Budget 2024 was framed amidst an “embarrassment of riches” in the Irish public finances that are the envy of much of the rest of the euro area. The wider context was, however, a need to minimise procyclicality in a high inflation environment with an economy at full employment. This had to be done while also keeping an eye on the political implications of these fiscal decisions with an election just around the corner. How did the government fare? Here our chief economist Dermot O’Leary presents the key takeaways from Budget 2024.
Budget surplus of 2.7% despite Budget giveaway
A falling debt burden and large budget surplus should please investors. Highlighting the extent of the resources available, this was done despite a large budget package of €14bn (4.6% of GNI*) being announced. While a core spending increase of 6.1% is only modestly above its own 5% spending target, the additional “one-offs” (€7.5bn) do little to dampen inflation in the context of an economy with little or no spare capacity. Maintaining a greater level of prudence is difficult in the second half of an election cycle.
New sovereign wealth funds announced
Recognising the vulnerability of booming (but concentrated) corporation taxes (27% of total taxes), the Irish government followed through on its pledge to initiate two new investment funds to be partly funded by “excess” corporation tax receipts. The Infrastructure, Climate and Nature (ICNF) is expected to grow to €14bn and be used to ensure a stable level of capital spending on infrastructure in the event of a downturn in the public finances. The Future Ireland Fund (FIF) is to be used for longer-term pressures such as aging and climate change and may grow to €100bn by the middle of the next decade. Both developments are welcome.
Financial commitment to increasing housing supply is large
There is also clearly spending pressures in the short-term due to large population growth, wage pressures and infrastructure shortages, particularly in housing. It was announced today that the overall spending on housing will amount to a record €5bn in 2024. This will support the delivery of 9,300 new build social homes and a further 6,400 through the LDA and the HFA. In addition, it was also announced that the Help-to-Buy scheme will be extended to end-2025. Financial resources are not a constraint in aiding an increase in housing supply.
A comfortable funding position entering 2024
Sovereign debt sustainability continues to improve despite a relatively large giveaway. Net debt may fall below 60% of GNI* by 2026, while the interest debt burden is expected to remain close to all-time lows of 1.2% of GNI*. With budget surpluses, a €28bn cash pool and only one bond worth €8bn redeeming in 2024, Ireland is in a very comfortable funding position in an era of rising interest rates. A funding target for 2023 of less than this year’s range of €7bn-€11bn is likely, but the NTMA will be keen to maintain market access given the risks and historical precedent.