in April this year the Irish Government published medium term fiscal projections incorporating a cumulative General Government surplus of €65bn over the four years 2023-2026, prompting much comment as to how best to utilise those funds, although of course forecast rather than actual. Following the 2024 Budget that cumulative total is now €40bn, the reduction due to a combination of weaker forecast revenue growth, one-off expenditure and tax measures, cuts to income tax, transfers to a newly created medium term fund and stronger growth in core expenditure.
The economic backdrop forecast for 2024 in the Budget is fairly benign, in that real GDP growth rebounds to 4.5% from a projected 2.2% this year with the labour market remaining around full employment , albeit with weaker employment growth, while CPI inflation is projected to fall sharply to average 2.9% from 6.3%, so supporting real incomes. Modified domestic demand is forecast to match this year’s 2.2% estimate.
The pre-Budget White paper had projected an Exchequer surplus €3.5bn this year but that is now reduced to €2.2bn, as a result of additional one-off current expenditure on household energy credits and other cost of living supports. For 2024 the pre-Budget figures had projected an Exchequer surplus of €9.4bn and that is now €1.8bn. Tax receipts are €0.7bn lower as a result of Budget decisions with current expenditure up by €2.6bn and capital rising by €5bn including a €4bn transfer to a newly created Future Ireland Fund.
Is the Budget inflationary? Probably, although the inflation forecast does not imply a big impact.The economy is around full employment and ‘core’ expenditure rises by €5.3bn or 6.1%, with an additional €5.3bn in ‘non-core’, largely related to humanitarian assistance to refugees , as against a projected €4.3bn rise in tax receipts. Non-tax revenue also falls sharply from €2bn to €1bn, in part because the Central Bank surplus will disappear, although there is no provision for further sales of bank equity.The Central Bank is also unlikely to be thrilled by the Budget decision to give a one-off tax relief for mortgage holders whose interest payments rose in 2023 relative to the previous year.
What about Government debt? There the picture remains bright because the average interest rate on the debt remains remarkably low, at a projected 1.6% in 2024, while GDP is forecast to rise in nominal terms by over 7%, so even though gross debt is forecast to remain stable around €223bn the ratio to GDP falls to 38.6% from 41.4% in 2023.
Irish 10-yr bonds trade around 40bp over Germany and 20bp through France so the market does not believe Ireland has a debt issue, and on that basis the Government decided that the benefit to society of higher spending, tax cuts and a Future Fund is higher than a faster debt reduction.