The Summer Economic Statement outlines the Government’s strategy as regards budgeting decisions in the medium-term, and establishes the fiscal parameters of the forthcoming budget.
It was released against the backdrop of a confluence of factors, namely the war in Ukraine, tension between the European Union and the United Kingdom over the Northern Ireland Protocol, rising inflation and upward pressures on lending rates in the eurozone. Collectively, these issues create much uncertainty in the overall economic landscape.
Budget 2023 is set to take place this year on 27 September, two weeks earlier than initially planned. The Summer Economic Statement outlines the broad measures we can expect to see as part of Budget 2023.
The Statement was released at a turbulent time, with a number of factors impacting the country’s economic outlook.
Public debt has increased as a result of the support provided by the Government throughout the course of the COVID-19 pandemic.
Until recently, Ireland—like many developed economies—could borrow interest-free in the eurozone. Currently, however, there are significant inflationary pressures across the eurozone. In the case of Ireland, inflation is estimated by Eurostat to have reached an annual rate of 9.6% in June 2022, higher than the figures predicted by most economic forecasters. These inflationary pressures, together with the expected adoption of less accommodative monetary policies by the European Central Bank and many other central banks globally, have already resulted in increased interest rates and borrowing costs.
Tackling inflation and supporting those struggling with increased costs lies at the heart of the Summer Economic Statement. Inflation management is a key objective of the Government in the medium-term.
The Government is also faced with an ongoing housing crisis, a scarcity of public health services, an ageing population and a physical environment that is increasingly showing the side-effects of climate change.
In the Spring of 2022, tax revenue was projected at €75.8bn, up almost 11% on an annual basis. One of the primary drivers of this strong revenue growth is the strength of corporation tax receipts. These receipts amounted to €15.3bn last year. However, it is worth noting that half of these receipts are attributable to just ten large taxpayers, meaning that the Irish corporation tax-take is largely reliant on the continued presence of these taxpayers and other multinationals that pay significant levels of corporation tax relative to Irish domestic businesses.
The Government intends to use these corporation tax receipts to rebuild its fiscal buffers over the coming years and not for day-to-day spending commitments.
As a result of the above factors, the Government has confirmed that the budget will be a ‘cost of living’ budget such that it will aim to help households navigate the turbulent economic landscape.
The Summer Economic Statement projects core expenditure of €85.8bn next year. Core expenditure relates to ongoing permanent expenditure to provide public services and capital expenditure on health services, education and social support. This core expenditure includes an overall budgetary package of €6.7bn, comprising additional public spending of €5.65bn and taxation measures amounting to €1.05bn.
In terms of spending, the €6.7bn figure represents an increase in spending of 6.5% from the prior year—greater than the 5% growth that was originally foreseen in last year’s budget. This increase is aimed at tackling the impact of inflation, whilst also protecting the provision of core public services. €3bn of the €6.7bn will be aimed at these core public services with the remaining €3.7bn to be allocated on Budget Day.
The Government also plans to provide €4.5bn in non-core expenditure for temporary measures. This expenditure will provide humanitarian relief for refugees arriving from Ukraine as well as more limited COVID-19 support, to the extent that such support continues to be required.
The Government is also providing for an overall taxation package of €1.05bn next year. This is double the amount set out in the original strategy and, once again, reflects the need to adjust the parameters given the higher-than-assumed level of inflation.
One of the key objectives of taxation policy in the forthcoming budget will be to prevent workers from having to pay additional tax purely because they have moved into higher tax brackets as a result of inflation.
The proposed allocations are in line with our expectations. They demonstrate an adaptive approach by the Government. Inflation is front and centre as the key issue to be tackled.
The Government has expressed the need for additional funding to balance the provision of public services with the aim of preventing excessive amounts of spending, which could result in an overheated economy. The Government also appears to be mindful of the precarious nature of its current corporation tax receipts and is looking to make the most of the high tax-take from this source.
More broadly, they recognise the turbulent state of the global economy and a willingness to provide the necessary resources to support Irish society through this difficult time.
In our view, there is a clear need to balance budgetary measures so that they ease the impacts of inflation with more long-term measures that will help Ireland weather the challenges of housing supply, an economic downturn, climate change, ageing demographics, and digital transition. Sound management of the economy that boosts productivity, attracts investment (particularly in the green and digital space) and supports indigenous businesses is a strategy that would help overcome the aforementioned challenges.
PwC will keep you informed of developments as the Government gives further indications of its strategy and intentions in the run-up to Budget Day. We are also available to assist you in understanding and reacting to any changes that may arise from the upcoming Budget.