Finance Minister warned against election tax cuts as budget surplus heads to €8.6bn

Economists advise Michael McGrath not to inject more money into the economy by way of unnecessary tax cuts

As the Irish exchequer heads for massive budget surpluses for years to come, leading economists have warned Finance Minister Michael McGrath against cutting taxes. Picture: Cillian Sherlock/PA

Finance Minister Michael McGrath shouldn’t bend to political temptation in an election year to inject more money by way of unnecessary tax cuts, as the exchequer heads for massive budget surpluses for years to come, leading economists have warned.

In an economic update, the Government has projected that a record inflows of tax revenues will boost the annual budget surplus to a better-than-expected €8.6bn this year, and has forecast the State will generate total surpluses of €38bn over the next four years through 2027.

Economic and Social Research Institute (ESRI) economics research professor Kieran McQuinn said the institute feel “very strongly” the Government should resist  political temptation to spend money from the State’s huge surpluses at at a time when the economy is already expanding at a healthy rate.

The Government should be wary of endorsing tax cuts when there is already broad agreement it should spend large amounts on housing, hospitals, and other important infrastructure projects, Mr McQuinn said.

Fixing anomalies in the personal tax code could be tackled, but offset by tax rises in other parts of the economy, he said.

Economist Austin Hughes said he is worried the Government will decide on a giveaway budget that splurges a lot of money on voters ahead of a general election. He said he favours the Government spending money mainly on healthcare and housing, when it will have the opportunity to increase public spending substantially in the next couple of years. In the short term, Mr Hughes said that, with many households still struggling from the cost-of-living crisis, there was, however, a case for fiscal initiatives in the budget but on a “modest” scale.

Nevin Economic Research Institute (Neri) co-director Tom McDonnell said the Government was projecting a period of economic stability when inflation and interest rates will fall and employment will rise. “The case for large personal tax cuts is very weak,” he Mr McDonnell said.

At a press conference, Mr McGrath insisted the Government was not thinking about the budget at this stage and that party leaders will defer any decisions until new economic projections become available this summer.

The huge budget surplus projected this year is net of the €4bn the Government plans to inject into the newly-established sovereign wealth fund, the so-called Future Ireland Fund.

Mr McGrath said there were no plans to increase the amount of contributions to the wealth fund, or into a second fund, called the Infrastructure, Climate and Nature Fund. Contributions to both funds are expected to amount to more than €6bn a year between 2025 and 2027.

According to the update, GDP will grow 2.6% this year, compared with the 4.5% growth projected in the budget last October.

Modified Domestic Demand — a measure that excludes the activity of multinationals — is expected to grow by 1.9%, compared with 2.2% growth forecast in the budget. The Government forecasts real wages will rise this year as inflation falls.

Its forecast for unemployment of just over 4.5% suggests the economy remains at close to full employment.