The massive spike in the rate of inflation has meant the Government has had to revise its plans for Budget 2023 fundamentally. Previous spending guidelines have been set aside – for now anyhow – and it is clear that the budget will involve a big increase in expenditure and a much larger tax package than had been envisaged.
Preparing a budget in the wake of the inflation surge changes the goalposts for budget Ministers Paschal Donohoe and Michael McGrath. Inflation boosts both tax revenues and spending pressures. There is a need to protect those worst hit and some scope exists in the redrawn figures to do so, including via some measures this year.
Finding the right balance will not be easy – and we will have to await the budget itself to see how the Government manages this. Core spending is due to rise by 6.5 per cent – above the previous 5 per cent ceiling –and there will be further once-off measures. It is a reasonable approach, given the inflationary pressures, but the test will come in delivering on plans to return to the previous spending growth plans from 2024 on.
What if the inflation rate stays high? Supporting those worst hit, while not fuelling inflation further, is difficult. Central to this will be targeting extra spending and tax relief as forensically as possible. This can be done in part through the welfare system. Resources will also be required for lower wage earners and to readjust the tax system for inflation. It is difficult territory politically as the bottom line is that higher energy costs leave Ireland worse off – and thus compensating everyone fully is impossible.
The scale of what is possible, meanwhile, is framed by Ireland’s high national debt, the increased cost of State borrowing and the uncertain economic outlook. The State’s reliance on corporate tax is also a key factor. Just ten big firms now contribute one euro in every eight of total tax revenue via corporation tax and more if the income tax payments of their employees is added in. With fears rising of an international recession, lower corporate profits are clearly a risk for Irish tax revenues.
Strikingly, on official calculations there would be an exchequer deficit of about ¤7 billion both this year and next were corporate tax receipts to have stayed at pre-pandemic levels. In contrast, a small surplus is now expected for both years by official forecasters. However, the challenge will increase significantly if inflation does not abate substantially in 2024, or if the euro zone economy lurches into recession over the winter, perhaps due to an interruption in gas supplies. Come budget day, the objective must be to keep as much flexibility as possible, while also helping those worst hit by soaring prices. It will not be an easy balance.