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

I welcome the opportunity to present budget 2023 to this House.

INTRODUCTION

When we gathered in this Chamber for budget 2022, we were emerging from the very worst of the Covid-19 pandemic. We now face a further economic challenge. If you are an older person, you are having to spend more of your pension on heating your home. If you are looking after your family, you are now facing higher grocery bills. If you are running a small business, you are trying to cope with increases in the cost of energy. This is why budget 2023, presented by the Minister, Deputy Michael McGrath, and I today, is and must be a cost-of-living budget focused on helping individuals, families and businesses deal with rising prices.

As we have seen all too clearly over the past few years with Brexit, with Covid and now with the war in Ukraine, unforeseen risks and challenges are becoming more frequent in their occurrence and more severe in their impact. As one of the most open economies in the world, we benefit when things are going well internationally but, when they reverse, we are also one of the most exposed. As such, it is imperative that we are prepared for these shocks.

Our recovery from the pandemic is testimony to the value of that preparation. We faced the pandemic with our finances in good shape and this ensured we could both respond and recover in its aftermath. Therefore, budget 2023 helps with the challenges of today but it will also ensure that we have sufficient reserves for what the future may bring. We must also be aware of the danger of making inflation worse through decisions that we could take.

MACROECONOMIC OUTLOOK

The onset of the war in Ukraine has sent shockwaves throughout the global economy. This is most evident in energy and commodity markets, where prices surged at the onset of the war and have remained high. Energy price inflation intensified over the summer as concerns grew regarding a complete shut-down of Russian gas supplies. The wholesale price of natural gas is now around eight times its average level in the years preceding the war. The inflationary pressures relating to energy have been further compounded by the imbalance between demand and supply that emerged as economies reopened.

Consumers released substantial pent-up demand as restrictions were eased, while supply chain bottlenecks prevented firms from keeping up with that demand.

As a result of these factors, headline inflation in Ireland, similar to many other economies, is now running at highs not seen in many decades. My Department now updates its forecasts to headline inflation of 8.5% for 2022, and just over 7% for 2023.

Non-energy, or so-called core inflation, is also experiencing high levels of growth, suggesting effects from energy and commodities markets to other sectors such as food, consumer goods and services. I am now revising our forecasts for core inflation to 5.25% this year, and just over 4.5% for next. These developments reflect the increasingly broad-based nature of our inflationary challenge.

The pace of growth in the economy is expected to slow throughout the rest of this year as mounting inflationary pressures reduce our ability to spend. This will see firms hold back on investment. As a result, my Department is now revising down its forecast for modified domestic demand, which is the most appropriate measure of our domestic economy, to 1.25% for next year.

I acknowledge that these are not just abstract economic figures. The Government understands, and I understand, the worries small business owners, farmers, pensioners and those who work so hard to get by, feel. That is why the Government will help, and by helping our country we will overcome this challenge.

We can do this because our economy has strong foundations. Due to the immense work of the Irish people, the labour market has made a remarkable recovery over the past year, with well over 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.

Looking ahead, while we expect employment growth to slow in line with the changes in our outlook for domestic demand, we also expect the unemployment rate to remain at relatively low levels.

While the war in Ukraine poses the most immediate threat to our economy, we remain vigilant of other risks on the horizon. Notably, Brexit could yet bring further challenges.

FISCAL OUTLOOK

This is why our public finances matter. They have recovered strongly from the effects of the pandemic. Much of this recovery is due to the careful management of this Government in undertaking appropriate responses to the unique challenges our country faced.

The recovery in tax receipts is broad based. At the end of August, tax revenues stood at almost €50 billion, up by over €10 billion on 2021. Income tax continues to perform well, and reflects the resilience of our jobs market and people, and the success of the Government’s employment schemes during the pandemic. The strong performance of VAT receipts confirms the rebound in consumer spending once public health restrictions were lifted.

As a result, I can announce to the House that we will register a general Government surplus of €1 billion, or just under 0.5% of national income this year, and €6.2 billion or 2.25% for next year.

To put these figures in context, last year we recorded a general Government deficit of €7 billion.

This is extremely welcome news. However, the headline figures do not account for the fact that much of the change is due to excess corporation tax. These receipts could change significantly in the future. They amounted to €12 billion at the end of August. We expect these receipts to exceed €20 billion by the end of the year. I will return to this point shortly.

It is essential that we use our surpluses wisely. We should not spend everything today. This will ensure that we are ready for tomorrow. It is what we did before Covid arrived. It worked and this is what we must do again. Because of this, we could help during Covid and because of this, the Government can help again today.

