Budget 2024: Short-term fixes

Budget 2024 has been characterised by some as a “giveaway budget”, but doubts continue to be cast over the sustainability of an economy so reliant on corporation tax receipts largely derived from foreign direct investment.

Announcing the Budget to Dáil Éireann on 10 October 2023, Minister for Finance Michael McGrath TD – delivering his first Budget since becoming Finance Minister – told the house of a positive image for the Irish economy, with “full employment, a growing economy, budget surpluses, a national debt that is falling, a population that is rising, and now a plan to secure the future”.

The Fianna Fáil TD added that the budget “provides help to households and businesses” and that “we face challenges for sure, but we face them from a position of strength, and we face them together”.

Budget 2024 can be characterised as a series of short-term measures to increase payments to those struggling with the level of inflation and subsequent cost-of-living. With a general election on the horizon within the next 15 months, some of these measures may prove popular with the electorate, but leading economists have stated that the majority of the Government’s measures, especially on housing, will not solve the fundamental economic problems facing the State.

The state of the economy

Over the last 12 months, inflation has incrementally increased 0.1 per cent to a stubbornly high level of 6.4 per cent. Government spending initiatives have been set out with the objective, in the words of Minister for Public Expenditure, NDP Delivery, and Reform, Paschal Donohoe TD, of providing “help again as the cost of living is still a challenge for so many”.

However, whilst the one-off payments in social welfare will serve as an effective sticking plaster to the wider challenge of inflation, analysis from the Irish Fiscal Advisory Council (IFAC) argues that the budget package is likely to add to inflation, leaving it “higher for longer”. The council further argues that “there are risks that the additional non-core measures will also lead to more persistent levels of high inflation”.

In addition, the budget shines further light on a rising point of interest in that the economy has become reliant on windfall corporation tax receipts, with the Government outlining that the State would be facing a budget deficit were it not for this income. Indeed, Budget 2024 is the 17th budget in a row where corporation tax receipts have had this critical level of influence.

With a cumulative surplus of €65 billion having previously been projected over the period between 2023 and 2026, the Government has revised this projection down to €46 billion. However, analysis shows that there is a potential for Ireland to enter an underlying deficit (when windfall corporation tax receipts are removed) should there be overruns in the health budget or continued unbudgeted supports paid to Ukraine.

In spite of the Government’s claims of facing current economic challenges “from a position of strength”, the IFAC states that the Government’s own spending cap, which bans spending increases by more than 5 per cent, is to be broken, with the Budget commitments already raising spending by 5 per cent, and the potential for a significantly higher overspend depending on health spending in the coming winter.

Labour TD Ged Nash said: “More than 20 per cent of workers are still on low pay, and deprivation rates went up four percentage points after last year’s budget. The Government had to follow this up with a mini-budget in February because they got it so wrong this time last year.”

Overall, the measures taken by the Government fall outside its own specified rules on spending and are unlikely to reduce inflation in the short to medium term. Rather than looking at the economic big picture, the impact of the Government’s measures on the economy shows a lack of ambition to remove the State’s overreliance on foreign direct investment and corporation tax receipts.

Sovereign wealth fund

Although the State’s reliance on corporation tax receipts presents a fundamental challenge to the State, the recent increase in the amount of money being received from said receipts has prompted the Government to establish a new sovereign wealth fund, although the legislation for this has not yet been introduced to the Oireachtas.

The Government has announced that, for the period between 2023 and 2026, that it will set contributions to the sovereign wealth fund at 0.8 per cent of GDP, which is estimated to be around 41 per cent of the State’s corporation tax windfalls in this period.
Health

The Government has allocated €22.5 billion for health spending, which includes an €808 million increase in core current funding. Minister Donohoe stated that this will deliver an expansion in capacity through the funding of over 2,500 additional beds in hospital and community settings and an increase of over 22,000 staff through additional recruitment.

Sinn Féin finance spokesperson Pearse Doherty TD characterised the Government’s health spending proposals as unambitious, accusing the Government of having decided “just to forget about health”.

Housing

For analysis of Budget 2024’s housing allocation, please see page 138.

