Press release
NED 2022 Scene setter: Economic and fiscal context - Opening remarks by Minister for Finance Paschal Donohoe
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Good morning.
I would first like to thank the Taoiseach for his opening address and Professor Alan Barrett for agreeing to chair our discussions today.
It is great to see so many of you here this morning and to be having these discussions in person.
The National Economic Dialogue is an essential part of our budgetary process and a vital opportunity to engage with you all on the economic and social direction of our country.
Before we break out into the individual sessions I, along with Minister McGrath, want to give you a sense of the overall economic and fiscal background against which our discussions today will take place.
In my remarks, I want to convey four key messages:
The macroeconomic context has changed significantly over the last year.
At the start of 2022, the pandemic, which had so dominated the economic outlook for the last two years, had receded as a significant factor. With public health restrictions lifted and pent up consumer demand being released, the stage was set for a robust recovery.
However, the war in Ukraine coupled with aftershocks from the pandemic, have given rise to global inflationary pressures not seen since the 1970s.
In the spring, my department published its updated assessment of the Irish economic outlook. While an annual growth rate of 4¼ per cent was projected for this year, there were clear risks.
Our best assessment at this point is that many of those risks identified in the spring have now happened.
In particular, it is now clear that inflation, which reached 8¼ per cent in May, is higher and more persistent than initially anticipated. Financial conditions have tightened and export growth is likely to slow as the global economy shoulders the economic fallout from the war in Ukraine.
The government recognises the real hardship rising prices create for households across this country. We have responded swiftly to ease the burden by introducing direct measures amounting to just under €2.5 billion, with many of the measures aimed at those most in need.
The measures that have been implemented, including but not limited to the reduction in VAT on gas and electricity; the cut in the excise duty levied on fuel; lump sum fuel allowance payments and the €200 energy credit to every household in the country, will help to ease the burden, but I am acutely aware that we will not be able to fully absorb the impact.
However, as we have seen from other countries, there are limits to what any one government can do to address the effects of global pressures outside of our direct control.
We in Government now have a responsibility to ensure that budgetary policy strikes a delicate balance, intervening where it is needed but without adding fuel to the inflationary fire.
Acting to protect households from the most severe impacts of the pandemic, and more recently from rising inflation, has been both necessary and appropriate, but these interventions have come at a significant cost.
In particular, the public debt is expected to amount to over €230 billion this year. The massive economic effects of a pandemic are still with us. On a per capita basis, public debt amounts to around €47,000 which is among the highest debt burdens in the world.
It is imperative that we continue to reduce the debt ratio over the medium term so that we retain our ability to swiftly and effectively respond to future shocks in this increasingly shock-prone world.
The monetary policy landscape has also changed significantly since the start of the year. As a result, sovereign borrowing costs are now on a rising trajectory. Indeed, the yield on 10-year government bonds has increased by over 2 percentage points since the start of the year.
The best way to insulate the public finances from the higher cost of borrowing is to ensure that Ireland’s borrowing is not out-of-sync with other semi-core economies of the European Union.
Indeed, we know that the higher our level of public debt, the more severe the implications of any rise in borrowing costs will be. We also know that affordable borrowing costs are closely tied to careful management of the public finances.
In a world that has become so susceptible to unforeseen shocks, it is even more important that we prepare now for the risks that we know are ahead.
There is a clear need to reduce our dependency on corporate tax receipts, which now account for €1 in every €4 collected in exchequer tax revenue, a figure that is well in excess of both historical and international norms. These excess receipts present an artificially benign picture of the public finances.
Moreover, half of corporate tax receipts are sourced from just 10 large firms. So to put it another way: around €1 in every €8 in total tax collected by the State is sourced from a very small number of firms. We have to be vigilant to the risks inherent in this level of concentration.
Our success in attracting high-quality multinational firms to Ireland has paid dividends, creating highly-paid jobs and boosting our tax receipts. But concentration risks as well as changes to the international tax landscape mean we cannot rely on this revenue stream continuing forever – we must not build permanent expenditure on transient revenue streams.
On current trends, our population will age at one of the fastest rates in Europe in the coming decades, placing pressure on the public finances through a slowdown in economic growth and increased expenditure.
There are digital and climate transitions to manage, long-term trends that have been accelerated by the pandemic and the war. A reshaped economy can offer huge benefits, making us a more efficient, more sustainable and more prosperous society, but only if we prepare for these changes now.
Resources are not infinite, and those of us in Government will have to take careful decisions in the months ahead. But what is essential is that we make these decisions that can keep us safer for longer in a world with more and longer shocks.
That is why this National Economic Dialogue is such an important forum. It is an opportunity for all of us to engage in frank, open and honest discussion. Previous dialogues have made a key contribution toward shaping government policy and I have no doubt that today’s discussions will do the same.
There will be hard decisions ahead but the experience of the last two years proves to me that we are more than capable of rising to the challenge. I would encourage all of the participants today to enter into your discussions in that spirit.
Thank you.