While conditions have been favourable to us in recent years, the Government knows that borrowing costs for countries have also changed significantly since the start of the year and are now rising. The yield on ten-year Government bonds, which is the rate of interest, has increased by over two percentage points since January. While markets continue to view our bonds, which is our debt, favourably, we know how quickly things can change. The best way to be safe and to insulate our public finances from the higher cost of debt is to ensure that our borrowing remains in line with other small open EU member states, which is what we are doing.

While the Department’s economic projections envisage a softening in economic growth next year, due to the phasing out of our exceptional Covid supports and the upward revisions in our tax forecasts, we are now in a strong position.

If we continue to follow our current strategy, we should see a stabilisation of public debt at approximately €225 billion. It is also important to acknowledge that public debt amounts to around €44,000 per capita, which is among the highest in the world. However, we will achieve a continued decline in the debt:national income ratio over the coming years by delivering these surpluses and by 2025, this ratio is projected to be 73%, which is the lowest level in our country since 2009.

We simply do not know what we could face in the future. When we face these challenges, I believe we will prevail. A crucial economic foundation of this is managing our debt safely. It matters.

BUDGETARY STRATEGY

Managing our public finances allowed the Government to act swiftly and decisively to provide support to households and businesses. We are especially mindful of the fact that the rising cost of living has hit hardest for those on the lowest incomes. In drafting budget 2023, the Government is aware of its responsibility to strike a balance between helping with the cost of living pressures but, on the other hand, not making them worse by adding fuel to the inflationary fire. The summer economic statement set out the parameters for this budget, as well as our medium-term budgetary framework.

In response to the increase in energy and other prices, the Government amended our budgetary strategy for 2023 to double the size of our tax package and to increase public expenditure in order to protect the real value of public services.

For future years, we will aim to stay within the parameters of this approach. It will allow for steady improvements in public services and sustainable reductions in personal taxation while ensuring that our public finances remain on a positive trajectory.

BUDGET 2023 MEASURES

To help families, individuals and businesses deal with the rising cost of living, the Minister, Deputy McGrath, and I are today announcing a package of once-off measures worth €4.1 billion. This will be accompanied by budgetary measures for 2023 worth €6.9 billion. This brings the total size of this budget to €11 billion. In addition, there will be a further €300 million in public service support measures funded from the contingency reserve fund.

I recognise that these are significant figures. However, I also appreciate that the needs are also significant. The strength in tax revenue has allowed us to have the means to undertake such a response.

As mentioned a moment ago, at the end of August tax revenues were approximately €10 billion ahead of the same period last year. While much of this is due to corporation tax, €5 billion was due to income tax and VAT. This growth is reflective of the domestic economy’s strengthening and this figure is what has guided the scale of once-off measures for this year. Further, given the urgency of the situation, these measures will come into effect this year and will be detailed by the Minister, Deputy McGrath, shortly.

VAT AND EXCISE EXTENSIONS

On the taxation side, I am extending the current excise reduction of 21 cent per litre in respect of petrol, 16 cent per litre in respect of diesel and 5.4 cent per litre in respect of marked gas oil, and the 9 % VAT rate for electricity and gas until 28 February 2023. I will be introducing the necessary financial resolutions to the Dáil this evening in order to give effect to these extensions.

INCOME TAX

As I have stated previously, one of the core objectives in budget 2023 is to help workers not to find themselves in a position where they pay more income tax solely because of inflation. There are so many people who work so hard but whose earnings push them outside of access to social welfare benefits. We need to help them too. We need to put money back into their pockets. I am, therefore, announcing an income tax package to the value of over €1.1 billion. I am increasing the standard rate cut off point by €3,200 to €40,000, with proportionate increases for married couples and civil partners. I am also increasing the main tax credits for personal, employee and earned income credit by €75. I am also increasing the home carer tax credit by €100, to support stay-at-home parents.

UNIVERSAL SOCIAL CHARGE

Further, I am increasing the second USC rate band of 2% from €21,295 to €22,920 in line with the 80 cent per hour increase in the national minimum wage recently agreed by the Government. The increase in the band will ensure that full-time workers on the minimum wage will remain outside the top rates of USC, while giving a modest benefit to workers whose income is above that amount. In addition, a concession applies to those who have a medical card and earn less than €60,000 per year, such that those individuals pay a reduced rate of USC. Given the broader challenges facing so many this year, I confirm the extension of this concession for a further year.

INCOME TAX – THIRD RATE

The recent report of the tax strategy group, TSG, examined the impact of introducing an intermediate or third rate of income tax. Further analysis from the TSG process would give options to Government on additional policy levers in future budgets to make our income tax system more balanced and effective.

It is agreed that this analysis will commence immediately and conclude prior to the publication of next year’s summer economic statement and will take into consideration the overall macroeconomic and fiscal context. This analysis will assist the Government in arriving at an informed decision in a timely manner.

