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Caution urged over spending corporate tax receipts, as Varadkar warns about fueling inflation

Taoiseach Leo Varadkar today said it is important not to fuel inflation – a mistake previous administrations have made.

LAST UPDATE | 21 Jun 2023

TAOISEACH LEO VARADKAR has said it is important not to fuel inflation – a mistake previous administrations made by having too big a package.

At tonight’s Fine Gael parliamentary party meeting, Varadkar said the Summer Economic Statement has not yet been drafted and this was the ideal time for input from his party colleagues.

Varadkar said both a tax and spending package – while also setting money aside – can be achieved this year.

There were 30 contributors at the party meeting tonight, where TDs and senators called for tax cuts, childcare fee reductions, welfare and pensions package, services for people with disabilities and mortgage interest relief.

The budget demands come as Public Expenditure Minister Paschal Donohoe said there is a “powerful case for the role of caution” when it comes to spending corporate tax receipts and not spending money that might not always be available.

Speaking to reporters after the Central Bank of Ireland warning that big tax cuts in this year’s budget or spending increases above expenditure rules could risk overheating the economy, the minister said: 

“So much of our surplus for next year is made up out of corporate tax receipts.

“If you were to remove the corporate tax receipts from our surplus for next year, we would be left with either no surplus or a small surplus.”

He said the Central Bank has spelled out what the government already knows – that everything pivots on the level of spending decisions or taxation decisions made this autumn. 

The government got the balance right last year, said the minister. He said he could understand the public debate in recent weeks, given the level of surplus money the government has to play with this year. 

However, he added: “We need to be really careful that we don’t spend money that might not always be available to us. That’s been my attitude for many, many years. It’s a case that I’m going to continue to make.”

When asked about the current housing crisis and today’s Threshold report which found that renters felt less secure than they did last year, the minister said he understood the concerns of those that are renting at the moment, particularly somebody whose rent is up for renewal this year.

“Of course, I can understand why they would be concerned… why they will be anxious,” he said. 

Donohoe said he believed there were some positive indicators in the marker, but said: “We all know that we have more work that we need to do”.

When asked about tax breaks for renters and landlords in the upcoming budget, he said the Minister for Finance Michael McGrath has already indicated that “he is aware of the issues with regard to the rental sector involving landlords, but the nature of any measures of whether such measures will be available, has not been decided”. 

He said summer budget discussions will continue over the coming months. 

The Fianna Fáil parliamentary party, meanwhile, heard an idea put forward by Malcolm Byrne for a deputy leader to be installed so as to have someone to lead on the strategic development of the party and election planning.

The suggestion was made in the absence of Micheál Martin, who was not at tonight’s meeting due to being out of the country on government business. 

It is understood there were no dissenting voices to the prospect, with some speaking in support of the idea. 

The party members also supported comments about Ireland remaining a military neutral country. 

Inflation

With the budget kite-flying having already kicked off, much of the focus today was on the Central Bank’s report today on the economy, where it said that core inflation is picking up and is expected to be 4.9% this year, adding that various factors point to the economy now operating at capacity. 

In its latest quarterly bulletin, published today, the regulator said inflation dynamics in 2023 are primarily being driven by the second round effects of the energy and other price shocks seen throughout last year and early this year. 

The Central Bank said that as 2024 progresses and in 2025, the primary factor driving inflation will be the strength of the domestic economy and capacity constraints. 

Headline inflation is expected to average 5.3% in 2023, 3.4% in 2024 and 2.5% in 2025. 

Core inflation, which excludes food and energy and is a better reflection of domestically-determined price pressures, is not expected to peak until late this year and to decline relatively gradually thereafter. 

Core inflation is forecast to average 4.9% in 2023, 3.4% in 2024 and 2.7% in 2025. 

Employment

Over the last quarter of 2022 and the first quarter of this year, employment growth remained positive, the Central Bank said. 

It noted that the unemployment rate reached multi-decade lows, consumption was firmly expanding, as was the output of domestically oriented sectors of the economy. 

The Bank said the labour market is forecast to remain very tight.

The unemployment rate is expected to average 4%, 0.4 percentage points lower than was predicted in the last quarterly bulletin, and remain in that region out to 2025.

Slower employment growth and a pick-up in wage growth is expected as capacity constraints become more binding, according to the Central Bank. 

Compensation per employee is forecast to rise by 6.2% in 2023, 5.9% in 2024 and 4.4% in 2025. 

“With wholesale energy and food prices continuing to ease, domestic factors have begun to play an important role in the inflation outlook,” Robert Kelly, director of economics and statistics at the Central Bank, said. 

Kelly said that “growth in the domestic economy this year is expected to be slightly stronger than previously anticipated”.

“Various indicators, particularly from the labour market, point to the economy operating at capacity,” he said. 

