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

I thank the Chair and the members for the invitation to the Minister for Public Expenditure and Reform and myself to attend the committee today to make our presentations on the status of our budgetary work. I will begin by briefly outlining the economic and budgetary context for the budget. This is a challenging and deeply uncertain period for our economy. Over the past several years, we have found ourselves facing a series of shocks, including Brexit, a pandemic and the consequences of a war. The pandemic that dominated our lives for two years has receded, and I think it is important we do not lose sight of the fact that, even with the challenges we are facing, we have recovered with remarkable speed and strength. The strength of the recovery is driven by two factors: the resilience of the Irish people and the success of the budgetary and economic policy of the Government over the past two years. During the pandemic, the Government made available resources in the region of one fifth of national income to protect households, businesses and our health throughout the crisis. That was the appropriate response, and it laid the foundation for a robust and broad recovery.

For a brief period at the start of this year, the prospects for the economy appeared to be bright. However, we are now confronting the consequences of the war on Ukraine. It has changed the economic situation and outlook, with this being most evident in the changes in energy and commodity pricing. The reduction in purchasing power that has taken place due to this change in pricing will dampen consumer spend over the coming quarters, with the risk of increased uncertainty and weaker external demand affecting investment decisions by employers. As a result, my Department is revising its projection for growth in our economy next year in the budget. We will make a downward revision, which I will confirm today fortnight. However, there are many positive signs in our economy. Due to the reasons I outlined, our jobs market has made a remarkable recovery over the past two years, with 2.5 million people in employment in the second quarter, the highest level on record, and an unemployment rate of 4.3% recorded in August. We are, therefore, facing into these challenges from a good starting point.

However, it is also clear that the cost of living is the most immediate and urgent challenge facing our country, households and businesses. Of course, it is not the only issue that we will have to contend with. That is why the Minister for Public Expenditure and Reform and I have said that budget 2023 will focus on the cost of living, with further interventions aimed to help. However, I emphasise to the committee that in drafting this budget we do have a particular responsibility to strike a balance. We have to provide help to those who need it, but without making inflationary problems here at home even worse. As a Government, we have an important role to play in limiting the impact of the current price shock. We know that. However, as we have seen from many other countries, there are limits to what any one Government can do to address the effects of global pressures outside of our direct control. As we remember from the 1970s and other points, trying to respond back and overreacting to some of the challenges of inflation can result in far bigger and more structural problems in the longer term.

I will now turn to the fiscal position, as it currently stands. At the end of last month, tax revenues stood at almost €50 billion, up by more than €10 billion on the same period last year. Income tax continues to perform well, and reflects the resilience of our labour market and the success of Government policy. The strong performance of VAT receipts confirms the rebound in consumer spending once public health restrictions were lifted. However, it should be noted that much of the surge in tax revenue that we have seen take place across the year is due to particular increases in corporate tax, which amounted to nearly €12 billion to end of August. My officials expect these receipts to top €20 billion this year. This is an enormous figure. To put it in context, a decade ago receipts from the corporate sector amounted to approximately €4 billion. These receipts are a reflection of our success, but, as the Government and the committee will recall, I have frequently warned that this is an extremely unreliable revenue stream that could be volatile in the future. The surge in corporate tax revenues is concentrated among a small handful of firms. To put it bluntly, the future growth of corporate tax receipts is not a one-way bet. Positive headline figures can, as a result, serve to obscure real challenges and vulnerabilities in our public finances in the medium term.

With this in mind, my Department last week published a range of corporate tax loss methodologies, and we will publish an alternative measure of the fiscal position that includes estimates of windfall corporation tax receipts.

In the summer economic statement, the Government set out our parameters for the budgetary strategy for 2023. Our total budget package for next year stands at €6.7 billion. As the Minister, Deputy Michael McGrath, and I have confirmed, a set of one-off measures will be provided this year. One of my main objectives in this budget will be to do what I can to try to help workers so that they do not find themselves in a position where they pay more income tax solely because of wage changes. For future years, we will stay within the parameters of the medium-term budgetary strategy set out last year. However, the Government believes that the parameters outlined earlier this year are appropriate, given the significant change in pricing.

This is a challenging time. We have once again found ourselves facing an unforeseen economic shock. We in government are very much aware that many are struggling to make ends meet as we approach a difficult winter. However, there are also reasons for hope. Employment is now at record levels and our public finances are back on the road to sustainability, giving us the ability in this budget to help on a significant scale with the cost of living challenge. We have shown time and again over the past two years that we will act when necessary to protect households and businesses to the extent that we believe is affordable and sustainable and does not create other risks in future. We will aim to continue with this approach in the forthcoming budget.