Speech
Opening statement by Minister for Finance Michael McGrath at the Budgetary Oversight Committee
By: Minister for Finance;
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By: Minister for Finance;
Published on
Last updated on
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Chair, members of the Committee, let me begin by thanking you for the opportunity to be here today to discuss the Stability Programme Update.
The document was published in draft form on 23 April 2024. In accordance with our legal requirements, the final version of the document was submitted to European authorities on 30 April.
By way of background, the annual update of the Stability Programme is prepared each spring by my officials, and sets out my department’s best assessment of the economic and fiscal situation and outlook.
The legal framework requires forecasts for the next three years at a minimum; the fiscal forecasts go out to 2027, while the macroeconomic forecasts once again extend out to the end of this decade. Following a rigorous process, the macroeconomic forecasts were endorsed by the Irish Fiscal Advisory Council on 2 April, a legal requirement.
It is important to stress that the SPU is a purely technical document. The numbers are prepared on the basis of the policy position set out in Budget 2024, with no new policy measures incorporated.
Government will formulate the broad parameters of its budgetary policy over the summer and this will be published in the Summer Economic Statement. Before that, Government will engage via the National Economic Dialogue which takes place on 27 May, the theme of which is ”A more shock-prone world: challenges and opportunities for Ireland”.
It is also important to highlight that due to a new set of economic governance rules at the European Union level, this is the last time that we will be submitting an SPU document. Going forward, Member States will be required to prepare and submit medium-term structural-fiscal plans to the European Commission.
These plans, which will be endorsed by the Council of the European Union, will commit Member States to an agreed net expenditure path and will be monitored through Annual Progress Reports which will replace Stability Programme Updates and National Reform Plans. Ireland will publish its first medium-term structural-fiscal plan in the autumn.
Moving to the substantive issues, Chair, let me say a few words about the economic outlook.
Despite the headwinds that have weighed on economic activity in recent years – namely the erosion of purchasing power due to high inflation and the associated tightening of monetary policy - the Irish economy remains in good shape overall.
The labour market in particular has proved remarkably resilient, with employment exceeding 2.7 million in the final quarter of last year, almost 330,000 up on the same quarter in 2019, just prior to the pandemic.
As a result almost three quarters of our working age population are now in employment – a near record high. According to the CSO, the unemployment rate in April stood at 4.4 per cent, consistent with any reasonable estimate of full employment.
Looking ahead some of the economic headwinds look set to ease and this should support a pick-up in economic activity as the year progresses.
Crucially, the energy price shock is now dissipating and the pass-through from lower wholesale prices to retail prices has triggered a faster than anticipated decline in headline inflation. The headline rate of HICP inflation stood at 1.6 per cent in April, one of the lowest rates in the euro area.
Indeed, the disinflation process has further road to travel, and this will boost real wages, real household incomes and in turn consumer spending.
Against this backdrop, Modified Domestic Demand (MDD) – my preferred measure for the domestic economy – is set to accelerate over the course of this year, with growth of 1.9 per cent projected for the year as a whole. This is a downward revision of -0.3 percentage points from the department’s autumn forecasts mainly on foot of weaker momentum coming into this year. As other headwinds moderate, MDD growth is set to accelerate to 2.3 per cent next year.
Headline inflation for this year is now projected at just over 2 per cent – consistent with price stability.
Employment is set to continue to expand over the course of this year and next, albeit at a slower rate than last year. The unemployment rate meanwhile is expected to average just over 4½ per cent this year and next.
Turning to fiscal developments, my department is forecasting a general government surplus of €8.6 billion for this year, the equivalent of 2.8 per cent of modified national income. Underlying this is tax revenue that is expected to grow by 4½ per cent to reach €92 billion: broadly similar to the forecast published as part of Budget 2024 in the autumn.
Of course, the fact that there are now significant headline surpluses in prospect over the next number of years is very much welcome. It is a reflection of the fundamental resilience of our economy and society to all the challenges we have faced, and also speaks to the success of Government’s carefully balanced budgetary strategy.
However, there are still vulnerabilities in our public finances. My department estimates that just under half the entire corporation tax yield this year is ‘windfall’ in nature. In other words, these receipts are not linked to our domestic economy and could potentially be transient. If windfall receipts are excluded, there is an underlying deficit in the public finances.
Last year we saw what may be the first signs of a levelling-off in this revenue stream: corporate tax receipts grew by around 5 per cent, which is, certainly, a steady performance, but growth the previous year was almost 50 per cent, so there has been a very significant slowdown.
Managing the risks around corporation tax is a key part of Government’s fiscal strategy. That is why we have decided to establish the Future Ireland Fund and the Infrastructure, Climate and Nature Fund. As Members will be aware, in March, I published the draft legislation for the establishment of these Funds to enable us to invest these receipts to ensure we have the resources necessary to address future structural challenges while, at the same time, minimising the risk of using volatile windfall taxes to fund permanent spending.
Turning to public debt, while we are moving in the right direction our debt burden remains elevated: indebtedness this year is projected at almost €221 billion, or just over 72 per cent of modified national income. For next year, our stock of debt is projected at €223 billion, or 69.7 per cent of national income. The progress we have made in reducing our ratio of public debt is encouraging, but we have much further to go, which underscores the importance of continuing to pursue a careful and sustainable budgetary policy.
In conclusion, the resilience of our economy and public finances over the last number of years has presented us with a window of opportunity: we can take action now to prepare for the future while also continuing to invest in our infrastructure, our housing sector and in the productive capacity of our economy.
I look forward to a fruitful and constructive exchange of views on the economic and fiscal outlook but, before that, I will now give the floor to my colleague, Minister Donohoe.