Paschal Donohoe (Dublin Central, Fine Gael) | Oireachtas source

I thank the members for the opportunity to attend the committee today to discuss the summer economic statement, which sets out the Government's medium-term budgetary strategy and the parameters for budget 2023. I will begin by briefly outlining the economic and budgetary backdrop against which the budget is being prepared.

Budget 2023 is clearly coming at a challenging time for Ireland. A little over two years ago, a pandemic without precedent upended our economy and society. I know we all want to move on from the pandemic and to leave it in the rearview mirror, but we cannot forget the toll it has taken on lives, livelihoods and our national finances. The Government responded, quickly and decisively, to protect households and businesses and to support our healthcare sector. We employed the full range of the resources we had carefully built up to prevent a deep and disastrous recession. This approach worked. At an enormous cost, we protected our economy from long-term damage and set the stage for a robust and broad-based economic recovery, particularly with regard to employment, when the pandemic had been brought under control. Today, there are more people at work in Ireland than ever before in our history. In the depths of the pandemic, when unemployment was at record levels, few could have thought that possible. It is a testament to the success of our budgetary policy that the link between employer and employee was maintained, and that people were able to return to work in such numbers as the recovery took hold.

However, as we are all well aware, the challenges did not end when the pandemic receded. The invasion of Ukraine, and the necessary sanctions that have been imposed, have triggered a further global economic shock. This is most evident in energy and commodity prices. Along with lingering after-effects from the pandemic, headline inflation in Ireland, like most advanced economies, is now running at highs not seen in many decades. In June, inflation rose to 9.6%, the highest level in nearly four decades. People clearly feel the pain, with prices rising in the supermarket, at the petrol pump and elsewhere. Once again, the Government has acted in response to an external economic shock. While it is beyond the ability of any Government to fully offset the impact of inflation that is driven by global pressures, we have provided €2.4 billion in direct relief to help ease the burden. I note that measures have been particularly focused on assisting the most vulnerable. Analysis of the distributional impact of these measures show that they are progressive, with the gains in disposable income most keenly felt by those in the lower income deciles. For example, the Economic Insights - Spring 2022document published by the Department of Finance in April 2022 shows that all households are expected to see increases in their weekly equivalised disposable income, with those in the lowest three income deciles gaining the most. Coming on top of the response to Covid, the Government has made available more than €50 billion in fiscal support over the past two and a half years.

This has taken a further toll on our public finances. The strength of the economic recovery, supported by Government action, has enabled us to make significant progress in restoring our national finances to a healthier position than a year ago, but much remains to be done. At over €230 billion, our level of public debt on a per capitabasis is among the highest in the developed world. The economic context is now changing rapidly. As a result of the jump in inflation, the extraordinary monetary support that has been made available over the last few years is now being withdrawn. The cost of borrowing is now rising. The era of low-cost borrowing is, clearly coming to an end. There are now clear indications that momentum in the global economy is slowing and this is the case in Ireland too. Furthermore, it is fair to say that the risks to the economy which we recognised in the stability programme update, have now begun to show signs of materialising. A chief further risk is the potential for a withdrawal of natural gas supplies from Russia to mainland Europe. While we do not, at present, view this as the most likely development, it clearly constitutes a very real risk nonetheless. It would result in major economic disruption in export markets with severe second-round effects in Ireland.

In these highly uncertain times, with heightened vulnerabilities, managing the public finances in a careful and responsible way is a matter of urgency. The committee will recall that the Government set out its medium-term budgetary strategy in last year's economic statement. In brief, this strategy was aimed at putting our public finances on a sustainable trajectory by limiting core current expenditure growth to the trend growth of the economy. This, of course, was framed in far more benign inflationary circumstances.In recognition of the changed circumstances, we have temporarily amended the expenditure rule for next year only. To protect public services and incomes, core current expenditure will now increase by 6.5% in 2023. For later years, the 5% rule will remain unchanged. I would point out that the Irish Fiscal Advisory Council has endorsed this aggregate fiscal approach. Accordingly therefore, the budget package for next year will be €6.7 billion, comprised of €5.65 billion in additional public expenditure and a tax package of €1.05 billion. The Minister for Public Expenditure and Reform, Deputy McGrath, will provide the committee with more detail on the expenditure package shortly. On the tax package, I note that this is now double the amount allowed for in the original budgetary strategy set out last year. This is in recognition of the need to adjust the parameters for budget 2023 in view of the altered economic context. A focus of the tax package in the budget will be to ensure workers do not move into higher tax bands purely due to inflation. Inappropriately or poorly designed fiscal policy runs the risk of backfiring. It can lead to an increase in inflationary pressures, with budgetary policy itself becoming part of the very problem that we are trying to address.

This leads on to some concluding comments on corporate tax. Taking into account the positive developments in tax revenue to date, an overall budget package of €6.7 billion is consistent with a very modest budgetary surplus for next year. There will of course be those who say we should spend this surplus. What I find remarkable, is that those who call for higher spending, on housing for example, will at the same time object to those same homes being built.

I want to stress that the headline taxation figures present an overly benign picture. Much of the recovery in our public finances is due to the continuing surge in corporate tax receipts – up 53% in the year. To be clear, we welcome these receipts. They reflect well on Ireland as an attractive location for highly profitable multinational firms. As I have warned many times however, these receipts are potentially extremely volatile and cannot be guaranteed at current levels into the future. More than half of our corporate tax yield is now paid by ten large companies. This means a very significant portion of our tax take is subject to the businesses decisions of a small number of taxpayers. The buoyant corporate tax receipts we have experienced over the past several years could be transient, and they do not form a sound basis for building permanent commitments. We cannot repeat other mistakes when temporary revenues were used to finance permanent spending because we know what happens when those revenues disappear. I have therefore asked my officials to examine how much of the current corporation tax yield may be "excess", above what should be expected from the economic fundamentals, and this will be reported in advance of the budget. Identifying this excess will enable us to avoid basing expenditure on unreliable revenues while ensuring Ireland remains a top-tier destination for foreign direct investment.

I will conclude on that point. The Government has no money of its own. It is public money that is hard-earned by the taxpayers of Ireland. We have a duty to be responsible with that money, to make what at times can be difficult choices, to do what we can but to be honest with people that we cannot do everything. The budgetary strategy set out in the summer economic statement meets these objectives. It helps to strike the appropriate balance between supporting those who need help, such as individuals, families, farmers and business owners, while not adding to inflation.