Budget surplus of €8.6bn forecast despite ‘loss of economic momentum’

The Government is forecasting a budget surplus of €8.6 billion this year and cumulative surpluses of €38 billion over the next four years on the back of windfall corporate tax receipts.

The latest projections contained in the Government’s stability programme update, an annual filing to the European Commission, came with a warning that there has been a loss of economic momentum in recent months with inflation and interest rates continuing to weigh on consumer spending and investment.

The projected budget surplus of €8.6 billion is equivalent to 2.8 per cent of national income and follows a surplus of €8.3 billion last year.

Minister for Finance Michael McGrath said much of the budgetary largesse was being driven by potentially volatile business tax receipts from the multinational sector. Stripping out these receipts, a deficit of €2.7 billion would be recorded this year and €1.8 billion next year, he noted.

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Annual corporate tax receipts have grown from €4 billion to €24 billion in the space of a decade. Mr McGrath, however, warned that the era of corporation tax over-performance was now “coming to an end”.

“These receipts cannot be relied upon: we saw a marked slowdown in corporation tax over the course of last year, highlighting the volatility of this revenue stream,” he said.

The Government’s strong tax position, which also reflects year-on-year growth in income tax and VAT receipts, will see €6 billion of budgetary resources diverted into a new wealth fund and a smaller infrastructure and climate fund, set up to act as buffers against future downturns.

The new projections will also allow for another strong spending and tax package in Budget 2025, the last one before an election. Minister McGrath and Minister for Public Expenditure Paschal Donohoe refused, however, to say if the budget would adhere to the Government’s self-imposed 5 per cent spending rule, which seeks to limit annual spending increases to a 5 per cent ceiling.

The Government broke the rule in each of its last two budgets. Mr Donohoe noted that whether expenditure next year increased by 5, 5.5 or 6 per cent “that decision is about hundreds of millions” when the Government was saving €6 billion “to ensure a better future for this country”.

“In evaluating caution and care in the budget strategy that €6 billion per year is a critical element,” he said.

The Government’s SPU document forecast the domestic economy would grow by a modest 1.9 per cent this year, down from a previous projection of 2.2 per cent, and by 2.4 per cent in 2025.

The report warned the Irish economy has faced numerous headwinds in recent years with a loss of momentum evident in the data in recent quarters.

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“This is largely due to two headwinds, namely the recent high rates of inflation which have weighed on real wages and consumer spending, and monetary tightening which pushed up the cost of capital,” it said.

Nonetheless, Minister for Finance Michael McGrath insisted the economy remained in “reasonably good shape” with lower energy prices and the associated easing in inflation likely to support “an improvement in real wages and household purchasing power”.

He noted that headline inflation for this year is now projected at 2.1 per cent, which is lower than the budget day forecast of 2.9 per cent.

[ €6bn has been removed from the budget day pot. Politically, this could get interesting ]

“The brightest economic spot is undoubtedly the labour market, which has remained resilient throughout the period of high inflation and rising interest rates,” he said, noting there are now over 2.7 million people in employment.

The macroeconomic forecasts underpinning the SPU were endorsed by the Fiscal Council on April 2nd, a legal requirement under European regulations.

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