LAST UPDATE | 18 Apr 2023
A BUDGET SURPLUS of €16.2 billion is predicted for next year, with the Department of Finance figures showing it will reach more than €20 billion in just three years.
Setting out the government’s latest economic forecasts and public finances, Finance Michael McGrath said Ireland’s economy had been extremely resilient over the last yea.
He said the rate of unemployment is close to historic lows and the number of people at work is at its highest ever level.
When asked a giveaway budget can be expected in the autumn, given the ballooning budget surplus, McGrath tempered expectations, though couldn’t deny the increased cash at the government’s disposal, stating that the Stability Programme Update is just one of the building blocks in the construction of Budget 2024.
“It’s not the only piece of the jigsaw, it is an important step on the road,” he said.
McGrath and Public Expenditure Minister Paschal Donohoe will now engage with social partners and the coalition party leaders engagement over the next couple of months ahead of the Summer Economic Statement.
Last year’s budget had a package worth €11 billion – €4 billion of which was for one off measures due to the “nature that was the environment where inflation last year averaged about 8%”, said the minister.
Today’s update predicts that inflation this year will average between 4% and 5%, down from the current rate of 7%.
Pointing out that inflation will be lower this year, he said the context in which budgetary decisions are made must be considered.
He added that last year, the government’s budget expenditure rule was adjusted to allow for greater spending due to the high level of inflation.
“One of the factors to consider in the next number of weeks is what is the appropriate budgetary expanse for 2024.
The minister said that work is ongoing and it is “too early to give any indication” as to the nature of the composition of the budget will be.
McGrath did state that there will be no measures taken by government before the budget this year.
Speaking to reporters this afternoon, John McCarthy, Chief Economist at the Department of Finance said “inflation has clearly peaked” and is now on a downward trajectory.
The tightening of monetary policy from the ECB and the retail banking, “really will be a headwind in next couple of months”, he said.
The rate of price increases “will almost certainly slow”, he said, however, indications were that price decreases might not reflect the rate of inflation decreases in the months ahead.
The Government had been expecting a 7% inflation rate year – but the inflation rate is projected to fall to 4.9%, with a further moderation to 2.5% next year.
There are some concerns that ‘core inflation’ which excludes the likes of energy price inflation, does not move, there could be a risk of stagnation in the economy.
“We are certainly not out of the woods yet,” said McGrath this afternoon.
Donohoe said the two ministers were “very much aware’ of the challenges that many continue to face with the rising cost of living, stating that he does appreciate the need “to connect” the budget surplus being announced today to the challenges that many face.
The expected surplus is being driven by strong corporation tax receipts, which ministers said could dry up at any time and therefore cannot be relied upon.
The government’s chief economist said the windfall corporation tax receipts are not predicted to fall within the next few years, but added “that day will come’.
Corporation tax of €3.2 billion was collected between January and March, up from €1.9 billion in the same three months last year.
McGrath told reporters he expects corporation tax receipts this year will exceed last year’s record €22.6 billion, calling it “truly exceptional”.
The minister said the government needs to “make very good use of the sweet spot, because we know it is not going to last”.
He added that the stability update also predicts that significant costs in the years to come will be unavoidable, as the population increases. Just to maintain and provide public services, an additional €7 or €8 billion will need to be spent by the end of this decade, relative to 2019.
McGrath is looking into putting windfall tax receipts into a new reserve fund, separate to the rainy day fund which is capped at €8 billion.
Such a funding vehicle will require primary legislation and require cabinet approval next year, he said.
The idea is draw down the fund when needed, with the fund being managed and expected to deliver a return.
The formula as to how much we put in, how much we draw down, will be teased out months ahead, said McGrath.
In two weeks time, a scoping paper will set out the government’s idea for the fund.
McGrath said such a fund will be an essential insurance policy, knowing that increased costs are coming the government’s way.
Sinn Féín’s Pearse Doherty said the stability update projects strong tax receipts in the years ahead and an improvement in the position of the public finances.
“This is welcome and strengthens the state’s capacity to address persistent failures by this government in the provision of housing and health services,” he said, stating that there is “no excuse and nowhere to hide for this government in addressing this and other challenges our people and economy face”.
Additional reporting by Christina Finn
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