15 Sep 2021, 17.02
The Parliamentary Budget Office has released its Pre-Budget 2022 Commentary. This report, produced for Members of the Oireachtas, highlights economic and fiscal areas of interest and concern in advance of Budget 2022.
The Director of the Parliamentary Budget Office, Annette Connolly, commenting on the release noted the positive economic indicators and stated:
“While Ireland’s economy is forecast to grow strongly this year, it is important to be aware that there is a difference between the performance of the multi-national and the domestic sector. As restrictions are eased, it is important to carefully balance the withdrawal of the economic support measures while ensuring support is available for retraining and reskilling those who may have to adjust to the changed circumstances.”
Ms Connolly also stated that:
“The PBO’s view is that government fiscal policy should seek to close the deficit as the economy recovers and avoid increasing the already elevated level of Government debt much further. Having said that, a balance must be made between that objective and funding growth-enhancing measures and structural reforms, which will allow the economy to achieve its full potential, ultimately supporting fiscal sustainability.
I also note that the Summer Economic Statement outlines a historically high level of public expenditure and accordingly it is even more important to manage spending efficiently and effectively. We would welcome further clarity on the medium-term plans for funding this expenditure, especially in light of the uncertainties around some of our tax revenues.”
Key messages and issues
Some of the key messages and issues outlined in the PBO’s Pre-Budget 2022 Commentary are:
The main driver of economic activity is the multi-national enterprise sector. There is clear evidence of a dual economy in operation. Large multinational companies are generating large profits while smaller domestic companies are less likely to and businesses in the hospitality and recreation sectors suffering greatly due to pandemic related restrictions.
The fiscal position is influenced by this through the dependence on Corporation Tax from multinational enterprises operating in Ireland. Corporation Tax receipts are now at their highest level and represented 20% of total tax revenue in 2020. There are concerns about the resilience of these receipts, especially due to global corporation tax changes.
Underpinning the economy’s resilience is the unprecedented level of Government spending especially on unemployment and employment supports. In 2021 the Government expects to spend €90.7 billion (in voted spending), including over €10 billion for temporary COVID-related employment and unemployment supports, with the State supporting over 500,000 individuals on such programmes at end-August.
Receipts from both income tax and corporation tax have continued to perform strongly in 2021 leading to the Department of Finance to increase their forecasts for these taxes in July by €1.6 billion. VAT receipts also look likely to comfortably exceed their forecast in 2021 as well.
The Government’s Summer Economic Statement 2021 (SES, published in July) sets out its fiscal strategy over the 2022 to 2025 period. It projects a budget deficit of approximately €7.4 billion in 2025 (-1.5% of GDP) with gross debt of €281 billion. This compares to a deficit of €800 million and debt of €263 billion for 2025 outlined in April’s Stability Programme Update 2021. It is not clear if the deficit path outlined in the SES meets the EU fiscal rules, specifically the structural budget balance rule.
The Mid-Year Expenditure Report suggests, that once already announced capital spending increases and the cost to maintain existing services are accounted for, there is approximately €1 billion per annum available for new spending measures from 2022 to 2025.
Some of the key spending issues for Budget 2022 include:
- Balancing the withdrawal of COVID-19 supports to businesses and individuals while ensuring support is available for retraining and reskilling those who may have to adjust to the changed circumstances.
- Additional funding for the health sector to address ongoing issues such as the COVID-19 pandemic, the cost of reducing patient waiting lists, Sláintecare, and the cost of the cyber-attack.
- Addressing long-term issues facing Ireland including the transition to a low greenhouse gas emission economy and the ageing of the population.
- Ensuring value-for-money for the proposed increases in capital spending including on social and affordable housing as capacity issues both in Government and the construction industry become more apparent and construction inflation rises.
The fiscal strategy articulated by the Government suggests few changes on the tax side especially in Budget 2022. However, the permanent increase in spending over the medium-term suggests a need to also increase tax revenue by broadening the tax base, reducing tax reliefs and/or increasing rates, while at the same time reducing the reliance on multinational companies.
The PBO’s Pre-Budget Report also includes boxes which elaborate on the various macroeconomic and fiscal topics, including:
- Labour Market Scarring
- Ireland’s Dual Economy
- Spending on COVID-19 related measures 2021