Dr. Alan Barrett:

I thank the committee for the invitation to appear before it today. I am a research professor at the ESRI and I am joined by my colleagues, Dr. Claire Keane and Dr. Conor O’Toole, who are both associate research professors. In the correspondence from the committee, we were asked to address four themes so we will take each in turn, answering the exam question narrowly.

First, I will provide views on the overall budgetary package as set out in the summer economic statement. In our last quarterly economic commentary, we wrote about our concerns regarding the fiscal stance that is being adopted by the Government. While the headline figures show general government surpluses, it is well understood that the underlying figures show deficits once account is taken of the windfall corporate taxes, both those from the Apple case and those that are unexplained by economic fundamentals. This situation leads to two concerns. Almost by definition, the windfall revenues could evaporate quickly in response to factors such as legislative changes. History, in particular the economic collapse, provides a stark reminder that a vulnerability in the tax base can become a major problem if something arises to test the vulnerability. Potential instability is magnified by the fact that so few companies are responsible for such a large proportion of tax revenue. As pointed out over many years by the ESRI and others, such as our colleagues in IFAC and the Central Bank, running underlying deficits is generally inadvisable when the economy is performing so well and possibly above potential output. A fundamental principle of fiscal management is that the fiscal stance should be counter-cyclical. Ireland’s fiscal policy looks pro-cyclical right now, which creates immediate risks such as overheating and longer term risks such as the need to continue with a pro-cyclical fiscal stance in any downturn, thereby magnifying the downturn. The challenge here is heightened by the need to fund a substantial level of capital expenditure. Based on these considerations, we see merit in moving to a situation where underlying surpluses are achieved.

My next point addresses some specific budgetary priorities. I will make an important point before I talk about them, however. It is for the Government to decide what groups should be prioritised in the budget and not for a research institute. This includes questions of whether tax should increase to fund priorities. However, we as a research institute can point to issues raised in our research that can inform the process of prioritisation. Inflation has been slowing but prices remain at an elevated level, with food inflation continuing to remain high. ESRI research has shown that, from 2020 to 2025, changes to the permanent tax and welfare system resulted in small average income losses compared with policy changes pegged to wage growth.

While the temporary measures were successful in helping households deal with higher prices, their phasing out will cause affordability issues, particularly for the older population and those with disabilities, if headline welfare payments fail to keep pace with income growth. Indeed, research carried out by the ESRI for the Irish Human Rights and Equality Commission, IHREC, found those with a disability faced a significantly higher cost of living in general and were much more likely to experience deprivation. Additional welfare supports, along with employment supports, could help those living with a disability who face these additional costs. Recent research by the ESRI and Trinity College Dublin found that a fifth of children were living below the poverty line once housing costs were taken into account, particularly children living in one-parent families. A second tier of targeted child benefit would result in significant reductions in child poverty rates.

I will say a few words about risks to the economy. We have already touched on two risks to the economy – the possible volatility in windfall corporate tax revenues and the possibility of overheating due to stimulatory fiscal policy. Overheating is often thought about in terms of inflationary pressures and price rises, but we are also concerned about capacity constraints that could hamper delivery of the national development plan and national housing targets. Housing and public infrastructure are crucial determinants of quality of life, but they are also important for augmenting the productive capacity of the economy. While the immediate threat from US tariffs has receded following the US-EU deal, we think it is important to recognise that other trade-related risks remain. For example, threats from the US Administration in relation to digital regulation and the taxation of tech companies could be very damaging for Ireland, given the importance of the sector to Ireland. More generally, given Ireland’s economic model is so reliant on an open international trading environment, ongoing threats to that environment are concerning.

The fourth and final point concerns additional budgetary matters. By its very focus, theannual- and I put "annual" in italics - budget cycle can lead to a focus on short-term challenges and goals but it is crucial that medium- and long-term perspectives are not lost. To take just one example, population ageing is a predictable challenge so there will be no excuse for not preparing for the additional spending required. The ESRI, in work commissioned by the Department of Health, has shown that long-stay bed capacity requirements are projected to increase from 29,000 beds in 2022 to over 47,000 beds or possibly even 53,000 beds by 2040, which is equivalent to an average annual growth of between 2.7% to 3.3%. In the same study, home support hour requirements are projected to increase from just over 28 million hours in 2022 to between 44.9 million and 54.9 million hours by 2040. Again, these are equivalent to annual growth rates of 2.5% to 3.7%, which are very significant.

These figures serve as a reminder of the need to be cognisant of longer term pressures and credit must be given for the establishment of the Future Ireland Fund and, indeed, the sister fund. However, as there will be many demands on the fund – it is to "help deal with future expenditure pressures including ageing, climate, digitalisation and other fiscal and economic challenges" – long-term fiscal planning is still needed, including public debate on how we see levels of taxation and public expenditure evolving over time.

I turn now to my concluding paragraph. The last few years have provided a set of circumstances in which loose fiscal policy has on been warranted on occasions, during Covid and the cost-of-living crisis, for example. The loose fiscal policy has also been facilitated by the strong corporate tax revenues. It could be argued that a degree of looseness inevitably continued in the run-up to the general election in 2024. In budget 2026, though, it is important that sound fiscal management moves to the fore again, including adherence to announced spending plans throughout 2026.

I am happy to leave it there and to take questions.