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12 October 2006 Edition

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Clock ticking on economy over-reliant on construction sector


Have you ever tried counting the cranes on the Dublin skyline? The construction boom is to be seen everywhere. Around 254,000 people in the 26 Counties work in the construction sector. That's almost 13% of the overall workforce, or more than one in every eight workers. It is the highest percentage in the EU. The construction sector accounts for 23% of the state's GDP, compared to an EU average of about 12%. The exchequer is heavily dependent on the construction sector for revenue, including revenue from VAT on building materials. The ESRI and even the IMF have raised concerns about this over-dependence.

But why should we be concerned, you might ask? The reason is the potential negative consequences of any significant normalisation in the construction sector as a percentage of GDP and in the numbers employed in this sector. Rising inflation could precipitate such a development.

Current over-reliance on the construction sector is not sustainable and cannot continue indefinitely. While a Goodbody report published last week predicts a gradual slowdown over the next year, the slowdown may be far more rapid than that.

How is the Government planning for the consequences of this sector re-adjusting to a situation more in line with the 1997 level and the present EU average of 12% of GDP? The answer to that is that the Government appears blissfully unconcerned. Ministers are too busy congratulating themselves on their prudent management of the economy to notice this hugely adverse development.

We are now more vulnerable than any other European state to a possible property boom reversal. What contingency plans are there to address the consequences of a rapid reduction in the numbers employed in construction? While a significant proportion of these workers are migrants from Eastern European and elsewhere, who may opt to return to their home countries in the event of a downturn, a large number of Irish workers in the sector are likely to be adversely affected. Also likely to be affected are workers in associated businesses and in services-sector employment presently being driven by the buoyancy in construction.

The Government needs to look at how to bring about a controlled reduction in dependency on the construction sector. It needs to be in a position to ensure that it has the revenue to provide public services, to fund social protections and to address infrastructural deficiencies.

Is the Government planning for the eventuality of a sharp contraction in revenue generated as a result of the present boom? Economic experts from the Department of Finance advised the Government's Tax Strategy Group in advance of Budget 2006 that any reductions to Stamp Duties "would involve very significant exchequer costs, and are not seen as realistic options for the present". Yet any significant downturn in the construction sector will result in a sharp contraction in revenue from this and other taxes. The Government needs to plan for this eventuality.

Those parties who claim they will not abide any increases in taxes need to tell us exactly how they will fill the gaping hole in revenue left by such a downturn in construction.

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