Irish Budget change does not make sense

The Irish Government has announced that the 2023 Budget will now be delivered on 27th September, two weeks earlier than planned. This makes little sense and far from bringing it forward there is a strong argument for pushing it out to later in the year, given the degree of uncertainty about energy prices and the risks of a global recession.

In fact ,delivering the following year’s budget in early October , let alone September, risks major forecasting errors, as illustrated in the 2022 Budget. The Government projected tax receipts in 2022 of €70.2bn, or 6.2% above the expected end-2021 outturn of €66.1bn. In the event the latter emerged at €68.4bn, so implying tax growth of only 2.7% in 2022. As the year unfolded a combination of higher real growth than predicted, much stronger employment gains and the spike in inflation rendered redundant the original Budget projections. In April the Government revised the tax target up by €5.5bn, to €75.8bn, and slashed the projected Exchequer deficit from €7.7bn to €1.1bn.

That forecast now looks wrong given the Exchequer figures to end-June and the Summer Economic Statement notes that the budget will probably be in surplus this year and next, albeit without providing any detail (if so Ireland will probably be alone in the euro area in not running a fiscal deficit). Tax receipts are 25% ahead of the same period last year while non-tax revenue is also much stronger than budgeted, including a transfer from the Central Bank of over €1bn and €650m from the sale of bank shares in AIB and BOI. As a result the Exchequer is running a surplus year to date of €4.2bn, and the NTMA’s cash balances (from overfunding) have risen to €35bn.

The Government has already taken some measures to partially offset the impact on households of the surge in energy prices, including a temporary cut in excise duty on fuel, and now intends to spend €400m more than originally budgeted in 2022. The Minister for Finance cannot put tax receipts from this year in a drawer and produce them in January so any tax or spending measures in the 2023 Budget are dependent on forecasts for tax growth next year.

The exact sums the Government plans to spend are clouded somewhat by the distinction made between ‘core’ gross voted spending, both current and capital, and total voted spending, as the latter has of late included one-off’ items largely related to Covid supports. These one-off sums are projected at €7.5bn this year , which alongside a ‘core’ total of €80.5bn gives a total gross voted spend of €88bn At end-June spending was €38.5bn, implying a spend of some €50bn in the next six months if the plans are met.

The Government had announced that it intended to limit the annual growth in ‘core’ spending in the medium term to 5%, implying a rise in 2023 of €4bn. That was predicated on inflation of around 2% which is clearly no longer plausible and the rise now planned for next year is €5.3bn, or 6.5%, taking the total to €85.8bn. Some €3bn of that has already been allocated leaving the balance to be decided on Budget day, with a tax package of €1.1bn also flagged.

What matters for the overall Budget arithmetic is total spending and there the planned rise is much lower, at €2.3bn, taking the total to €90.3bn, which explains why a Budget surplus is expected. The ‘one-off’ spending component is projected to fall to €4.4bn from €7.5bn as Covid supports dwindle, with the bulk of the total now a ‘Ukraine Humanitarian Contingency’.

The 2023 Budget is billed as a ‘cost of living’ budget, with extra sending and tax reductions to help cushion some of the impact of higher inflation, but those will come into effect next year. Moreover, as they have already been signalled there is no longer an ‘announcement effect’ in the Budget, whenever it is held. The Budget will include detailed economic forecasts and of course a prolonged period of high inflation and/or a marked global slowdown could again derail the Budget assumptions.

Tax surge transforms Irish fiscal outlook

The 2022 Budget, delivered last October, projected a €7.7bn Exchequer deficit , largely due to high capital spending by the State, with a capital deficit of €11bn offsetting a €3.3bn current budget surplus. The projections were predicated on real GDP growth of 5.0% and price inflation of 2.2%, with tax receipts forecast at €70.2bn, which implied a very modest rise of 2.6% on the 2021 out turn.

Tax receipts grew by by an annual 32% in the first quarter of 2022, so it was clear that the Budget forecast was redundant, in part because inflation was much higher than envisaged, so boosting expenditure based taxes and income tax. The Department of Finance normally publishes in February a monthly profile of expected tax receipts but that has not appeared, also indicating that a significant revision to the initial fiscal outlook was likely. That has now duly emerged in the form of the Stability Programme Update (SPU) which is mandated each April for EU member states.

Tax receipts for 2022 are now projected at €75.8bn, which is €5.6bn above the Budget forecast and 11% higher than the 2021 out turn,reflecting much higher than expected receipts from Income tax, VAT and notably Corporation tax, which yet again has surprised to the upside. The only heading seeing a fall is Excise , due to the cut in duty on fuel. Non-tax receipts are also now above the initial target while current spending is broadly as planned, so giving a current budget surplus of just under €10bn. Capital spending is expected to be larger due to higher prices but offset by stronger capital receipts (reflecting the sale of bank shares by the State) leaving the capital deficit marginally lower than planned at €10.8bn.The net result is a projected Exchequer deficit of just €1bn, and a broader General Government deficit of €2bn or 0.4% of GDP (the initial target was €8.3bn , 1.8% of GDP).

The outlook for Ireland’s debt also looks even more positive in these new projections even though the debt dynamics were already favourable given that the interest rate on the debt is substantially below the growth rate of GDP. In 2022, for example, the economy is now forecast(in the SPU) to grow by 11% in nominal terms against a 1.5% interest rate on the debt, which leads to a large fall in the debt ratio, to 50.1% from 55% ,as the primary fiscal budget (the actual balance excluding debt interest) is actually in surplus. The latter is forecast to increase out to 2025, which helps to generate a debt ratio of under 41% by that year.

In fact some of the commentary on the debt interest bill is misleading, as it is projected to fall, not rise, declining to €3bn in 2025 from €3.6bn this year. This may seem counterintuitive given the recent rise in Irish bond yields (the 10 yr yield is currently at 1.45%) but the interest bill is largely determined by the cost of new bond funding (largely at a fixed rate) relative to the interest rate on the maturing debt. From 2023-25 the coupons on the maturing bonds range from 3.4% to 5.4% so it would require much higher current rates (and much higher borrowing) to prevent an ongoing fall in the interest bill, although that does start to reverse from 2026 as bonds issued in the very low rate environment start to mature.

These forecasts may not emerge as planned of course but as it stands Ireland is set to run a very large current budget surplus and an overall budget excluding debt payments also in surplus, which alongside a falling debt ratio does not support the view that the debt is a big issue.