Michael McGrath (Cork South Central, Fianna Fail) | Oireachtas source

I thank the Chair and colleagues for being here. I am pleased to be here with my colleague, the Minister, Deputy Donohoe, and our respective officials today to discuss the stability programme update.

As members are aware, the document was published in draft form on 23 April this year. In accordance with our legal requirements, the final version of the document was submitted to European authorities on 30 April. By way of background, the annual update of the stability programme is prepared each spring by my officials working with colleagues in the Department of public expenditure. It sets out my Department's best assessment of the economic and fiscal situation and outlook.

The legal framework requires forecasts for the next three years at minimum. The fiscal forecasts go out to 2027, while the macroeconomic forecasts once again extend out to the end of this decade. Following a rigorous process, the macroeconomic forecasts were endorsed by the Irish Fiscal Advisory Council on 2 April, which is a legal requirement.

It is important to stress that the SPU is purely a technical document. The numbers are prepared on the basis of the policy positions set out in budget 2024 with no new policy measures incorporated. The Government will formulate the broad parameters of its budgetary policy over the summer and this will be published in the summer economic statement. Before that, the Government will engage via the national economic dialogue, which takes place on 27 May, the theme of which this year is a more shock-prone world and the challenges and opportunities for Ireland. It is also important to highlight, due to a new set of economic governance rules at European Union level, that this is the last time we will be submitting a SPU document. Going forward, member states will be required to prepare and submit medium-term structural fiscal plans to the European Commission.

These plans, which will be endorsed by the Council of the European Union, will commit member states to an agreed net expenditure path and will be monitored through annual progress reports, which will replace stability programme updates and national reform plans. Ireland will publish its first medium-term structural-fiscal plan in the autumn of this year.

Moving to the substantive issues, I will say a few words about the economic outlook for Ireland. Despite the headwinds that have weighed on economic activity in recent years, namely the erosion of purchasing power due to high inflation and the associated tightening of monetary policy, the Irish economy remains in good shape overall. The labour market in particular has proved remarkably resilient, with employment exceeding 2.7 million people in the final quarter of last year, almost 330,000 up on the same quarter in 2019, just prior to the pandemic. As a result, almost three quarters of our working-age population are now in employment, a near-record high. According to the CSO, the unemployment rate in April stood at 4.4%, consistent with any reasonable estimate of full employment.

Looking ahead, some of the economic headwinds look set to ease, and this should support a pick-up in economic activity as the year progresses. Crucially, the energy price shock is now dissipating, and the pass-through from lower wholesale prices to retail prices has triggered a faster-than-anticipated decline in headline inflation. The headline rate of harmonised index of consumer prices, HICP, inflation stood at 1.6% in April, one of the lowest rates in the euro area. Indeed, the disinflation process has further road to travel, and this will boost real wages, real household incomes and, in turn, consumer spending and will result across this year in an improvement in living standards for the vast majority of people in Ireland.

Against this backdrop, modified domestic demand, my preferred measure for the domestic economy, is set to accelerate over the course of this year, with growth of 1.9% projected for the year as a whole. This is a downward revision of 0.3 percentage points from the Department's autumn forecasts, mainly on foot of weaker momentum coming into this year. As other headwinds moderate, modified domestic demand growth is set to accelerate to 2.3% next year. Headline inflation for this year is now projected to average just over 2%, consistent with price stability. Employment is set to continue to expand over the course of this year and next, albeit at a slower rate than last year. The unemployment rate, meanwhile, is expected to average just over 4.5% this year and next.

Turning to fiscal developments, my Department is forecasting a general government surplus of €8.6 billion for this year, the equivalent of 2.8% of modified national income. Underlying this is tax revenue that is expected to grow by 4.5% to reach €92 billion this year, broadly similar to the forecast published as part of budget 2024 last autumn. Of course, the fact that there are now significant headline surpluses in prospect over the coming years is very much welcome. It is a reflection of the fundamental resilience of the Irish economy and society to all the challenges we have faced and speaks to the success of the Government's carefully balanced budgetary strategy.

There are still vulnerabilities in our public finances, however. My Department estimates that just under half the entire corporation tax yield this year will be windfall in nature. In other words, these receipts are not linked to our domestic economy and could potentially be transient. If windfall receipts are excluded, there is an underlying deficit in the public finances. Last year, we saw what may be the first signs of a levelling off in this revenue stream: corporate tax receipts grew by around 5%, which is certainly a steady performance, but growth the previous year was almost 50%, so there has been a significant slowdown in growth. Managing the risks around corporation tax is a vital part of the Government's fiscal strategy. That is why we have decided to establish the future Ireland fund and the infrastructure, climate and nature fund. As members will be aware, I published the draft legislation for the establishment of these funds in March in order to allow us to invest these receipts to ensure we have the resources necessary to address future structural challenges while, at the same time, minimising the risk of using volatile windfall taxes to fund permanent spending. The select committee of finance completed its consideration of Committee Stage of that Bill this morning.

Turning to public debt, while we are moving in the right direction, our debt burden remains elevated: indebtedness this year is projected at almost €221 billion, or just over 72% of modified national income. For next year, our stock of debt is projected at €223 billion, or 69.7% of national income. The progress we have made in reducing our ratio of public debt is encouraging but we have much further to go, which underscores the importance of continuing to pursue a careful and sustainable budgetary policy.

The resilience of our economy and public finances over recent years has presented us with a window of opportunity. We can take action now to prepare for the future while also continuing to invest in our infrastructure, our housing sector and the productive capacity of our economy.

I very much look forward to our discussion over the course of the evening and to an exchange of views on the economic and fiscal outlook facing our country.