Irish net debt ratio projected at 28% of GDP in 2025 Budget

The Irish 2025 Budget was delivered against an unusual fiscal backdrop. Unlike virtually all its euro peers the Government is running a fiscal surplus and the debt ratio is low and falling, helping to make Irish 10yr bond yields the third lowest in the Euro Area.The economy is also around full employment, prompting some concerns that an expansionary budget would be inflationary, although the current inflation rate is only 0.2%, the lowest in the EA. In addition, as a result of the recent ECJ ruling on the Apple tax case, €14.1bn is to be transferred from an escrow account to the Irish Exchequer, €8bn this year and the balance in 2025.

A feature of the Irish budgetary process is the publication of a White Paper a few days head of the Minister’s presentation, setting out pre-Budget estimates of the Exchequer position at end-2024 and a forecast for 2025. The former showed tax receipts some €13bn ahead of the original Budget 2024 projection, largely due to the €8bn from Apple and another large overshoot (€5bn ) from current Corporation tax receipts. Government current voted spending is also expected to come in some €3bn ahead of that projected, but still leaving a very large current budget surplus of €30.8bn in the White Paper, partially offset by a capital deficit of €17.5bn( which included a €4bn transfer to the Future Ireland Fund) and therefore an overall Exchequer surplus of €13.3bn.

The Government decided to spend over €2bn of this in 2024 in the form of a ‘cost of living package’, comprising a raft of social welfare supports. Consequently the Budget package on the day amounted to €10.3bn instead of the €8.3bn figure announced a few months ago.

For 2025 that package included €1.6bn in income tax and USC reductions, which generally went beyond indexing credits and bands and will reduce tax paid by 2.2% for a single worker on average earnings. Underlying tax revenue is forecast to rise by just 3% in 2025 (and fall marginally in total given the Apple tax impact)but the forecast current budget surplus is still large, at €28.6bn. The capital deficit is projected at €20.7bn (including €6bn as announced in transfers to the Future Ireland Fund and the Infrastructure fund), so leaving an Exchequer surplus of €7.9bn. The General Government balance is forecast at €9.7bn or 1.7% of GDP, down from €23.7bn (4.5% of GDP) in 2024.

The Government’s choice of how to allocate the Apple funds was interesting, in that it chose not to transfer all or part to the two Future Funds,which have restrictions on use in terms of timing, and instead plans next year to announce additional spending on various capital projects , including Water, Electricity and Transport. As a consequence the NTMA which had already overfunded this year, will have much larger cash balances and so will not need to fund to the same extent as previously thought in 2025. Ireland’s gross debt falls only modestly therefore this year, from €221bn to €217bn (41.4% of GDP) but net debt falls sharply to €166bn (32% of GDP). Next year the gross debt ratio is projected at 38% of GDP and the net figure at 28%.

Finally, the macro forecasts underlying the Budget arithmetic paint a benign picture, with the economy projected to remain around full employment against a backdrop of sub-2% inflation and real wage growth around 2.5%.