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.
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.
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.”
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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