Summer Economic Statement 2024 - Analysis

Strong tax receipts mask runaway current expenditure

The release of the Summer Economic Statement (SES) has signalled a Budget 2025 package of €8.3 billion. The package is larger than many anticipated, even allowing for the fact that this is the final budget before the next election. A large part of the budget package will go towards current expenditure, which is perhaps a missed opportunity.

PwC’s pre-Budget submission outlined a need to stimulate Ireland’s future economic growth, while also safeguarding the State’s future finances. This Budget should prioritise spending on areas that will provide a tangible social and economic return, such as housing, climate action, education, and infrastructure. These are the areas that matter most to businesses and citizens, and can boost Ireland's productivity and competitiveness in the long run. 

Budget 2025 needs to support the delivery of a resilient, competitive and green economy. One that supports private enterprise, foreign direct investment, and social cohesion. As the final Budget before the next election, it represents a critical moment for this Government to prove its commitment to these goals and to address the long-term challenges facing the country.

The proportion of the budget package allocated to current expenditure does not appear to be strategically aligned with these long-term challenges and opportunities which the country faces. The 6.4% increase in current expenditure which was signalled in the SES continues a concerning trend of cost overruns in recent years.

Healthcare spending 

Of particular interest is health expenditure which now accounts for 28% of all current expenditure. Health expenditure has more than doubled over the past decade, and it is difficult to see how the Government can continue funding this rate of increase in years to come.  The SES flagged that an additional €1.5 billion in funding for the health service will be provided in 2024, despite the health service having already run €1.1 billion over budget this year. The SES also provides for €1.2 billion additional spending in Budget 2025. 

Record tax receipts, but they may not last forever

The Government is in the fortuitous position of having record tax receipts to shelter such cost overruns. At end-June, tax revenues were ahead of the same period last year by 9.3%. Robust income tax (up 7.5% on the same period last year) and VAT revenues (up 6.2%) also provide an indication of the strength of the Irish economy. However the majority of the annual growth has been driven by a significant increase in corporation tax receipts, which has seen a more-than five-fold increase over the last decade. 

However, caution should be applied. The strong growth in tax receipts is underpinned to a significant extent by corporation tax receipts, which is susceptible to possible fluctuations if a global economic slowdown were to occur. It is, therefore, encouraging to see in this year’s SES acknowledgement that the Government “cannot, and will not” use these potentially transitory receipts to fund permanent increases in public expenditure. A consistent breach of the 5% spending rule in recent years, however, would indicate that there is still room for improvement in this area - albeit the Government has had to grapple with  cost-of-living and population growth challenges, amongst other things.

A potentially more productive approach with respect to expenditure increases would have allowed for greater scope to deliver on strategically important capital projects. Close to €91 billion will be provided for current expenditure this year, with €14.5 billion being allocated to capital expenditure in comparison.

Housing and infrastructure challenges

Prioritising strategically important capital projects and investing in the future productive capacity of the economy is essential if Ireland is to maintain its economic success for future generations. For instance, Ireland’s acute housing shortage and inadequate infrastructure are among our most pressing challenges and one that should be a strategic priority. From an economic perspective, it represents a significant threat to fiscal growth when businesses cannot attract or retain talented workers to live in cities, towns or villages due to a lack of housing stock.

As in other areas, tax policy can play a vital role in reversing this situation. Such policy options range from:

• Extending the retrofitting scheme aimed at modernising Ireland’s housing stock and bringing stock into the market. 

• Reducing the tax cost for Irish businesses letting properties to staff at below market-rates. 

• Developing incentives to promote carbon and cost-efficient modern building methods including modular homes or housing components.

Support for Private Businesses

Similarly, measures which stimulate growth and incentivise investment into private businesses would serve as a boost to economic growth in future years. Measures such as:

• Assisting private businesses in securing investment and raising funds, such as allowing interest earned on loans by angel investors to be taxed at 12.5% (instead of 25%) 

• Increasing the lifetime limit for the Revised Entrepreneur Relief to €5m (from €1m). 

• Removing cash as a non-qualifying asset for Capital Acquisitions Tax Business Relief purposes.

It is positive that some receipts are now being directed towards Ireland’s two new sovereign funds - the Future Ireland Fund and the Infrastructure, Climate and Nature Fund. However, a more fiscally prudent approach with respect to current expenditure would be preferable. The rapid growth in corporation tax receipts cannot last forever. Adding permanent increases in current spending on that basis would be fiscally irresponsible. The Irish Fiscal Advisory Council has repeatedly warned about this. Putting our robust tax receipts to longer-term and more productive uses would safeguard the public finances. It would also provide a springboard to maintain Ireland’s strong economic growth for future generations.

We are here to help you

Stay tuned for further updates and key insights from the PwC Tax Policy team in the lead-up to Budget Day. Our pre-Budget webcast on 4 September will provide an overview of the key measures we expect ahead of this Government’s final budget. We will also be with you on Budget day to pick apart what that Budget 2025 delivered, and should have delivered.