“The tightening of monetary policy is beginning to feed through the economy and will contribute to dampening demand and economy-wide price pressures. In this environment, it will be important that fiscal policy charts a careful course that does not exacerbate the imbalance between demand and supply conditions across the economy.”

Domestic economy

The Central Bank has said headline measures of growth in the economy continue to be distorted by the activities within and outside the State of Irish resident multinational firms, but domestic economic activity is projected to grow.

Growth in Modified Domestic Demand (MDD), a measure which encompasses personal, government and investment spending, is expected to be slightly stronger this year than previously forecast at 3.7%, to be followed by growth of 2.5% in both 2024 and 2025. 

A number of factors are supporting demand conditions, the Central Bank said. 

“First, a gradual improvement in households real income as inflation eases and the tight labour market spurs higher wage growth,” the Bank said. 

“Second, a more definitive reduction in the savings ratio to pre-pandemic norms that appears to be happening. Continued investment in the State in plant and machinery by high-growth sectors is also expected to support growth in modified investment.”

With reporting by Christina Finn

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34 Comments
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    Mute Shesh
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    Jun 21st 2023, 7:34 AM

    I’m still waiting for the energy prices to go down as promised.

    629
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    Mute david finglas
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    Jun 21st 2023, 8:56 PM

    @Shesh: Hahaha you should do stand up comedy …with the punch line I’m still waiting for the energy prices to go down as promised.

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    Mute Gerard Carey
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    Jun 21st 2023, 6:11 AM

    I wouldn’t believe the Lord’s prayer out of the Gob of the Central Bank.

    478
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    Mute Justin Gillespie
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    Jun 21st 2023, 11:22 AM

    @Gerard Carey: Just had a quick scan down through the comments here and sure enough, it’s an unrelenting barrage of moaning, griping, whinging & complaining.
    Some things never change on journal.ie.

    129
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    Mute Tom's
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    Jun 21st 2023, 11:59 AM

    @Gerard Carey: They we’re at the centre of our problems over the last 15/20 years

    125
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    Mute Tom Newell
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    Jun 21st 2023, 8:32 PM

    @Justin Gillespie: yet you are here whinging about how things haven’t changed……the irony

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    Mute Colette Kearns
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    Jun 21st 2023, 11:18 PM

    @Gerard Carey: Exactly, P.D. introduced a ” New Law ” that bankers would never be go to jail!

    19
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    Mute Paolo Ciuchini
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    Jun 21st 2023, 7:28 AM

    The Central Bank should put pressure on Irish banks to increase their rates on deposits in line with the ECB rates. That’d help to bring inflation under control.

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    Mute Dan Dare
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    Jun 21st 2023, 1:03 PM

    @Paolo Ciuchini: Is there a mechanism for that kind of edict in place now? What effect would it have? We know it will increase lending for one so how does that reduce inflation?

    21
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    Mute Conrad Shields
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    Jun 21st 2023, 10:06 PM

    @Dan Dare: How would that increase lending? I would expect it would encourage more savings.

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    Mute lumberjack
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    Jun 21st 2023, 8:42 AM

    What an amusing article, these guys can tell what will happen in 2025.
    Would you believe that core inflation, ie excl. food and energy, is a better reflection of domestically determined price pressure. But don’t we produce and consume food and energy here. Surely these two costs make up a huge proportion of domestic spending, those earning less than the median salary.

    Yet as wholesale energy prices have crashed (Dutch TTF down from 340 EUR peak last summer to just 38 EUR now), “domestic factors” have now taken over. What is this double speak nonsense…..remember how the war was blamed for everything going? Well now that that has been debunked, what domestic factors are so powerful, we can still have soaring prices while gas is down 90%.

    I’d need to write an article to explain….journal?

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    Mute Fergal McDonagh
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    Jun 21st 2023, 12:30 PM

    @lumberjack: 100%

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    Mute Roj Blake
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    Jun 21st 2023, 8:17 PM

    @lumberjack: energy suppliers don’t buy on spot market, they buy forward contracts, as they expire prices will drop

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    Mute Barry Donnelly
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    Jun 21st 2023, 7:19 AM

    Many employers have no pay rises at all. .
    Same companies put their prices up at the same time
    Greed

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    Mute Dan Dare
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    Jun 21st 2023, 1:07 PM

    @Barry Donnelly: Yes good point. Those companies control input costs less than they can control wages. Getting a pay rise is the only way out of this for the individual who didn’t get the benefits of inflation early!

    36
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    Mute Garreth Byrne
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    Jun 21st 2023, 8:00 AM

    Low paid workers in the gig economy are finding it impossible to make ends meet. Tell that to the banking profession.

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    Mute Joe McNamara
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    Jun 21st 2023, 8:39 AM

    The Central Bank itself is the source of inflation in Ireland due to the regulations they imposed on lending to construct new homes. This increases rents and property prices.

