of capital? Will these technologies generate ‘winner takes all’ or ‘winner takes most’ dynamics?”
There’s a risk, McCarthy added, that AI might create new problems for government: “Can it boost living standards and productivity, or will it be inconsistent with other public policy goals?” AI’s huge appetite for electricity, for example, might hamper progress towards net zero, and its creative capabilities could be used to generate disinformation.
Deglobalisation
Finally, McCarthy covered deglobalisation. Trade as a proportion of global GDP has barely risen since the 2008 financial crisis, he pointed out. This may partly reflect the declining returns of further globalising production, but it’s also a response to a loss of “geopolitical equilibrium”. In an era of extreme weather events, social disruption and geopolitical tensions, governments are keen to “de-risk supply chains” – particularly where military action or trade protectionism might leave their economies without crucial supplies. The number of trade restrictions being introduced, he added, has shot up from around 500 per annum until 2017; by 2022, the figure was approaching 3,000.
Meanwhile, major countries are pouring subsidies into their key industries – and that applies within the EU, as well as in China and the USA. “That really is a concern to a small, open economy like Ireland, where we can’t compete with the big boys in Europe in terms of being able to subsidise national champions,” he said. “The potential unlevelling of the European Single Market, the unlevelling of the level playing field, is something that I worry about.”
Defence and debt
As McCarthy wound up his talk, Declan Costello, deputy director-general of the European Commission’s Economic and Financial Affairs Directorate, suggested another two ‘Ds’ for McCarthy’s list. “If somebody from the east of Europe was making this presentation, they would add ‘defence’,” he said. “We have a war on the border of Europe. There is a clear need to augment our own capacity to defend ourselves and provide for our security.”
The second additional structural issue, Costello continued, is ‘debt’. Ireland’s public finances are “in pretty good shape; that’s not the case for the rest of Europe,” he said. “We have higher deficits, higher debt post-COVID. We need to rebuild our fiscal buffers, and the interest rate environment we face now is very different from that pre-COVID. So we face all these additional investment needs, but against much tougher fiscal constraints.”
Ireland too faces a future of rising public debt, responded McCarthy. While the country currently runs a surplus of about 2% of national income, those figures are flattered by time-bounded windfall taxes. Debt as a proportion of national income is likely to fall from its current 72% to 56% by 2031 but the demographic changes he’d outlined will – absent other changes – then begin pushing it back up to a forecast 98% by 2050.
That future is not inevitable, however: by boosting productivity and growth, Ireland could – like other rich nations – generate the tax revenues to fund higher pension and service costs. More investment is required, said McCarthy, particularly in skills, plant, housing and infrastructure. “There’s a need to deepen capital markets, particularly given the need to invest in climate,” he said.
The gathering storm
Meanwhile, McCarthy pointed to one more economic metric worth focusing on. The “US yield curve has been inverted,” he explained, meaning that it’s currently cheaper to borrow for a longer period than a shorter one. This typically happens when investors, fearing a recession, flock to buy 10-year US Treasury bonds. “Since the mid-1970s, every time the yield curve has inverted, it’s been followed about nine months later by a recession in the US,” he said. “That hasn’t happened yet: the curve inverted in July 2022 and has been inverted ever since.”
However, he added: “There’s only been one period in which the yield curve in the US has been inverted for a longer period of time. That was the couple of years leading up to 1929, and we all know what happened after that.”
He said that the signalling may be affected by measures such as quantitative easing “but I think it’s something that needs to be watched”.
The invitation-only Global Government Finance Summit is a private event, providing a safe space at which the civil servants leading finance departments and national treasuries can debate the challenges they face in common. We publish these reports to share some of their thinking with our readers: note that, to ensure that participants feel able to speak freely, we give all those quoted the right to review their comments before publication.
The 2024 Meeting, supported by knowledge partner Mastercard, will be covered in five reports, covering the various sessions:
– John McCarthy, chief economist of Ireland’s Department of Finance, analyses the structural challenges facing advanced economies
– How finance ministries can use artificial intelligence
– Making tax less taxing: using technology to improve assessment and collection
– How to improve public sector productivity
– Using ‘just in time’ insight in government finance and service delivery
For information on the next Global Government Finance Summit, which will be held in June 2025, visit our dedicated website.
About Matt Ross
Matt is Global Government Forum's Contributing Editor, providing direction and support on topics, products and audience interests across GGF’s editorial, events and research operations. He has been a journalist and editor since 1995, beginning in motoring and travel journalism – and combining the two in a 30-month, 30-country 4x4 expedition funded by magazine photo-journalism. Between 2002 and 2008 he was Features Editor of Haymarket news magazine Regeneration & Renewal, covering urban regeneration, economic growth and community development; and from 2008 to 2014 he was the Editor of UK magazine and website Civil Service World, then Editorial Director for Public Sector – both at political publishing house Dods. He has also worked as Director of Communications at think tank the Institute for Government.
