THE SUMMER ECONOMIC STATEMENT & MID-YEAR EXCHEQUER RETURNS

The money tree will need lots of fertiliser & irrigation to satisfy our political culture.

Just as central bankers around the world are struggling with the dilemma of what to do with interest rates in an environment where growth is under significant threat, but inflation is still rising, governments are struggling with the most appropriate response to the cost-of-living increases that have been building over the past 6 months or so.

Here in Ireland the political pressure has been building, with opposition politicians apparently believing that there is a magic money tree out there and that taxpayer’s money can be dispensed like snuff at a wake. The justifiable intervention by government during the pandemic has certainly cemented the notion of government intervention at every opportunity. Of course, the precedent for intense government intervention was created during the banking crisis, but was ratcheted up several notches during the pandemic. It is now built into the popular psyche and government is now under massive pressure to intervene to protect everybody from the impact of rising prices. It goes without saying of course that whatever measures are introduced will still not satisfy the opportunistic opposition.

Budget 2023 has been brought forward by two weeks to September 27th – not quite sure what that will achieve. The Department of Finance has just laid out the parameters for Budget 2023 in the Summer Economic Statement. The highlights, or lowlights, depending on one’s perspective are as follows:

·       Budget 2023 will be dubbed a ‘Cost-of-Living Budget.

·       Government has already provided €2.4 billion by way of fiscal supports to cushion the impact of higher prices, but there is more to come.

·       Budget 2023 will provide an overall package of €6.7 billion, which will comprise of additional public spending of €5.65 billion, and tax measures of €1.05 billion. Presumably, the expenditure will be in the form of significant social welfare increases. The measures need to be targeted and not in the form of universal payments. The tax measures are likely to comprise of the significant indexation of tax credits and allowances.

·       Last year, the Government adopted a medium-term budgetary strategy based on public expenditure growth of 5 per cent per annum over 2023 to 2025. Core spending on public services is now projected to increase by 6.5 per cent in 2023. This represents an increase of €1.7 billion on what was originally planned. €400 million will be used in 2022, as many of the measures announced on budget day will be applicable from midnight on budget day. In the past, some of the measures would not come into effect until the following year.

·       Government is also providing €4.5 billion extra non-core expenditure for temporary measures such as the Ukraine humanitarian supports and some Covid-19 supports as needed.

Government is now set to ramp up spending significantly, but there are reasons to be concerned. Over the coming years, the pressure on public expenditure from climate change mitigation measures; ageing demographics; the impact of higher interest rates on debt servicing costs on what is a very high level of debt; Sláintecare and the digital transition will intensify.

Government is ramping up expenditure on the basis of tax revenue buoyancy as evidenced by the mid-year Exchequer returns. Corporation tax revenue buoyancy is the key feature. A prudent approach would be to save up the possibly temporary corporation tax windfall in some form of ‘rainy day’ fund, but such farsighted strategy is not consistent with the political realities. Culture always trumps strategy, unfortunately. The Irish political culture is not very appetising at the moment.

Despite the considerable global economic, financial and political uncertainties, the Irish Exchequer continues to collect significant tax revenues. In 2021, the Exchequer collected €68.4 billion, which is the highest total ever collected. The tax buoyancy has continued in 2022. In the year to the end of June, the Exchequer ran a surplus of €4.2 billion, which compares to a deficit of €5.3 billion in the same period in 2021. The turnaround of €9.5 billion is due to ongoing strong growth in tax revenues and reduced current expenditure as the Covid-19 supports are being phased out.

• Overall tax revenues totalled €36.9 billion which is 25 per cent or €7.4 billion higher than the equivalent period in 2021. The early months of 2021 and 2020 were distorted by severe Covid restrictions, which exaggerates the annual growth rate in 2022. However, when compared to the first 6 months of 2019, tax revenues in 2022 were €10.2 billion or 38.3 per cent higher.

• Corporation tax receipts in the first 6 months totalled €8.8 billion, which is €3 billion or 52.9 per cent higher than last year. While there are some timing issues, it continues to reflect the strong profitability of many of the multi-nationals operating in Ireland. Corporation taxes accounted for 23.8 per cent of tax revenues in the first 6 months of the year. This is the highest ever share. Is this sustainable?

• Income tax came in at €14.3 billion, which is 16.8 per cent or €2 billion ahead of 2021. The strength of income tax receipts reflects the very progressive nature of the Irish income tax system, and the high quality of employment that is being increasingly created in the economy.  It is indicative of a very buoyant labour market, where retention, recruitment and increased labour costs are now significant challenges for many employers. Income tax accounted for 38.7 per cent of total tax revenues in the first 6 months of the year.

• VAT receipts totalled €9.1 billion, which is up by 26.2 per cent or €1.9 billion on the same period in 2021. This reflects the ongoing improvement in consumer spending, although the year-on-year growth rate is exaggerated by the restrictions in place a year ago. However, when compared to the first 6 months of 2019, the VAT take is up by 22 per cent, or €1.6 billion.

Ireland’s Government debt expanded by €33 billion during the 2 years of the pandemic. At the end of 2021, the national debt stood at €236.6 billion, equivalent to 106.1 per cent of Gross National Income* (GNI*). This is equivalent to €47,250 for every person.

Ireland has a lot of debt and the money tree will need lots of fertiliser and irrigation to deliver the crop that populist politics is now dictating.