Budget 2025 likely to be a balance between prudence and political pragmatism

On 1 October the last budget of this government will be presented. The economic and fiscal background against which it is being prepared and presented is generally positive. However, as is always the case there are considerable challenges facing the global and domestic economy and there is considerable uncertainty about what the future might hold.

Economic background to Budget 2025

The domestic economy is still performing well, although there are some pressures on the personal sector and consumer spending has softened somewhat. The global economic outlook is a bit more positive than in 2023, but the global geo-political risks are quite intense. So far in 2024 there has been greater optimism about global economic prospects; inflationary pressures continue to gradually ease; and interest rates have started to come down in some jurisdictions, most notably in the Euro Zone and the UK. The ECB cut official interest rates by 0.25 per cent at the June meeting and cut by another 0.25 per cent at the September meeting.

In the first half of 2024, the latest national accounts data show that compared to the first half of 2023:

• GDP contracted by 4.4 per cent.
• Exports of goods and services expanded by 8.6 per cent.
• Imports of goods and services expanded by 7.8 per cent.
• Personal consumption of goods and services expanded by 1.9 per cent.
• Modified domestic demand expanded by a reasonably robust 1.9 per cent.

As is always the case interpreting Irish national accounts data is challenging, but most indicators are suggestive of an economy that is performing at a solid pace.

• The labour market has remained very strong in 2024. CSO data show that in the second quarter of 2024 total employment in the economy stood at 2.754 million, which was 2.7 per cent or 71,500 higher than the second quarter of 2023. The employment rate for those aged between 15 and 64 stood at a high level of 74.4 per cent. For most sectors and businesses, recruitment and retention of employees remains a significant challenge, and labour costs are rising. The unemployment rate in August stood at a low 4.3 per cent of the labour force.

• The headline annual inflation rate has fallen from a peak of 9.2 per cent in October 2022 to 1.7 per cent in August 2024. However average consumer prices in August 2024 were 21 per cent higher than August 2020. This is the manifestation of the cost-of-living pressures, which will be very influential in preparing Budget 2025.
• In the first seven months of 2024, the volume of retail sales was just 0.8 per cent higher than in 2023, and when car sales are excluded, the volume of retail sales was flat. Due to higher interest rates and the escalation in the cost-of-living, consumer spending on goods is under pressure, and it is generally a challenging environment for consumer-facing business.
• Export growth has been a key component of Ireland’s economic success in recent years. Merchandise exports declined by 5.5 per cent in 2023 but have rebounded so far in 2024. In the first 6 months of 2024, merchandise exports were 6.4 per cent higher than the equivalent period in 2023. Chemical and Pharmaceutical sector exports were up by 5.6 per cent; machinery and transport equipment is up by 20.2 per cent; and food exports were 1.8 per cent lower.

Exchequer finances

The final set of Exchequer returns ahead of Budget 2025 on 1 October confirms the ongoing health of the Exchequer finances. In the first eight months of the year the Exchequer ran a surplus of €3.8 billion. This compares to a deficit of €0.3 billion in the first 8 months of 2023.

• Tax receipts of €59.8 billion were collected, which is €6.7 billion or 12.6 per cent ahead of the equivalent period in 2023. This tax revenue buoyancy continues to be driven primarily by solid growth in income tax and VAT, and by substantial growth in corporation tax receipts.
• Income tax receipts totalled €22.2 billion, which is €1.4 billion or 6.9 per cent higher than in the first 8 months of 2023. This reflects the ongoing strength of employment and solid growth in wages.
• VAT receipts totalled €14.5 billion, and is €1 billion, or 7.5 per cent higher than the equivalent period in 20203.
• Corporation tax receipts totalled €16.3 billion which is €3.6 billion or 28.4 per cent ahead of the equivalent period last year. The corporation tax take in August alone at €3.7 billion was €1.9 billion or 108.7 per cent ahead of August 2023.The Department of Finance is attributing the monthly growth to a timing factor as receipts were weak earlier in the year.

Gross voted government expenditure totalled €63.6 billion, which was €7.3 billion or 12.9 per cent higher than the first 8 months of 2023, and €2.6 billion higher than the Department had forecast or profiled. Of this total, gross voted current expenditure was €56.7 billion, which was 9.6 per cent or €4.9 billion ahead of 2023. Gross voted capital expenditure totalled €7 billion, which was 49.7 per cent ahead of 2023.

Tax Revenues (January – August 2024)

Source: Department of Finance Fiscal Monitor, 4 September 2024

Budget 2025

The domestic economy is still showing solid momentum. The labour market is strong; exports are recovering; and the public finances are healthy. Consumer spending is under some pressure due to cost-of-living pressures. The SME sector is generally challenged.

In framing Budget 2025, the Government will have to balance cost-of living pressures and a pressurised consumer; a challenging trading environment for many SMEs, particularly in retail and hospitality; warnings from IFAC that it is not prudent to inject stimulus into an economy that it believes is growing above potential; serious pressures in the housing market; and most importantly from a political perspective, the imminence of a general election that must be held before March 22^nd 2025.

According to the Summer Economic Statement published in June, an overall package of €8.3 billion is available for Budget 2025, consistent with expenditure growth of 6.9 per cent. This is composed of additional public spending amounting to €6.9 billion and taxation measures amounting to €1.4 billion. €90.9 billion is being provided for current expenditure, while €14.5 billion is being provided for capital expenditure under the Government’s National Development Plan. Capital spending is projected to grow by 1.4 billion or 10.6 per cent in 2025.

Of the increased spending of €6.9 billion, €5.1 billion is already accounted for, as €1.2 billion will go to the Department of Health to cover the cost of additional levels of service, €1.3 billion will go towards the cost of the public sector pay deal, €1.3 billion will pay for measures previously announced in Budget 2024 and €1.4 billion will be used for additional capital spending. This means that there will be €1.8 billion left for new spending measures.

The €1.4 billion tax package will be used to adjust tax credits and bands, to ensure that workers will not find themselves paying a higher rate of tax due to higher wages, and the USC burden is likely to be further eased.

It is highly unlikely that government will adhere to these plans and ways will be found to introduce a larger package. For example, it is believed that €3 billion will be used from the Ireland Strategic Investment Fund to provide necessary infrastructure for housing.

Budget 2025 is likely to be confusing and will contain a significant element of ‘smoke and mirrors’ but it will be a substantial fiscal package.

Register and join us for a live webcast featuring an in-depth analysis of Budget 2025. Our expert speakers will discuss how the budget measures will impact you and your business. Additionally, our guest speaker, renowned economic analyst and commentator Jim Power, will engage in a fireside chat with Lisa Kinsella to explore the broader economic implications.