The Council publishes its Fiscal Assessment Report, June 2023

This is the Council’s main bi-annual report, the Fiscal Assessment Report.

The report assesses the fiscal stance that the Government sets out in its Stability Programme Update 2023. It assesses the Government’s overall fiscal stance, its macroeconomic and fiscal forecasts, and its compliance with fiscal rules.

Supporting Information sections

Supporting information

You can read the Minister for Finance’s response to the report The Minister for Finance responds to the Fiscal Assessment Report, June 2023

Response of the Minister for Finance to the Fiscal Assessment Report, June 2023

Summary assessment

After slowing over winter, Ireland’s growth looks set to recover as inflation eases. While high price increases and an uncertain outlook softened the volume of consumer spending in 2022, a rapid recovery following the pandemic has led to once-in-a-generation low unemployment rates. The Government forecasts that real GNI* growth will be just 1.7% in 2023, before recovering to 2.1% in 2024 and 2.5% in 2025.

Capacity constraints have emerged, with the jobs market exceptionally tight. Capacity constraints are now a major challenge. Few construction workers are unemployed, housing output appears to have slowed, and wage and rent pressures could yet prove more persistent.

The Government’s underlying deficit, excluding excess corporation tax receipts, is projected to narrow to 0.6% of GNI* this year. Some €1.2 billion (0.4 % GNI*) of ad-hoc fiscal supports were introduced in February for businesses and households facing higher prices. However, these are expected to be met within the existing Budget allocations. More transparency is needed around within-year measures like these. Moreover, the justification for such supports is waning as they are poorly targeted and energy prices are falling.

In 2024, the Government expects to run its first underlying surplus in 17 years, when excess corporation tax receipts are excluded. The projections assume the Government sticks to its National Spending Rule. This implies a fall in the net debt-to-GNI* ratio of 23 percentage points between end-2022 and end-2026 (from 69% to 46%). Windfall corporation tax receipts contribute about 16 percentage points of the overall decline, helped by relatively high inflation and robust growth.

Exceptional inflows of corporation tax receipts from foreign multinationals are boosting the public finances. Excess corporation tax receipts, those beyond what can be explained by domestic activity since 2014, now account for €11 billion of annual receipts (4% of GNI*). New research shows that just three corporate groups accounted for one-third of corporation tax receipts over the past five years (Cronin, 2023). This concentration entails a high risk of reversals due to firm-specific risks and changes to the international tax environment. Moreover, the receipts — when spent — represent a net injection of money into the economy as they are based on overseas profits rather than being taken out of domestic activity.

The Government does not appear to have factored in spending pressures fully, and it faces some difficult choices. The measures needed to address climate objectives do not appear to be factored into official plans in full and could be sizeable. In addition, current spending increases in 2024 and 2025 do not appear to fully accommodate demographic and price pressures, falling short by €1.1 billion per year on average. This implies limited scope for additional spending without offsetting tax increases or spending reductions elsewhere.

Against this background, the Council assesses that:

The Government should stick to its National Spending Rule. This is warranted given the exceptionally tight labour market, high inflation, capacity constraints, and the risks related to tax receipts. The rule limits net spending growth to 5% each year so that permanent policy measures match trend growth rates and are broadly sustainable. Following the rule helps to stabilise activity in the economy and avoid fuelling further price pressures at a time of capacity constraints.
The Government needs to make choices between new tax and spending measures and how much it maintains existing spending. Under the rule, there is little space once the Stand-Still costs of maintaining existing policies are taken into account. Going beyond this, without offsetting tax increases or spending cuts, risks repeating the mistakes of the 2000s. It would mean using temporary revenues from corporation tax and an economy at full employment to finance permanent expansions. It also risks fuelling further price and wage increases, given how tight the labour market is. With capacity constraints, additional investment may not provide value for money. Instead, the Government should explore ways to alleviate capacity constraints, including through fiscal tightening elsewhere.
The Government has made important steps towards long-term planning, but further improvements are needed. The Council welcomes the Government extending its macroeconomic forecasts to 2030. However, the budgetary forecasts are only to 2026 — the minimum required. This makes it impossible to fully assess how sustainable the Government’s medium-term fiscal plans are. It comes at a time when ageing and climate change pressures are deepening. Lengthening the budgetary forecasts would help improve long-term planning in Ireland.
The Council welcomes proposals for a new national savings fund. This could represent a landmark reform. It would put excess corporation tax receipts to good use and reduce the need for tax increases or spending cuts to fund pension shortfalls in future years.
The Government should reinforce its National Spending Rule as a “first line of defence”. The Government’s National Spending Rule has proven to be a useful anchor. With Ireland likely to face less scrutiny under the new EU fiscal rules, the National Spending Rule takes on more importance as a local safeguard. It should be reinforced in several ways as outlined in a new Analytical Note (Casey and Cronin, 2023), including by putting it on a legislative basis, having a debt anchor, and widening it to capture general government spending.