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Fiscal Data

Dáil Éireann Debate, Thursday - 7 April 2022

Thursday, 7 April 2022

Questions (245)

Pearse Doherty

Question:

245. Deputy Pearse Doherty asked the Minister for Finance the projected deficit levels in nominal terms and as a percentage of GDP and GNI, in each of the years to 2030, taking into account such factors as demographic change and reduced tax revenues as a result of the green transition to less carbon-intensive consumption; and if he will make a statement on the matter. [19064/22]

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Written answers

My Department will set out updated scenarios for the trajectory of the general government balance as part of comprehensive macroeconomic and fiscal forecasts in the Stability Programme Update, to be published next week. These projections will have a forecast horizon as far as 2025.

My Department has not produced detailed annual deficit projections to 2030 of the nature outlined in the Deputy’s request. However, my Department published a report entitled Population Ageing and the Public Finances in Ireland last September. Included in this publication are long-term simulations of the impact of age-related expenditure on the deficit and debt ratios under a hypothetical, no-policy change scenario. This exercise assumes non-age related expenditure as a share of GNI* remains unchanged, while total revenue is assumed to move in line with nominal GDP/GNI*. As such, these simulations are not forecasts of the expected trajectory of the general government balance but instead show the potential impact of demographic change on the public finances in the absence of other policy changes over the coming decades. In addition, the starting point for this exercise began with outturn fiscal data from 2019 and the simulations do not, therefore, capture the significant increase in expenditure related to the support measures implemented by the Irish Government during the Covid-19 pandemic.

The results of the simulations, set out below, suggest that under this no-policy change scenario, and holding all other variables constant, age-related expenditure alone could result in a worsening of the general government balance of 3.4 percentage points of GNI* relative to 2019. These projections are published as a share of GNI*/GDP and not on a nominal basis.

Table 1: Percentage point difference in general government balance from base year (2019) as a result of projected age-related expenditure

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

percentage point of GDP

-1.0%

-0.8%

-0.7%

-0.8%

-0.9%

-1.1%

-1.3%

-1.5%

-1.7%

-1.8%

-2.1%

percentage point of GNI*

-1.7%

-1.4%

-1.2%

-1.4%

-1.5%

-1.8%

-2.1%

-2.4%

-2.7%

-3.0%

-3.4%

It is also important to note that these simulations do not account for second round effects or non-linearities. For example, continuing to run significant deficits over an extended time period would likely result in a notable risk premium, with adverse implications for sovereign borrowing costs and the interest bill over the long-term.

Finally, these projections do not account for the possibility of losses in tax revenue as a result of the green transition or any changes to the taxation framework. My Department is undertaking a review of the potential losses in tax revenues as the economy transitions to less carbon intensive consumption patterns. This analysis will form an integral part of the Department of Finance’s wider economic analysis of the effects of the green transition. As part of this ongoing work, the Department published a Review of Green Budgeting from a Tax Perspective alongside Budget 2022. The review found that approximately €5.7 billion of carbon-related tax revenues were collected in 2019, representing 9.6 per cent of total tax revenues. For comparative purposes, analysis undertaken by the UK government in the 2021 HMT Net Zero Review indicates that carbon-related tax revenues of £37 billion, or 5.8 per cent of all tax revenues over the period 2019-20, are at risk of declining almost to zero by 2040, as the economy transitions away from carbon-related activity.

The fiscal challenges described above will add significant pressure to the public finances and highlight the importance of rebuilding our fiscal buffers. Last year's Summer Economic Statement set out a medium-term framework for the public finances, with public expenditure ceilings that are fixed for the next few years. Following this strategy will allow for the rebuilding of fiscal buffers while continuing to make significant capital investment, as outlined in the National Development Plan.

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