Scene setter by Minister McGrath at the National Economic Dialogue (NED) 2024: Economic and fiscal context

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Good morning. I would first like to thank the Taoiseach for his opening address. It is great to see so many of you here.

Before we break out into our individual discussions, Minister Donohoe and I will set the scene of the overall fiscal and economic landscape.

As you will be aware, the theme of this year's Dialogue is “A more shock-prone world: challenges and opportunities for Ireland”.

My officials have drafted a short overview paper on this theme which summarises the issue at hand.

The key message that we are trying to convey is that the global economic landscape is in a state of flux – geopolitical strains are spilling over to the global economy, mainly via changing trade and investment patterns, increased protectionism and the re-emergence of industrial policies.

As is universally acknowledged, the successful integration into the European and wider global economy has been a key driver behind the transformation of Irish living standards in recent decades. So we must be alive to the threat posed by the de-coupling of trade and investment.

To ensure that we are well prepared for the more challenging external backdrop, we need to boost productivity, continue to build our fiscal buffers and improve our competitiveness. And I know the chair of the National Competitiveness and Productivity Council – Professor Frances Ruane – is going to speak about these issues later today.

But the changing dynamic also presents opportunities – in areas such as Artificial Intelligence and the green transition; our significant capital investment is designed with this in mind.

In my remarks today, I want to briefly touch on three key points:

• firstly, the economic outlook;
• secondly, the risks that remain in our public finances;
• and finally, the new European fiscal framework and what this means for Ireland

On balance, the Irish economy is in reasonably good shape, at least in aggregate terms. Inflation is now firmly on a downward trajectory and this has been achieved without any increase in unemployment – indeed, the unemployment rate is now consistent with any meaningful definition of ‘full-employment’. The fall in the rate of inflation which we are experiencing, taken together with increases in earnings and welfare payments means that I am confident that we will see an improvement in real living standards this year.

My department’s assessment – published last month – sees Modified Domestic Demand increasing by just under 2 per cent this year, and by a further 2¼ per cent next year. Risks to this outlook are two-sided – in other words, there is both upside and downside potential – with the downside risks predominantly external in origin.

The general good health of our economy is reflected in the public finances where, at least in headline terms, the budget position remains in positive territory.

We must be conscious, however, that some revenue streams are temporary in nature and it is imperative that these are not used to build up permanent fiscal commitments. Corporate tax receipts a decade ago amounted to around €4 billion; the equivalent figure for this year is closer to €24 billion. Moreover, a large part of this is paid by just a small handful of large, profitable multinational firms.

Establishing two longer-term savings vehicles – the Future Ireland Fund and the Infrastructure, Climate and Nature Fund – is a key pillar of the government’s risk management strategy. The necessary legislation is currently making its way through the Oireachtas and I hope that it will be enacted before the summer recess. This is a profoundly important initiative and I am grateful to my colleagues for the support I have received in bringing forward this landmark Bill. The easy option would be to spend more of the CT receipts now but I believe we are making the correct long term decision for the wellbeing of all of society and the benefit from setting up these funds will be clearly evident in the years ahead.

In that regard inter-generational equity is a key factor behind the establishment of these funds. It is important that we do not pass on the bill for higher current spending today to the next generation – instead, we must partly pre-fund the costs associated with an ageing population, as well as the digital and climate transitions.

I want to stress that Government is still investing in our economy and society. In other words, the establishment of these savings vehicles is not a substitute for investing today. Instead, are an integral part of broader fiscal strategy that is carefully calibrated, sustainable and balanced between the need to respond to the challenges of today and to build resilient public finances for the future.

With all of this in mind, and keeping in mind the discussions that take place here today, we will be setting out the fiscal parameters for Budget 2025 in the Summer Economic Statement in the coming weeks.

No Budget decisions have been taken as yet but there are a number of themes which will be foremost in our thinking as we frame the package. As well as investing in public services I will be bring forward a substantial income tax package.

Last year I delivered an income tax package worth over €1.5 billion in a full year. This included a reduction in the main rate of USC, the first such reduction in five years. This was a very important part of the package as it allowed, when combined with the changes to tax credits and tax bands, earners at all income levels to benefit from the income tax changes. I expect to be in a position to deliver a further substantial income tax package in October which will again include changes to tax credits, the standard rate cut off point and the USC.

An important part of last year’s Budget was the enterprise package which included measures in relation to EIIS, the R&D tax credit and a new CGT incentive for angel investors. I am keeping all enterprise related tax provisions under review and I expect to bring forward further measures in Budget 2025.

As policymakers, we face a number of constraints in calibrating budgetary policy: as well as the simple question of what resources are available, there is the more important decision of what approach is appropriate in view of economic conditions and the long-run sustainability of the public finances.

There is also the revised European fiscal framework, which will have substantial implications for the formulation of budgetary policy in Ireland.

Our strong headline fiscal position means that Ireland will not receive a formal binding fiscal constraint from the European Commission. Nevertheless, the new budgetary framework will require all Member States to submit binding fiscal plans to the European Commission: this will commit us to a binding expenditure path over a five-year period.

This is a sea-change in terms of our budgetary cycle. It means that, going forward, we will need to consider fiscal policy in the context of a defined path for net public expenditure. In general, once Member States’ plans have been endorsed by the European Council it will not be possible to alter the fiscal parameters, unless a new government takes office. This means that we must carefully consider our approach, taking into account the wider economy and pressures facing the public finances to formulate a realistic, credible and sustainable plan for Ireland.

Of course, much of the updated framework mirrors the government’s domestic budgetary strategy: we have set out our own medium-term expenditure framework, built around keeping public expenditure growth at sustainable levels.

A key objective of the revised EU fiscal framework is to foster stronger ownership with the new national medium-term fiscal-structural plans. A crucial part of this starts today. The new framework means the government will be required to consult with stakeholders ahead of the formulation of a new medium-term fiscal plan. Today provides the perfect opportunity to do just that.

The National Economic Dialogue has been an important part of our budgetary process for almost a decade now and given this sea-change in our budgetary cycle, takes on even greater importance today. The discussion provides an important opportunity to frame budgetary policy not just for next year but over the medium-term.

When we reflect on the events of the last few years, it seems clear that we are living in a world where major shocks have become almost a regular occurrence. It is a testament to the fundamental resilience of our economy that we have navigated all these challenges and emerged in such a strong position.

We know that there will be further challenges to face. In uncertain times, it is perhaps even more important that we act now, while we have the opportunity to do so, to prepare for the future. I look forward to hearing your views on how we can best balance responding to the pressures of today and ensuring that our public finances remain resilient to future shocks.

Thank you.