The latest exchequer returns for October show a continuation of the strong trends which have benefited the national finances in recent years. The ongoing buoyancy of corporation tax and income tax provide significant flexibility for the Government, which has been able to spend extensively on supporting households through the energy crisis, stash away money for future use and still plan for a budget surplus.
While the trends are welcome, it would not be wise to count on them continuing. The economy is slowing in the face of the energy crisis and, as the latest IBEC quarterly commentary puts it, Ireland’s economic momentum will be challenged over the winter. IBEC has cut its forecast for growth in the domestic economy to 3 per cent next year.
If this happens, then corporate profits, employment and consumer spending will all be affected, and this will knock on to tax revenues. Already there is some cause for concern in the tech sector, where recent share price falls reflects fears that profits are on the slide. Ireland’s reliance on a small number of big firms creates vulnerabilities.
The outlook remains very uncertain, due largely to the consequences of the war in Ukraine. For this reason, the decision to set ¤6 billion aside in the National Reserve Fund this year and next made sense. We just don’t know what lies ahead. Other decisions may be needed too, including how to continue supporting households if the energy crisis persists, particularly if economic growth is slowing at the same time. Rising interest rates make a slowdown all the more likely.
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This week the first of the major payments under the budget energy support programme kick-in, notably a special double month for child benefit payments. The €200 energy credit is also starting to appear on bills and other supports, including those particularly aimed at less well-off households, will be paid as the month goes on.
The Government has made the case that all households should benefit from some of the package, despite criticism that the universal measures will go in part to households who do not need them. That’s politics. But if the crisis persists, the Government will need to think again about directing help in a more focused way. New figures from the Central Statistics Office this week showed that many better-off households, as well as being on good incomes, also have significant savings after Covid.
As the economy slows and resources start to tighten, the Government should start thinking now about its strategy if the energy crisis persists. Trends on gas markets give some hope, but wholesale prices remain multiples of their levels for most of the past decade. The exchequer is flush for now, but there is no excuse not to start planning immediately for what 2023 might bring.