Were the Government to opt for the introduction of a third rate of income tax, it would require considerable change to the systems in both the Revenue Commissioners and payroll providers; changes that will need significant lead-time to implement. We are advised that this could be done for January 2024. As a result, my Department will engage with the Revenue Commissioners on the necessary preparatory work, in advance of a policy decision being made by Government.

The Government is also committed to developing a medium-term roadmap for personal tax reform, taking account of the recent Report of the Commission on Taxation and Welfare, and will consider a range of measures across income tax, USC and PRSI together with other related personal taxation issues.

HOUSING

As everyone in this Chamber is well aware, housing is the central challenge facing the country over the next number of years. Too many people cannot afford to buy their own home, or are paying too much of their income in rent. Too many people have no home at all. Hundreds of thousands of homes will be required over the next decade across all sectors, social, private and rental.

The Government has made unprecedented levels of investment available to-date and we are seeing results. Some 25,000 new homes were built in the last 12 months, 28,000 have begun construction, and a further 44,000 have been granted planning permission. Despite this progress, it is clear that Government can do more, and will do more.

HELP-TO-BUY

The help-to-buy scheme has been a significant support for first time buyers of new homes. Since its inception in 2017, 35,000 people have benefitted from the scheme. However, as with any tax expenditure, I will keep the scheme under review. Earlier this year I commissioned an independent review of help-to-buy and I am publishing this report today. There are a number of recommendations within that report which the Government will consider for future budgets. In the meantime, I am going to continue the scheme, at current rates, until the end of 2024.

RENTAL TAX CREDIT

For those taxpayers who are paying rent on their principal private residence, I am introducing a new rent tax credit valued at €500 per year.

This measure, aimed at those who do not get any other housing supports, will apply for 2023 and subsequent tax years but I am providing that it may also be claimed in respect of rent paid in 2022. Approximately 400,000 persons are expected to benefit. Further details are contained in the Budget documentation.

PRE-LETTING EXPENSES

I have also decided to enhance the pre-letting expenses regime for landlords by doubling the amount that may be claimed per premises to €10,000 and by reducing the period for which a premises must be vacant from twelve to six months.

VACANT HOMES TAX

Maximising the use of existing housing stock is also a key objective of this Government. Accordingly, I am introducing a vacant homes tax to increase the supply of homes for rent or purchase to meet demand. The tax will apply to residential properties which are occupied for less than 30 days in a 12 month period. There will be a number of exemptions to ensure that owners are not unfairly charged where the property may be vacant for a genuine reason. The tax will operate on a self-assessment basis and will be administered by the Revenue Commissioners. The tax will be charged at a rate equal to three times the property’s existing basic local property tax rate.

RESIDENTIAL ZONED LAND TAX

In budget 2022 I announced a residential zoned land tax. In order to identify zoned land within the scope of the tax, maps are currently being prepared by local authorities and they will publish their first draft maps on 1 November this year. Following the publication of the maps, people will have the opportunity to apply to their local authority to have the zoning status of their land amended as part of a variation process. In the finance Bill 2022 I will bring forward a number of amendments to streamline the operation of the residential zoned land tax and ensure it is efficiently administered.

RESIDENTIAL DEVELOPMENT STAMP DUTY

I also propose to extend the residential development stamp duty refund scheme to the end of 2025. In place since 2017, this is a scheme whereby a portion of the stamp duty paid on the acquisition of non-residential land is refunded where that land is subsequently developed for residential purposes. The net minimum stamp duty payable after a refund is 2%, whereas the normal rate for non-residential property is 7.5%. To the end of 2021, this scheme had been availed of in respect of projects that have delivered over 15,000 homes.

DEFECTIVE CONCRETE PRODUCTS LEVY

Earlier this year the Government agreed a comprehensive redress scheme for those owners who have been affected by the issue of defective products used in the building of their homes. This redress scheme comes with a significant cost and therefore I am bringing forward a levy on concrete blocks, pouring concrete and certain other concrete products. The levy is expected to raise €80 million annually and will be applied from 3 April 2023 at a rate of 10%.

CLIMATE CHANGE

I want to turn to one of the other key challenges of our times, climate change, the effects of which are more frequent and more destructive. Protecting our environment is the responsibility of us all and Government is acting to reduce emissions and support newer and cleaner technologies, particularly in energy and transport. The additional funding needed for measures, such as retrofitting and more sustainable modes of travel, comes in part from carbon taxation. This is appropriate and will continue under the Government.

CARBON TAX

The rate per tonne of carbon dioxide emitted for petrol and diesel will go up from €41 to €48.50 from 12 October-----

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