Minister for Finance says Ukraine crisis will have significant impact on public finances

The Russian invasion of Ukraine will have a significant impact on the public finances, resulting in a budget deficit rather than a budget surplus this year, Minister for Finance Paschal Donohoe has indicated.

The Government had been expected to run a small budgetary surplus in 2022, the first since 2019, on the back of strong consumer spending and employment growth in the wake of Covid-19. However, Russia’s war in Ukraine has dramatically altered the economic outlook.

“Higher prices for energy and other goods will weigh on economic growth in the months ahead, and this will affect tax revenue,” Mr Donohoe said, while noting that the costs associated with housing refugees fleeing the fighting would be “substantial”.

The Government estimates that it will cost up to €2.5 billion a year to accommodate 100,000 refugees. The State has so far taken in 18,000.

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“My expectation is that we will finish off this year with a deficit. If we had been in a different place and had not see the terrible war unfolding in front of us and the economic consequences of it, we would be presenting a very different economic outlook,” Mr Donohoe said.

The expected budgetary shortfall for 2022 will be included as part of the Government’s Stability Programme Update, due out next week.

As the EU prepares to impose more sanctions on Russia, Mr Donohoe indicated that his department had modelled the impact of an adverse energy supply shock on the Irish economy, the results of which would also be published next week.

Exchequer returns

He was speaking as the Department of Finance published another strong set of exchequer returns which show the Government collected just over €17 billion in taxes during the first three months of 2022. This was 31 per cent or €4.1 billion up on the same period last year.

However, the department cautioned that the early months of 2021 were distorted by the lockdown, which flattered the year-on-year comparison.

The figures show VAT – traditionally a proxy for consumer spending – generated €5.85 billion in the first three months of the year, 30 per cent more than in the same period of 2021.

Income tax, a reflection of the strong labour market, generated €6.8 billion, up 16 per cent on the same period last year, while excise duty receipts were flat at €1.2 billion, perhaps reflecting the impact of rising energy prices.

Corporation tax delivered just under €1.9 billion, which was 224 per cent up on last year, but this reflected earlier-than-expected payments from several companies that had been due in August.

As a result the Government generated a surprise budget surplus of €200 million in March, compared to a deficit of €4.2 billion recorded at the end of March 2021, an improvement of over €4.3 billion.

The increase reflects strong growth in tax revenues, the department said.

Supports

Spending for the three-month period amounted to €18.9 billion, €600 million or 3 per cent below the same period last year. This was driven by a decline in expenditure in the Department of Social Protection due to the impact of Covid restrictions in early 2021 and increased spending on pandemic supports.

“As we emerge from the pandemic we now face a new challenges, including the impact of the Russian invasion of Ukraine and the humanitarian response. Providing for Ukrainian refugees is a key humanitarian concern which the Government addresses through a whole-of-government approach. However, this will involve significant costs,” said Minister for Public Expenditure Michael McGrath.

Some €2.5 billion of the Government Covid contingency fund will provide the Government “ with some scope to meet the costs of the humanitarian provision in response to the crisis in Ukraine”, he said.