BUDGET 2023 THROWS MONEY AT EVERYTHING THAT MOVES

Despite the fiscal largesse, the usual suspects still not happy.

The past couple of budgets were dominated by Covid-19 and in a sense were emergency budgets. Unfortunately, the occurrence of emergencies is becoming more frequent and this year’s very expansionary package could certainly be described as an emergency budget and unfortunately the current emergency does not look like ending anytime soon. One wonders when the government will have to intervene again. A key feature of this week’s budget and indeed the past two is the extent to which the size of the State is growing and becoming more and more pervasive in our everyday lives.

Listening to the reaction to the budget makes me realise why I am becoming more and more cynical and disillusioned with the politics of Ireland, broadly defined. The Government has just delivered a massive fiscal package that is throwing money at virtually everything that moves; which has dramatically expanded the role of the State; and yet all of the usual suspects are out criticising it and suggesting it is not enough. Of course, no amount of money is ever enough, but we have to recognise that money does not actually grow on a tree and we will eventually have to pay for today’s largesse. I guess I am being incredibly naïve to expect a gracious response from opposition politicians and other interest groups.

The global and domestic economic background against which Budget 2023 was prepared and delivered was very challenging. Global economic policy makers, political leaders and business leaders are facing immense challenges due to a combination of rapidly rising inflation; ongoing supply-chain difficulties; rapidly rising interest rates; intense global geo-political uncertainty; and a much more uncertain global economic outlook.

The latest assessment from the OECD  in September earlier this week saw a significant deterioration in the outlook compared to its last forecast in June. Global growth is projected to slow from 3 per cent in 2022 to just 2.25 per cent per cent in 2023, well below the pace foreseen prior to the war. In 2023, the OECD is estimating that real global incomes could be around USD 2.8 trillion lower than expected a year ago. This is a significant global economic shock by any standards.

Annual GDP growth is projected to slow sharply to 0.5 per cent in the United States in 2023, and 0.25 per cent in the euro area, with risks of output declines in several European economies during the winter months. Growth in China is projected to drop to 3.2 per cent this year, due to COVID-19 shutdowns and significant property market weakness, but policy support is expected to help growth recover somewhat in 2023.

The OECD is forecasting that headline inflation is projected to ease from 8.2 per cent in 2022 to 6.6 per cent in 2023 in the G20 economies.

For the small open Irish economy, this very uncertain and challenging external background; the deterioration in the cost of living and the cost of doing business; and increasing interest rates are of deep concern. To date, there is limited evidence that the external difficulties are having a significant impact, but some signs of stress are starting to emerge, in the consumer sector in particular, but greater business caution is also becoming more evident. It seems inevitable that growth will slow significantly over the coming months.  

Budget 2023 can accurately be described as a ‘cost-of-living’ budget. €4.4 billion is being allocated to ‘once-off measures’, with €1.7 billion related to tax measures and €2.7 billion in expenditure measures. (€300 million of this expenditure is coming from the Contingency Reserve Fund).

The core budget package totalled €6.9 billion, with €5.8 billion accounted for by increased expenditure and €1.1 billion accounted for by taxation measures.

In summary, the total budgetary package totalled €11.3 billion, including the €300 million from the Contingency Reserve Fund. This is an incredibly large fiscal package. However, in the circumstances, Budget 2023 was always going to be a very political and populist budget offering with a significant package of once-off measures delivered alongside a significant expansion in government expenditure.

In the Summer Economic statement in July the Department of Finance projected a core budgetary package of €6.7 bln, with €1.05 billion pencilled in for tax changes and €5.7 billion for expenditure increases. In the event, the overall package was slightly larger at €6.9 billion. Of course, the €4.4 billion package of once-off measures was not anticipated even at that stage.

The most positive aspect for government coming into Budget 2023 is the buoyancy of tax revenues. It was this buoyancy that enabled the delivery of the very significant expenditure and taxation package in the budget. This demonstrates that a well-functioning economy is essential to generate the resources that are used to fund public services such as social protection, health and education. This highlights just how important it is to ensure that the business environment is as positive as possible in order to support growth, employment and tax revenue generation.

The success or failure of any budget in terms of delivering on its objectives is heavily dependent on the realism of the economic forecasts. The Department of Finance is projecting GDP growth of 4.7 per cent in 2023 and growth of just 1.2 per cent in Modified Domestic Demand (MDD), which provides a more realistic assessment of real activity in the economy. In April, MDD in 2023 had been forecast to expand by 3.9 per cent, but the downward adjustment reflects the difficult external environment, rising interest rates and the ongoing cost of living pressures. The domestic components of the Irish economy look like flatlining later this year and into next year.

While there is considerable uncertainty about the economic growth outlook, the outlook for inflation is even more uncertain. Following projected annual inflation of 8.5 per cent in 2022, average inflation is projected to moderate to 7.1 per cent in 2023 and 2.4 per cent in 2024. Unfortunately, much of this will be determined by factors that are outside of our control, but the recent significant downward trend in global energy, oil and shipping costs does give cause for some optimism.

Following the changes announced in the budget, the Department of Finance is Projecting total tax revenues of €87 billion in 2023, which would represent a growth rate of 6.6 per cent. Income tax is projected to grow by 6 per cent to €32 billion; VAT by 5.9 per cent to €19.4 billion; and Corporation Tax is projected to reach a new high of €22.7 billion, representing a growth rate of 7.9 per cent. Interestingly, the fiscal projections out to 2025 anticipate corporation tax revenues of 23.7 billion in 2025.

Ahead of the tax and expenditure measures introduced in Budget 2023, the Department of Finance was projecting a General Government Surplus of €4.4 billion (0.9 per cent of GNI*) in 2022 and €11.8 billion in 2023 (2.2 per cent of GNI*). Following the budget changes, a surplus of €1 billion (0.4 per cent of GNI*) is projected for 2022 and a surplus of €6.2 billion (2.2 per cent of GNI*) in 2023.

Ireland’s gross government debt is projected to stabilise at just over €225 billion in 2022 and gradually decline over the coming years, going from 100.8 per cent of GNI* in 2021 to 73.3 per cent by 2025. However, at €44,000 per head of population, Ireland has one of the highest debt per capita in the world.

Budget 2023 is an incredibly large fiscal package of €11.4 billion in total. It is designed to address once-off pressures from the cost-of-living crisis; the external uncertainties; rising interest rates and the political reality that exists in Ireland today. It is a good idea to have once-off measures, given that they should not become permanently embedded in the system, but it is clear that post-Covid there is a strong belief across large swathes of Irish society in relation to the larger role that government plays in our lives.

Ireland has a dangerously high level of debt and is now facing significant challenges. Thankfully the country has the fiscal resources to pay for the current fiscal largesse at the moment, but spending is ratcheting higher at an alarming rate.

The Minister for Finance is putting €2 billion into the National Reserve Fund this year and €4 billion in 2023. This is a good prudent move.

However, the reality is that Budget 2023 should be viewed in a political rather than economic prism.