Hanover

6 Jul 2022

2022 sees an earlier than anticipated Summer Economic Statement (SES), with the Irish Government having been called on from across the political spectrum for policies to address the inflation and increases in the cost of living. The SES sets out the Government’s medium-term budgetary plan and the fiscal brackets within which discussions within Government will take place ahead of Budget 2023.

SES 2021 vs. SES 2022

Last year, the Government accommodated the desire for enhanced capital funding for a new governmental housing plan while simultaneously ensuring that the State would not be running an excessive deficit by 2023. Back then, the SES amounted to a core package of €4.7 billion with a €2.8 billion contingency reserve for pandemic-related expenditure.

Participants at last month’s National Economic Dialogue (NED) called for the Government to address the increases in the cost of living, reduce the fiscal reliance on corporation tax and ensured the economy’s overall competitiveness.

For this year, the SES outlines a core budget package of €6.7 billion, which includes a reduced contingency reserve. In contrast to last year, core expenditure is set to increase by 6.5% in Budget 2023, primarily to address inflation, energy prices and increases in the cost of living more broadly. However, the Government has reasserted its aim to reign in core expenditure to annual increases of 5% per annum in the medium term.

Ireland’s Economy in 2022

Reflecting many of the concerns raised by participants in the National Economic Dialogue, the resilient and rapid economic recovery that Ireland displayed post-pandemic is slowing. A swift demand-side recovery has demonstrated supply-led capacity constraints, thereby resulting in inflation and eroding real incomes.

The international impacts on Ireland’s economy continue to deteriorate, with risks tilted to the downside. Russia’s invasion of Ukraine and the impact on energy prices as well as supply chains in general has disrupted the Irish export-driven economy.

Furthermore, Ireland’s public debt is one of the highest in Europe, and longer-term risks such as an ageing population, climate change, the digital transition and the implementation of Sláintecare will pose significant burdens on the Exchequer.

The reliance on corporate tax receipts must also be addressed. If corporation tax receipts had remained unchanged at pre-pandemic levels, deficits would have been likely for 2022 and 2023, somewhere in the region of -1½% of GDP.

Budget 2023

Taoiseach Micheál Martin has said that Budget 2023 “will be a cost-of-living budget”, and it will be his last as Fianna Fáil head of Government, before the Fine Gael leader and current Tánaiste Leo Varadkar trades offices with him in December.

In the context of an inflationary environment, Budget 2023 will seek to ease the increase in costs across the economy, while simultaneously seeking not to add to them. Higher inflation has resulted in increased borrowing costs for both the Government and the wider economy, and so the Department of Finance is keen to ensure that Budget 2023 addresses inflation with maintaining a balanced economy.

It will do this via increased public expenditure to protect core public services and the humanitarian response to refugees from Ukraine and targeted cuts to taxation. A key objective of taxation policy in Budget 2023 will be to avoid workers paying additional tax simply because they move through higher tax brackets due to inflation.

Budget 2023 will aim to curb the worst effects of a deteriorating economic environment on Ireland, while ensuring that inflation is not aggravated by fiscal policy. Given the uncertain near-term economic outlook, all eyes will be set to September 27th – Budget Day.