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    Mute Pato
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    Jun 21st 2023, 9:05 AM

    Ah the everwise bankers. Asleep at the wheel when they were needed. Now they are nodding dogs as we are subjected to swingeing measures to curb the inflation to which they contribute.
    If they are so wise can they please tell us what horse will win the Gold Cup at Ascot.

    129
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    Mute UCD Trinity
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    Jun 21st 2023, 8:42 AM

    All systems go
    Full steam ahead
    Nothing to see here, so move along.

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    Mute Super Simo
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    Jun 21st 2023, 12:11 PM

    Fingal CoCo should be taken to task about the ongoing illegal developments at 10 Burrow road, Sutton by Mr Philip Farrelly. 3000sq ft house with no planning permission.

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    Mute thesaltyurchin
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    Jun 21st 2023, 9:54 AM

    Cap Capitalism.

    52
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    Mute Aircraft Protocol
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    Jun 21st 2023, 9:48 PM

    We can’t spend the windfall tax receipts that we have now gotten concurrently over a few years….. But we can absolute smash you with taxes should the weather turn

    55
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    Mute Hurrly 90
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    Jun 21st 2023, 8:05 PM

    Only read the first few line of the article to be honest.

    This budget is four months away and the constant parroting in the media about it is all a big distraction.
    The CB is basically saying what the Governments own INDEPENDANT Tax reform board proposed to them around 5 months or more ago.
    Dont cut taxes, instead broaden the take to help support and aging population claiming state pensions.
    Raise taxes on wealth to become less reliable on Corporate Taxes, Etc Etc Etc.

    Governments response at the time? Nah we wont be doing that it sounds like a SF thing.

    The more i hear about all this the more i do lean towards SF even thier idea of a review into the SCC which has also been derided by global humanitarian charities and even had a maority approval to abolish in the recent Government appointed INDEPENDANT think tank.
    It genuinely sounds more like the Government are legit not interested in solving problems and just want to buy votes.

    Look at Paschal comments on Today FM earlier about Dublin Teachers subsidies to help with housing.
    Basically he claimed if he did it in Dublin he would have to do it everywhere. If it was done everywhere he could ‘be accused’ of forcing people out of Rural areas.

    There is a Teaching problem with finding accomdations or traveling to school, there is a proposed soloution to that problem that could work short to medium term.
    It wont be done cos there ‘might’ be ‘accusations’ from Rural voters.

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    Mute Schrodingers Immigrant
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    Jun 21st 2023, 10:42 AM

    @Paulo because it won’t influence bahaviour. Savers can already get returns far in excess of theECB deposit rate by simply investing in a UCITS or Unit linked investment fund but they choose not to because Ireland has the second lowest rate of financial literacy in Europe.

    All you need to do is read the comments above as proof of that.

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    Mute Paolo Ciuchini
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    Jun 21st 2023, 11:56 AM

    @Schrodingers Immigrant:
    there is a vast cohort of people who would not invest in UCITS or Unit-linked funds for a number of reasons, but would still be inclined to save more in deposits and saving accounts if these offered higher returns.
    E.g. young couples saving to buy their first home within the next 2-3 years:
    on the one hand they are not be in an ideal position to invest in UCITS and other instruments taylored for investors with a longer-timeframe horizon, while
    on the other hand they are aware that high inflation is eroding the deposit that they are working hard to put together. Feeling this pressure they may end up rushing to buy pretty much any home that is available, which in turn contributes to keep inflation high.

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    Mute Schrodingers Immigrant
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    Jun 21st 2023, 12:27 PM

    @Paulo, they will already be saving. 3.25% less dirt tax over 2-3 years will amount to sweet bugger all – it’s not an incentive.

    19
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    Mute Karl O'Toole
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    Jun 22nd 2023, 9:52 AM

    I’d rather see the money being put to use because it might not always be there. Invest in big infrastructure projects (no, not a white water rafting park in Dublin that only 5 people want) that we might not be able to afford in future and that we’ve been skimping on for the past decade or two.

    Or we could just continue to watch the country go down the drain which FFG seem more than happy to do as long as their pensions are secure.

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    Mute D
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    Jun 21st 2023, 8:42 AM

    @Paolo Ciuchini: no it won’t.

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    Mute Paolo Ciuchini
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    Jun 21st 2023, 8:44 AM

    @D: Care to argument why?

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    Mute UnpopularOpinion
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    Jun 22nd 2023, 10:17 AM

    It’ll be the same old story. The people struggling most to own a home and start a family get zip, zero, zilch. Every single year those people who made the tough decision not to have children so that they could continue to work and save their hard-earned cash have to watch their contributions go towards child benefits, childcare, landlord relief and increase to social welfare payments for people who can’t/won’t work, all the while watching their energy/food/rent/waste/travel/healthcare bills go up up up.

    4
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    Mute Tony Harris
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    Jun 22nd 2023, 1:46 PM

    Just build houses for Christ sake, convert empty offices, do up derelict sites, anything….. but DO something.

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