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.