Cost-of-living supports

Inflation is estimated to have made the average Irish household approximately €5,000 worse off than they were in 2021. With this in mind, Minister McGrath told the Dáil of measures aimed at alleviating the cost-of living in an Ireland where inflation remains at a stubbornly high 6.4 per cent.

McGrath announced that the State’s social welfare payments will increase by €12 per week, which will bring in an additional estimated €500 per annum for a household in receipt of social welfare payments. This is in addition to two double social welfare payments (colloquially referred to as a ‘Christmas bonus’) which will be paid in the periods before and after Christmas 2023, and will be worth a further €500 for each household.

People Before Profit member Richard Boyd Barrett TD referred to the Government’s €12 weekly increase as “miserable”, adding that it was that is “not even close to compensating for the cost-of-living hikes people have suffered over the past year”.

The Government also announced that the cost of childcare will be cut by 25 per cent. However, this measure will not be in place until September 2024, just months before the deadline for the next general election. A more short-term payment has been announced which will see a doubling of child benefit payments scheduled for before Christmas.

Former Social Democrat leader Róisín Shortall TD, whilst welcoming the commitment to increase affordability of childcare, outlined her view that there is an “increasing corporatisation of the childcare sector, with the involvement of multinational chains and investment funds”. She added: “We do not believe the early education of our children should be entrusted to large firms whose main motivation is the return to investment funds.”

Infrastructure, climate, and nature fund

The Government announced that 18 per cent of the windfalls (around €2 billion) will be set aside for a smaller infrastructure, climate, and nature fund. The fund will grow incrementally by €2 billion for seven consecutive years when it will reach €14 billion plus interest accrued, in a move which Environment Minister and Green Party leader Eamon Ryan TD described as “gamechanger”.

The IFAC reacted to the development positively, stating that: “If used correctly, this could help address future ageing pressures, lessening the need to increase taxes on future taxpayers.”

Transport

Budget 2024 has allocated €3.5 billion to the Department of Transport, comprising €892 million in current and €2.7 billion in capital funding. Minister Donohoe stated that this will provide for the continuation of the temporary 20 per cent fare reductions until the end of 2024, as well as metropolitan transport investment outlined in the National Development Plan.

Donohoe also announced funding of €1.35 billion for the “development, protection, and renewal of our roads network”, in addition to announcing that eligibility for young adult cards for public transport is being extended to cover adults aged 19 to 25.

Taxes and VAT

The Government is to increase the threshold for entering the top rate of income tax (40 per cent) to earnings above €42,000, up from €40,000. This is in addition to a drop in the 4.5 per cent USC rate to 4 per cent. It has been estimated that a household bringing in €70,000 will be approximately €900 better off in raw cash terms, whilst a household bringing in €55,000 per annum will be approximately €820 better off.

Minister McGrath also announced his intention for government to increase the existing VAT registration thresholds for businesses from €37,500 for services and €75,000 for goods to €40,000 for services and €80,000 for goods, respectively. He said: “While modest, these changes will provide more latitude to small businesses whose turnover is close to the existing thresholds and is broadly in line with forthcoming EU VAT registration thresholds.”

Broad analysis

The Government can be satisfied with the state of Ireland’s finances and with a set of proposals which may prove broadly popular with the public as the date of the next election slowly gets closer. However, a closer look at the figures shows an underlying vulnerability with the State’s finances, with the reliance on corporation tax receipts to be a point of contention for decision-makers.

In his concluding remarks to the Dáil, Minister Donohoe said: “Our public finances were gradually, step by difficult step, returned to health, from deficit to balance to surplus. This budget, presented by the Minister, Deputy Michael McGrath, and me today, continues that approach. We are not spending every cent today; we are leaving some aside for tomorrow.”

However, the IFAC states that the National Spending Rule is planned to be breached for every year out to 2026. With no other credible anchor, the group argues that this has “the potential to severely undermine Ireland’s public finances”.

The Parliamentary Budget Office states that inflation is not likely to be back to government target levels until 2025. Therefore, reducing inflation will, for both political and national interests, need to remain a top priority for the Government, with the value of the spending proposals, especially in housing, falling short of meeting the needs of citizens should inflation not be under control.