Michael McGrath (Cork South Central, Fianna Fail)
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I thank the Chairperson for the opportunity to attend the committee alongside my colleague, the Minister for Public Expenditure, National Development Plan Delivery and Reform, and our officials to discuss the summer economic statement published on Tuesday of last week, which sets out the fiscal parameters for budget 2024.

I will begin by briefly outlining the economic and fiscal context for the upcoming budget. Our economy has weathered a series of unprecedented challenges remarkably well. The level of modified domestic demand is well above its pre-pandemic peak, with little if any evidence of scarring to the economy from the shocks. The underlying strength of the Irish economy is particularly evident in the labour market. There are more people at work than ever before, with the unemployment rate at its lowest in modern history. Inflation is on a clear downward trajectory and the ongoing easing in energy prices will help support growth through the remainder of the year.

On the international front, the economic outlooks remains uncertain and weak. According to the OECD's summer economic assessment, global GDP growth this year is expected to be 2.7%. With the exception of the pandemic-hit year of 2020, this is the lowest annual growth rate since the global financial crisis. Growth is expected to see a very modest improvement next year. Much of the growth is disproportionate and is expected to come from China and emerging markets. Growth is slowing in many of our key export markets as the impact of significant monetary policy tightening in most regions weighs on demand. The outlook among Ireland’s main trading partners is particularly weak, with growth of 0.9%, 1.6% and 0.3% projected this year in the euro area, the United States and the United Kingdom, respectively. Irish exports will not be immune from weaker external demand, although headline exports may continue to benefit from the resilience of exports in some multinational-dominated sectors.

In addition, we cannot ignore the potential impacts of the war in Ukraine. The uncertain course of the war could very well lead to further disruptions in global energy and other commodity markets, including food.

To summarise, on the domestic front, it is clear that the economy is operating at full capacity, having rebounded strongly following a series of negative supply-side shocks. Internationally, however, the overall outlook remains muted, with downside risks to the fore, despite the fact that energy prices and inflation are now, thankfully, on a downward trajectory. I am, of course, acutely conscious that despite our strong economic performance, there are still may challenges facing our economy and society, and I am particularly conscious of the impact of the high level of inflation that our society has been experiencing for the past while, and the income that is having on households and many businesses all over the country.

Core inflation has been more persistent than expected, reflecting continuing capacity constraints, lagged pass-through of energy prices and some evidence of growing profit margins. The rise in interest rates, while necessary to curb inflation, has placed a greater burden on households and businesses. This also has implications for government borrowing over the medium term. We have demonstrated consistently that we will act when appropriate and as needed to maintain public services and protect incomes. Over the past two years we have made available €12 billion in direct support to help offset some of the impact of inflation. However, it is important to emphasise that Government has a responsibility to strike a delicate balance between addressing the issues of today and ensuring that we are prepared for the challenges of the future.

At the headline level, our public finances are performing well. For the first half of the year we are, broadly speaking, where we expected to be in respect of tax revenues. Significant budgetary surpluses are in prospect for the next several number of years. However, beneath the surface, there are real vulnerabilities. The Minister for Public Expenditure, National Development Plan Delivery and Reform, Deputy Paschal Donohoe, and I have said on many occasions that the exceptionally high growth in corporation tax we have seen over the past several years is not sustainable. These receipts are welcome but will not last forever. Estimates by my Department suggest that half of the entire corporate tax yield this year is potentially windfall in nature and that is why it is so important that Government follows a fiscal strategy that strikes the right balance: one that allows for continued investment in our public services and infrastructure, but also maintains our public finances on a positive path.

I believe the strategy which Government set out in the summer economic statement, SES, last week achieves this. Budget 2024 will comprise a total package of €6.4 billion, consisting of slightly above €1.1 billion in taxation measures, and new core expenditure of just over €5.2 billion. This brings core spending growth in budget 2024 to 6.1%. I recognise that this is above the original 5% target that was set out in Government's medium-term strategy two years ago but, as the committee will appreciate, that strategy was framed in a radically different context. A realistic fiscal strategy must take into account the prevailing economic environment. Adjusting the fiscal parameters for budget 2024 makes sense in a context where even though inflation is easing, prices remain elevated. It give us the additional flexibility that we need to maintain the real value of public services, to invest in the productive capacity of our economy, and to adjust tax credits and bands so that workers do not face a higher tax burden just because their wages have risen.

Is there a vote?