Budget 2023 was prepared and presented in the face of significant domestic and external challenges. This resonates with the last two budgets, which were presented in the midst of an unprecedented challenge caused by the Pandemic. Just as was the case with the two Pandemic budgets and indeed the extra emergency packages implemented during the Covid crisis, Budget 2023 is very expansionary and is allocating significant funding to as many areas as possible across the economy and society.
The day before the budget was presented, the extent of the global challenge was highlighted by the OECD. The latest economic assessment from the OECD saw a significant deterioration in the outlook compared to its last forecast in June. Global growth is projected to slow from 3% in 2022 to 2.25% in 2023, well below the pace foreseen prior to the war. In 2023, the OECD is estimating that real global incomes could be around USD 2.8tn lower than expected a year ago. This is a significant global economic shock.
Annual GDP growth is projected to slow sharply to 0.5% in the United States in 2023, and 0.25% in the euro area, with risks of output declines in several European economies during the winter months. Growth in China is projected to drop to 3.2% this year, due to COVID-19 shutdowns and significant property market weakness, but policy support is expected to help growth recover somewhat in 2023. (Table 1).
The OECD is forecasting that headline inflation is projected to ease from 8.2% in 2022 to 6.6% in 2023 in the G20 economies.
Table 1: OECD Global Economic Outlook
Source: OECD, September 2022
It is clear that the global economic backdrop and outlook is now of great concern. Equity markets are very volatile, nervous and weak; bond yields are rising; central banks everywhere are increasing interest rates; commodity prices are at still at elevated levels, albeit declining; inflation is continuing to scale heights not seen in over 30 years; and the war in Ukraine and its consequences are showing no signs of ending anytime soon.
The OECD admits that significant uncertainty surrounds its global growth projections. More severe fuel shortages, especially for gas, could reduce growth in Europe by a further 1.25 percentage points in 2023, with global growth lowered by 0.5 percentage point, and this would raise European inflation by over 1.5 percentage points.
Economic and political uncertainty is the key theme at the moment and this is likely to be the dominant theme for the foreseeable future. Setting an Irish budget against this backdrop was always going to be challenging.
Budget 2023 can accurately be described as a very expansionary budget that is intended to address the current challenges facing the economy, but particularly the ‘cost-of-living’ challenges for business and households. €4.4bn is being allocated to ‘once-off measures’, with €1.7bn related to tax measures and €2.7bn in expenditure measures. (€300m of this expenditure is coming from the Contingency Reserve Fund).
The core budget package totalled €6.9bn, with €5.8bn accounted for by increased expenditure and €1.1bn accounted for by taxation measures. In total the budget package is €11.4bn, including the €300m from the Contingency Reserve Fund.
In the Summer Economic statement in July, the Department of Finance projected a core budgetary package of €6.7bn, with €1.05bn pencilled in for tax changes and €5.7bn for expenditure increases. In the event, the overall package was slightly larger at €6.9bn. Of course, the €4.4bn package of once-off measures was not anticipated even at that stage.
The most positive aspect for government coming into Budget 2023 is the buoyancy of tax revenues. It was this buoyancy that enabled the delivery of the very significant expenditure and taxation package in the budget. This demonstrates that a well-functioning economy is essential to generate the resources that are used to fund public services such as social protection, health and education. This highlights just how important it is to ensure that the business environment is as positive as possible in order to support growth, employment and tax revenue generation.
The success or failure of any budget in terms of delivering on its objectives is heavily dependent on the realism of the economic forecasts. In 2023, the Department of Finance is projecting GDP growth of 4.7% in 2023 and growth of just 1.2% in Modified Domestic Demand (MDD), which provides a more realistic assessment of real activity in the economy. In April, MDD in 2023 had been forecast to expand by 3.9%, but the downward adjustment reflects the difficult external environment, rising interest rates and the ongoing cost of living pressures.
While there is considerable uncertainty about the economic growth outlook, the outlook for inflation is even more uncertain. Following projected annual inflation of 8.5% in 2022, average inflation is projected to moderate to 7.1% in 2023 and 2.4% in 2024. Unfortunately, much of this will be determined by factors that are outside of our control, but the recent significant downward trend in global energy, oil and shipping costs does give cause for some optimism.
Table 2: Economic Forecasts Underlying Budget 2023
Source: Department of Finance, Budget 2023, 27 September 2022
Following the changes announced in the budget, the Department of Finance is projecting total tax revenues of €87bn in 2023, which would represent a growth rate of 6.6%. Income tax is projected to grow by 6% to €32bn; VAT by 5.9% to €19.4bn; and corporation tax is projected to reach a new high of €22.7bn, representing a growth rate of 7.9%. Interestingly, the fiscal projections out to 2025 anticipate corporation tax revenues of 23.7bn in 2025.
Table 3: Projected Tax Revenues 2022 & 2023 (post-Budget 2023 measures)
% TOTAL TAX
Ahead of the tax and expenditure measures introduced in Budget 2023, the Department of Finance was projecting a General Government Surplus of €4.4bn (0.9% of GNI*) in 2022 and €11.8bn in 2023 (2.2% of GNI*). Following the budget changes, a surplus of €1bn (0.4% of GNI*) is projected for 2022 and a surplus of €6.2bn (2.2% of GNI*) in 2023.
Ireland’s gross government debt is projected to stabilise at just over €225bn in 2022 and gradually decline over the coming years, going from 100.8% of GNI* in 2021 to 73.3% by 2025. However, at €44,000 per head of population, Ireland has one of the highest debt per capita in the world.
Table 4: Fiscal Projections 2022-2025 Budget 2023
Budget 2023 is an incredibly large fiscal package of €11.4bn in total. It is designed to address once-off pressures from the cost-of-living crisis; the external uncertainties; rising interest rates and the political reality that exists in Ireland today. It is a good idea to have once-off measures, given that they should not become permanently embedded in the system, but it is clear that post-Covid there is a strong belief across large swathes of Irish society in relation to the larger role that government plays in our lives.
Ireland has a dangerously high level of debt and is now facing significant challenges. Thankfully the country has the fiscal resources to pay for the current fiscal largesse, but spending is ratcheting higher at an alarming rate.
The Minister for Finance is putting €2bn into the National Reserve Fund this year and €4bn in 2023. This is a good prudent move. In overall terms, the expansionary nature of the budget will help prevent guard against key economic risks, but we are facing into a very uncertain period.
Economist Jim Power joined a panel of Crowe partners on the morning of Wednesday 28 September to present their reaction and analysis of Budget 2023 in a live webcast to over 200 guests. Watch a recording of our Budget 2023 Briefing webcast.
Should you have any taxation or business questions, our experienced team will be happy to share their insights with you.