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.