This “Flash Release” gives a preliminary analysis of Budget 2022 and some of the key areas that the Council will explore in its next Fiscal Assessment Report (due out in November).
The economy looks set to recover more strongly than was expected
The domestic economy is set to recover to above pre-pandemic levels this year.
The Department now assumes a more limited degree of scarring from the pandemic and growth of around 3% in real terms over the medium term. Its macroeconomic forecasts were endorsed by the Council.
There are risks from further potential waves of the pandemic and changes in global tax arrangements, though short-term upside risks linked to the performance of the multinational sector and an unwinding of excess savings also exist.
Activity set to return to potential
Official estimates suggest that the Irish economy fell well below normal levels of activity in 2020 amid the pandemic. This means that there were lots of unused resources in the economy and plenty of scope for activity to be boosted.
Good economic management suggests that policy was right to support incomes and demand amid these conditions. As the economy recovers, temporary supports can continue to be unwound.
The estimates produced by the Department suggest that the economy will recover to potential next year.
Budget package of €4.7 billion
The core Budget 2022 package is about €4.7 billion. This includes €1.6 billion to maintain the existing level of public services, an increase of €1.1 billion in government investment, and an additional €1.45 billion in new current spending measures. The Government also raised tax allowances to take into account inflation and undertook a few other tax changes.
In addition, a temporary spending amount of €4.5 billion of Covid contingency reserves was set out for 2022.
The allowance for maintaining existing levels of services partly responds to the Council’s recommendations to fully account for the “stand-still” costs – maintaining public services and supports in real terms, recognising demographic and price pressures.
Taxes recovering strongly
Income tax and corporation tax are above pre-pandemic levels, while VAT and excise are close to recovering.
The Department’s forecasts imply that VAT and Excise will remain close to pre-pandemic levels, while Income Tax and Corporation tax look set to outperform.
The Government continues to assume that €2 billion of corporation tax receipts will be lost in the coming years due to international tax reforms, but revenue from corporation tax will still be above €15 billion in 2025.
The deficit reduced in 2021 as restrictions were eased and is projected to close in the coming years
The Government is expected to have run large deficits in 2020 and 2021 of €18.4 billion and €13.2 billion (equivalent to 8.8% and 5.9% of modified GNI*, respectively).
However, the recovery in receipts coupled with spending restraint is projected to help close the deficit by 2024.
In underlying or “structural” terms, the deficit is projected to close to within 0.5% by 2023
Using the Department’s preferred estimates of the cycle to adjust the deficit for short-term effects, and setting as a share of national income, the structural deficit should narrow to 0.3% by 2023, turning positive in later years.
High spending has been the key driver of the deficit
A large gap between government spending and government revenue opened up in 2020 amid the costs of the pandemic.
This reflected a substantial increase in spending on health, income and business supports associated with the impact of the pandemic. Revenues fell amid weaker economic activity, but many taxes were quite resilient.
As temporary supports unwind and with the forecast increases projected, the Government expects the gap between spending and revenues to narrow substantially in 2023.
Permanent spending increases projected at 5% annually
In line with its new spending rule, as set out in this year’s Summer Economic Statement, the Government plans to limit permanent spending increases to 5% on average over the medium term.
By following this rule even as revenues have surprised on the upside, the Government has the economy on a more prudent path that will reduce borrowing and the debt ratio in the years ahead.
The spending rule is a useful innovation, and one that the Council has been recommending for a long time. The Government should reinforce the rule in terms of what it covers, how it is governed, and how it is set (see Box B of the Pre-Budget 2022 Statement).
Public investment is set to rise to high levels
The Government projects that public investment will rise to 5.4% of national income in the coming years.
This is a high rate of investment both in an international context and historically. In the past two-and-a-half decades, investment was only higher on two occasions.
This high rate of public investment should help to address shortfalls in housing and climate areas. However, with the public debt ratio already high and public investment management historically weak in Ireland, there is a greater need to ensure that future investments generate value for money in the coming years.
The Government debt ratio is projected to fall from very high levels
Ireland’s Government debt burden was high but declining going into the pandemic. It increased as a result of supports.
As a share of modified gross national income (nominal GNI*), gross debt is set to peak at 106.2% of GNI* at the end of this year, falling to 89.5% in 2025.
Net debt, which excludes cash and other liquid assets, is forecast to rise to be 90.4% of GNI* at the end of 2021, and is projected to fall at a steady pace towards 79.2% GNI* by 2025.