The Irish Government has just published its annual Stability Programme update(SPU), as mandated by the EU, setting out fiscal projections out to 2027, although this will be the last update in this form as revised fiscal rules will require the publication of a five-year fiscal Structural Plan (more on that below)
For context, Ireland has been running very large current Budget surpluses , supported by substantial inflows in Corporation tax. In 2023 , for example, current revenue amounted to €90bn, against current spending of €73bn and if both are assumed to rise at broadly the same pace the absolute surplus grows over time , and was projected to exceed €24bn in 2026 . Of course the Government has used this excess revenue to fund capital spending, but this still left the Exchequer as planning to run overall cash surpluses into the future, raising the question of whether it would be better for Ireland to run down debt at a rapid clip or to use the surpluses to fund future spending.
The Government chose the latter option and set up two funds; the Future Ireland Fund(FIF) will be managed as an investment fund out to 2035, receiving an Exchequer transfer of 0.8% of GDP each year in order to help cope with fiscal pressures arising from an ageing population, while the Infrastructure , Climate and Nature Fund (ICNF)will be a shorter term counter cyclical vehicle for infrastructure spending out to 2030, receiving €2bn annually from current receipts. This still leaves the Exchequer running projected surpluses, and hence nominal debt falling,and the State running much larger General Government surpluses as these transfers are included in the latter, along with surpluses in the Social Insurance Fund.
What has changed in the SPU? .For the 2024 outlook very little, which is surprising as forecast GDP growth this year has been revised down and tax receipts to date are running behind profile. However, the Department of Finance expects this to largely correct, so tax receipts are projected to emerge only modestly behind target, with higher voted current spending offset by reduced spending elsewhere, including lower than forecast EU contributions and a lower contribution to the FIF (because GDP fell last year). The net result is that the projected Exchequer surplus is now seen some €0.7bn higher at €2.5bn, with the General Budget Surplus marginally higher at €8.6bn.
A comfortable fiscal position therefore is expected ahead of the 2025 Budget and the General Election but in contrast there are significant changes to the outlook further out. The economy is deemed to be at fill employment and so employment growth and therefore GDP growth is constrained by labour supply, although net migration is assumed to rise by 35,000 a year. Inflation has also been revised down so GDP in 2026 is now forecast at €600bn or €50bn below the previous projection. As a result tax receipts at that point are lower than was envisaged but the big change is on the spending side, with gross voted current spending in 2026 €5bn higher than forecast last October.’Core expenditure’ is still projected to rise by 5% per annum , albeit against a higher 2023 base , but the contingency reserve has been rolled on to these years, including ‘ Covid-related spending primarily in Health, costs relating to accommodating and supporting beneficiaries of temporary protection from Ukraine and expenditure related to EU funds’.
The upshot is that the Exchequer is now forecast to be running a deficit in 2026 and 2o27 , some €3bn in total, and the General Budget Surplus (which is nstill assumed to include the transfers to the two funds) is smaller , at €8.7bn instead of €14.6bn. The Exchequer deficit therefore means Ireland will actually be borrowing, albeit small sums, at least in part to fund the FIF and ICNF. Nominal debt will therefore rise modestly but given the low interest rate on the debt and GDP growth the debt ratio continues to fall, to 36.7% of GDP by 2026,although the October forecast was 33%.
As noted above this will also be the final SPU. The EU’s latest revisions to its fiscal rules put greater emphasis on each State setting out a five-year plan including spending commitments consistent with a falling debt ratio. Ireland’s debt ratio is already well below the 60% reference value set out in the Growth and Stability pact but will still be required to publish a five-year strategy, set to commence in the Autumn.