What the economy says about the budget

In normal times, Government budget frugality or generosity tends to be more a function of the timing of the electoral cycle than a reflection of how the economy is performing.

Right now, the Irish Government is in something of a sweet spot as it has a very strong economy with almost full employment, and an election expected before the end of the year.

In July, the summer economic statement signalled that Budget 2025, due to be announced on 1 October, will include a package of measures totalling €8.3bn.

That will be made up of €6.9bn of extra spending commitments, taking total Government spending to €105bn, and €1.4bn of tax cuts.

There was no breakdown of how the new spending would be distributed in the summer statement, but the areas of healthcare and infrastructure were flagged as likely candidates for more Government investment.

With an election likely in the coming months, it is fairly safe to assume that freshly minted Minister for Finance Jack Chambers will try to spread the spending as widely as possible.

But before we get to how the money is to be spent, we need to look at whether the money should be spent.

There is no doubt that the Irish economy has been in a very strong position in recent years.

Despite a tick higher in July 2024, unemployment in the country has remained below 5% every month since January 2022. More importantly, the number of people employed in the economy has risen by almost a quarter of a million since that date and passed 2.5m in June of this year (Figure 1).

The value of that for the budget can easily be seen in how much income tax those workers paid.

The Government collected €19.56bn in income tax in the first seven months of this year – that is more than the €19.17bn collected in income tax receipts in all of 2016.

In fact, total tax receipts for the January to July period are €9bn higher in 2024 than they were in 2022 (Figure 2).

If that trend holds for the rest of the year, a total of €8.3bn in budget measures would seem, if anything, overly conservative.

Ireland’s gross national debt stands at around €230bn, having generally held above €200bn since 2012.

Back then, when it was at €220bn, it was equal to around 3.5 times annual gross Government revenue. Because the economy, and the tax take, has grown so much since then, today’s €230bn is equal to just over 1.5 times gross Government revenue.

Debt to gross national income (GNI) is less than 80%, while debt to gross domestic product (GDP) is near 40%. By any measure, Ireland does not have a serious debt burden.

So, Jack Chambers has record tax receipts, record employment, no significant debt burden and an election just over the horizon.

Everything seems to be set for a huge giveaway.

Irish Government fiscal policy has moved a long way from the “if I have it, I’ll spend it” days of Charlie McCreevy and Bertie Ahern. Today’s Minister for Finance has to take account of numerous reports into the outlook for the Irish economy and advice from a variety of experts before committing to extra spending or tax cuts.

Sustainable footing

The Commission on Taxation and Welfare report published in 2022 highlighted the need to ensure tax receipts are on a sustainable footing before spending is looked at.

It warned that it might not be possible to count on continued high levels of corporation tax such as those seen in recent years. These receipts should be kept for future expenses and capital spending rather than to fund current spending.

The Government responded to this in last year’s budget announcement, launching the Future Ireland Fund and the Infrastructure, Climate and Nature Fund.

The Irish Fiscal Advisory Council in its June 2024 report warned that the economy is running at or above capacity.

In plain English, this means that the Irish economy is short on resources for the output it is achieving, which means it is at risk of higher inflation and possibly even a pronounced slowdown.

The council warned there is a danger that the economy could overheat, and that pursuing a policy of increasing spending risks causing further problems in future.

They make the argument that the Government should be putting aside more money now.

The economy is still in very good shape, so now is the time to prepare for the next economic downturn. With the economy currently so healthy, the council argues that there is no need for fiscal stimulus (ie more spending) right now.

Farmers will be watching the budget for any measures on inheritance or land value taxes.

The Commission on Taxations and Welfare recommended that the Government should “materially increase” wealth and property taxes as a proportion of overall tax revenues.

As part of this, it suggested that the level of agricultural capital acquisitions tax relief be reduced and that the qualifying conditions for it should be amended.

Recent comments from Taoiseach Simon Harris suggest inheritance tax is on his mind for the coming budget.

‘Radical reform’

He recently said that there needs to be “radical reform” of succession and inheritance taxes and said that “we need to be mindful of the fact that farm and house prices have risen and inheritance tax rates haven’t.”

He also recently reiterated his promise that no active farmers would be hit by the residential zoned land tax.

Tax incentives

As part of its pre-budget submission the IFA is looking for tax incentives and income supports for younger farmers who take over family farms.

While Minister for Agriculture Charlie McConalogue said that a farmer retirement scheme could be considered as part of the next CAP, it seems unlikely that it will be a feature of October’s budget.

Overall, for agriculture, the tale over recent years has been that the sector has been getting a smaller portion of total Government spending.

There is little to expect that to be any different this year as the spending will be targeted to help as many people as possible, rather than any particular group within the economy.

Governments always want to cut taxes and increase spending on vote-winning initiatives. They particularly want to do that in the months ahead of the election.

Minister Jack Chambers will increase spending and cut some taxes on 1 October, but a massive giveaway is extremely unlikely.

In fact, from listening to the warnings from experts, a giveaway budget may be exactly what the economy doesn’t need at the moment.

With the country facing long-term challenges from an aging population and the costs surrounding the transition to a low-carbon future, there may be a lot to be said for keeping the chequebook in the drawer on budget day.

Any economy moves in cycles from good times to bad times.

The only thing certain about the current good times is that they will not last, so by preparing for the future through saving and capital investment, the Government will be doing what is needed for the long-term fiscal sustainability of the country, even if such moves are not necessarily a huge vote winner.