The Government’s Summer Economic Statement sets out plans to tackle inflation and rising living costs in Budget 2023. Susan Kilty digs into the details.
The Summer Economic Statement released this month outlines the broad measures we can expect to see in Budget 2023 against the backdrop of rising public debt prompted by the cost of the government’s numerous pandemic support schemes.
Until recently, Ireland – like many developed economies – could borrow interest-free in the eurozone. Currently, however, we are facing significant inflationary pressures across the eurozone.
In the case of Ireland, inflation is estimated by Eurostat to have reached an annual rate of 9.6 percent in June, higher than the figures predicted by most economic forecasters.
These inflationary pressures and the expectation of tougher monetary policies from central banks have led to higher interest rates and borrowing costs.
Tackling inflation, and supporting those struggling with increased costs, lies at the heart of the Summer Economic Statement.
The Government is also facing an ongoing housing crisis, a scarcity of public health services, an ageing population and a physical environment that is increasingly showing the side effects of climate change.
In the Spring of 2022, tax revenue for 2022 was projected to total €75.8 billion, up almost 11 percent annually.
One of the primary drivers of this revenue growth is the strength of corporation tax receipts, which amounted to €15.3 billion last year.
Half of these receipts are attributable to just ten large taxpayers, however. This means that our corporate tax-take relies largely on the continued presence of these taxpayers in Ireland, alongside other multinationals paying significant tax relative to indigenous businesses.
The Government intends to use these corporation tax receipts to rebuild its fiscal buffers in the years ahead, and not for day-to-day spending.
The Summer Economic Statement projects core expenditure of €85.8 billion in 2023. Core expenditure relates to ongoing permanent expenditure on public services and capital expenditure on health services, education and social support.
This core expenditure includes an overall budgetary package of €6.7 billion, comprising additional public spending of €5.65 billion and tax measures amounting to €1.5 billion.
In terms of spending, the €6.7 billion figure represents a 6.5 percent jump on the year prior – greater than the five percent growth predicted in last year's budget.
This increase is aimed at tackling the impact of inflation while also protecting the provision of core public services. Of the €6.7 billion figure, €3 billion will be aimed at these core public services. The remaining €3.7 billion will be allocated on Budget Day.
The Government is also providing for an overall taxation package of €1.05 billion next year. This is double the amount set out in the original strategy and, once again, reflects the need to adjust the parameters given the higher-than-assumed level of inflation.
One of the critical objectives of taxation policy in the forthcoming budget will be to prevent workers from having to pay additional tax purely because they have moved into higher tax brackets because of inflation.
Overcoming challenges
The proposed allocations demonstrate an adaptive approach by the Government, which has expressed the need for additional funding to balance the provision of public services to prevent excessive spending resulting in an overheated economy.
The Government also appears to be mindful of the precarious nature of its current corporation tax receipts and is looking to make the most of the high tax take from this source.
More broadly, it recognises the turbulent state of the global economy and a willingness to provide the necessary resources to support Irish society through this challenging time.
In my view, there is a clear need to balance budgetary measures to ease the inflationary impact with more long-term measures, which would help Ireland weather the challenges of housing supply, an economic downturn, climate change, ageing demographics, and digital transition.
Sound management of the economy is needed to boost productivity, attract investment (particularly in the green and digital space) and support indigenous businesses.
Susan Kilty is Head of Tax at PwC.
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