The Finance Ministry of Ireland has published the government’s Stability Programme Update for 2023, which forecasts a budget surplus of €10bn, the equivalent of 3.5% of national income.
This is based on the assumption of tax revenue amounting to almost €89bn this year, a growth rate of almost 7%.
The Finance Minister, McGrath, commented that despite multi-decade high inflation rates, the Irish economy has proven “remarkably resilient”, most notably in the labour market where the unemployment rate is at a near-record low.
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Absent any further energy price shock, the Department of Finance expects headline inflation to average 4.9% through 2023 before returning to 2.5% in 2024.
DoF is projecting Modified Domestic Demand growth this year of 2.1% and growth of 2.5% for 2024.
“Nonetheless, there is a considerable margin of error around these forecasts with the outlook for the global economy remaining fragile as noted by the IMF last week,” the minister cautioned.
Over the second half of this decade, output as measured by GNI is projected by the SPU to grow at an average annual rate of 2.25%, a moderation on recent decades owing in part to an ageing population, according to DoF economists.
Despite the tax bonanza, McGrath argued that serious fiscal challenges lie ahead, citing an ageing population, risks to the sustainability of corporate tax receipts, as well as the fallout for economic activity from rising geopolitical tensions.
“For example, by the end of this decade it is estimated that additional age-related expenditure of between €7bn and €8bn per annum, relative to the level of outlays at the beginning of the decade, will be required simply to deliver existing levels of public service.
“Moreover, we are facing into these challenges from a position of high public debt, with the cost of borrowing increasing. That is why I will shortly be presenting proposals for a longer term focused national reserve fund,” McGrath stated.
The Stability Programme Update is a legal requirement under EU law, with all member states required to submit forecasts to the European Council and Commission by end-April each year.
According to the SPU forecasts, the easing of headline inflation from the second quarter of this year will support real disposable income, which is assumed to strengthen as the year progresses.
The recovery in real incomes should support consumer spending, which is projected to increase by 3.9% in 2023 and by 3.8% in 2024.
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The SPU predicts strong employment growth in the near term, with the number of people employed growing by 1.6% through 2023 and by 1.4% in 2024. The unemployment rate is likely to remain at around 4.5%, which the government describes as full employment.
State debt next year is projected at €224bn compared with €203bn before the Covid pandemic.