Speech
Opening statement by Minister for Finance Jack Chambers at the Budgetary Oversight Committee
By: Minister for Finance; Jack Chambers
Published on
Last updated on
By: Minister for Finance; Jack Chambers
Published on
Last updated on
Check against delivery
Thank you for giving me the opportunity to attend the Committee today to discuss the Summer Economic Statement, which sets out the fiscal parameters for Budget 2025.
Firstly, I will briefly outline the economic and fiscal context for the Budget.
Over recent years, the economic backdrop has been defined by a series of successive external shocks. These shocks saw global supply chains upended, inflation surge to multi-decade highs and monetary policy rapidly tighten. One of the most important lessons we have learnt from the past few years is that the world is becoming more ‘shock-prone’.
Fortunately, our economy has weathered these shocks remarkably well and now appears to have entered a period of relative stability.
The brightest spot in our economy is undoubtedly in our labour market. There are now more people at work in our country than ever before. By any reasonable estimate, we have been operating at full employment for some time now. Going forward, it is clear that the main constraint on the growth of our economy is supply.
Inflation, which has weighed so heavily on businesses and households over recent years, has now thankfully abated. At its peak, the annual rate of inflation was close to 10 per cent. The latest data shows that inflation stood at just 1.5 per cent in June, the lowest rate since April 2021. Ireland now has one of the lowest rates of inflation in the euro area. Given the relative stability in global energy and commodity markets, my department expects inflation to remain on this sustainable trajectory over the coming years, averaging close to 2 per cent this year and next.
The easing in inflation will have a meaningful impact on the everyday lives of many households and should support an improvement in real wages, enabling economic activity to gather momentum as the year progresses.
On this basis, Modified Domestic Demand is expected to grow by close to 2 per cent this year with a further pickup in growth next year.
However, I am of course acutely conscious that there are many more challenges facing our economy and our society. What’s more, we are living through a time fraught with uncertainty. The escalation of geopolitical tensions, a new era of subsidies and tariffs and the fragmentation of global trade have come to define the economic backdrop over the last year.
Whilst we cannot prevent external shocks of this nature from occurring, we can ensure that we are on the best possible footing to respond to these shocks when they do occur.
It is against this economic backdrop that Budget 2025 will be framed, this government’s fifth, and final, financial statement.
At the headline level, our public finances are performing well. Significant budgetary surpluses are in prospect over the coming years.
The Exchequer Returns, which my department published last week show a surplus of €3.1 billion in the first half of the year, underpinned by growth in tax receipts, which is a clear reflection of the strength of our economy and a result of the careful management of the public finances since the government took office.
However, the headline fiscal position masks the underlying vulnerabilities present in our public finances. My department and Minister Donohoe, have consistently said that the public finances remain exposed to a potential overreliance on corporation tax receipts, the recent growth of which has been unprecedented: in the first half of the year, we are, broadly speaking, where we expected to be in terms of tax revenue, with the exception of corporation tax. Corporation tax is now €1.2 billion ahead of target. These receipts are welcome, but will not last forever.
The month-to-month volatility of this tax head emphasises the need to ensure that these ‘windfall’ receipts are not relied upon to fund permanent expenditure commitments.
To put these potentially windfall receipts into context, my department estimated at the time of the SPU that around half of the entire corporate tax yield this year is windfall in nature. Furthermore, over half of the total corporate tax yield was paid by just the top ten payments. In other words, ten companies accounted for €1 in every €7 of tax collected by the State, an extremely narrow tax base, further emphasising that this is not a suitable basis upon which to build permanent spending.
This means that a sector-, firm- or even product specific shock could have a large impact on our public finances.
Furthermore, in the medium- to long-term there are structural changes, firmly on the horizon which pose significant threats to our public finances. These take the form of the “4Ds” of demographics, decarbonisation, digitalisation and de-globalisation. Financing an ageing population, climate change mitigation, the digital transition and the impact of transition away from globalisation will all put pressure on the public finances in years to come.
The combination of these challenges in the medium-term highlights the importance that Government follows a fiscal strategy that strikes the right balance by allowing for continued investment in our public services and infrastructure but also prepares for the challenges that we know we will face.
I believe the strategy which Government set out in the Summer Economic Statement achieves this.
Budget 2025 will comprise a total package of €8.3 billion, consisting of €1.4 billion in taxation measures and new expenditure of €6.9 billion.
This brings spending growth in Budget 2025 to 6.9 per cent. I recognise that this is above the original 5 per cent target that was set out in Government’s medium-term strategy back in 2021.
However, this adjustment is in order to provide for the necessary increases in capital expenditure and further investment in our public services in the context of a larger population.
The package set out in the SES also ensures that Government has the scope to once again adjust tax credits and bands to ensure workers do not find themselves paying a higher rate of tax because of higher wages.
I would also emphasise that even with increased expenditure we remain on track to run healthy budgetary surpluses over the medium-term.
One of the key mistakes made in the past has been to use transitory revenue to fund permanent spending. My department is preparing for the establishment of the Future Ireland Fund and the Infrastructure, Climate and Nature Fund to help to ensure that we do not follow the past mistakes. The strength of the headline position provides us with the resources to invest in our economy and boost our long-term potential, while also allowing us to prepare for the future structural and fiscal challenges that we know are on the horizon.
Furthermore, the introduction of better medium-term planning from the new European fiscal framework will pivot the focus of fiscal planning from the short-term to the medium-term. This autumn we will submit our first medium-term plan under the revised framework.
The strategy I have outlined today, which was announced in the Summer Economic Statement, builds on the progress we have made.
It prioritises support to households and firms, the provision of additional public services, boosting the resilience of the economy and enhancing our public infrastructure, while maintaining the sustainability of the public finances.
There are many challenges on the horizon but there are also opportunities. It is crucial that we use the window of opportunity presented by the relative health of our economy and public finances to seize them.