Ministers McGrath and Donohoe publish Stability Programme Update
This week, Minister for Finance Michael McGrath and Minister for Public Expenditure, National Development Plan delivery & Reform Paschal Donohoe, set out the Stability Programme Update. The Stability Programme Update establishes the economic and fiscal parameters for the year ahead and is a precursor to the summer economic statement. The Government has slightly lowered its estimates for growth in the domestic economy this year, but still expects a moderate rate of expansion in 2024 and beyond.
A newly projected surplus of €8.6 billion has been revealed by Minister McGrath in light of the Stability Programme Update. The surplus figure is based on the assumption of tax revenue amounting to more than €92 billion, a growth rate of 4.6%. However, Minister McGrath clarified that the €8.6 billion surplus is “heavily dependent on volatile ‘windfall’ corporate tax receipts which have grown from €4 billion to €24 billion in the space of a decade”.
On the topic of corporation tax receipts stimulating a budget surplus, McGrath highlighted that they “cannot be relied upon” and pointed to a “marked slowdown” and “volatility” in corporation tax over the course of last year. In concluding his remarks on corporation tax receipts being a leading indicator of recording a surplus, McGrath outlined, “We can say with reasonable confidence at this point that the era of corporation tax over-performance is coming to an end”.
A rationale as to why the estimates of growth for the domestic economy for this year have been lowered is because Modified Domestic Demand, a core metric for the domestic economy, is now expected to rise by only 1.9% this year, a downgrade from 2.2% in the Department of Finance’s autumn forecasts.
At present, the outlook of the Department of Finance regarding the current state of the economy is a view of “reasonable shape” in some areas – especially the labour market – remaining resilient as inflation eases at a faster pace than expected. Core inflation is now projected at 2.1%, having been once estimated at 2.9%, which the Department of Finance clarifying that it broadly aligns with price stability.
Looking forward, potential barriers to the country’s economic outlook include the possibility of an escalation in geopolitical tensions or further energy price shocks, however these represent downside risks. In terms of future upside indicators for Ireland’s economic outlook, these include the possibility of a stronger-than-expected performance in the multinational sector, a more rapid reduction in inflation, and a further decline in the savings rate by households.