Surging growth transforms public finances ahead of Budget Day

The outlook for the public finances has been transformed by a bounceback in economic growth, with predictions for the budget deficit this year and next being slashed, according to new official figures. The figures dramatically improve the outlook for the public finances ahead of next Tuesday’s budget, but the two budget ministers insisted last week that they would stick to their original tax and spending targets despite the improving outlook.

The budget deficit this year –using the EU general government balance measure – is forecast to come in at €13.165 billion, compared to the target of €20.285 billion, according to the pre-budget White Paper on the public finances, boosted by strong tax receipts across the board and also spending coming in below target.

With growth set to remain strong going into 2022, the deficit for next year is now forecast, before the budget, to be just over €6.5 billion. This is well below the €14.37 billion predicted in the Summer Economic Statement as the outturn for next year. Budget measures already planned – and announcements on the day – will add to the 2022 figure, but it is still significantly lower than expected.

Presenting updated economic growth forecasts last week, Minister for Finance, Paschal Donohoe and Minister for Public Expenditure and Reform Michael McGrath have said that despite the stronger trends in the public finances, they intend to stick to the plans they have for Budget 2022 in terms of extra spending and lower taxes. A total of €4.7 billion in extra sending is planned, but with the bulk of this already allocated, there was to be just €1 billion for additional outlay on measures not yet announced and €500 million for tax reductions.

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At the briefing on the forecasts, Mr Donohoe indicated that the Government wanted to allocate additional money to a contingency fund for next year and that there might also be the prospect of reducing the deficit more rapidly than forecast over the next few years.

The unexpected strength of the latest forecasts is bound to lead to late pressure for additional Budget Day measures while still staying within the existing deficit targets for next year. The Ministers pointed out that the Irish Fiscal Advisory Council (IFAC), the official budgetary watchdog, had warned that the existing budget plans were at the limit of what is prudent for 2022.

The figures show that taxes are now expected to raise €65.7 billion this year, more than 8.5 per cent ahead of the budget target. Taxes are stronger across the board, with notable strength in income taxes and corporation tax anticipated to raise a record €13.5 billion this year. Taxes are expected to rise by another 7.1 per cent next year to €70.1 billion.

State investment spending of €10.1 billion of this year looks set to come in below the estimated level of €11.6 billion.

The rise in tax revenue reflects a stronger bounceback from the Covid-19 pandemic than official forecasters had expected.