Seamus Coffey: We are spending faster than money is coming in. That leaves us vulnerable
The framing of last Tuesday’s budget is from an opening position that appears strong. There is full employment and the unemployment rate has been holding steady at 4.5%, while wage growth is once again faster than inflation. At a headline level, the public finances also seem to be in a good position. There are annual surpluses and debt ratios are declining. However, the impact of the budget and potential vulnerabilities to this opening position are evident in the figures the government set out in the budget documents.
For 2025, the government is estimating a general government surplus of €10bn. For 2026, this is projected to fall to €5bn. At a time of strong economic performance and exceptional corporation tax receipts, this reduction in the surplus is due to Government decisions. The Government is spending money faster than it is coming in.
For 2026, the Government forecasts that Corporation Tax receipts will hit €34bn - a significant upward revision on previous forecasts. However, if the Government is set to run a surplus of just €5bn this means that pretty much all the exceptional corporation tax revenue is being used to cover ongoing expenditure.
As is oft discussed, Irish corporation tax receipts are unusual, in many regards. They are highly concentrated in a small number of foreign, mainly US, companies. Unlike typical taxes, they do not subtract from domestic demand. They are not collected from income that would otherwise be spent in the Irish economy.
By spending the corporation tax collected on the profits of US companies operating here to service international markets, the government is adding demand to an economy that may already be operating at close to capacity.
And, if recent expenditure overruns continue, the actual surplus in 2026 could be even lower. This time last year, Budget 2025 set out a ceiling for gross voted expenditure of €105bn for this year. Tuesday’s budget, although nominally Budget 2026, indicated that spending in 2025 will be €109bn - €4bn higher than was originally set out.
If spending in 2026 is similarly higher, which is something we have seen now for several years, then, everything else equal, that starting surplus of €5bn would all but be eliminated. At a time of record employment and bumper corporation tax receipts, we would be doing no better than balancing the books. This would not be a good position to be in.
Indeed, the Government figures themselves highlight the vulnerabilities within the public finances. If the Department of Finance’s estimates of ‘excess’ corporation tax were no longer available and the economy was to return to a more typical unemployment rate of perhaps 6%, then the budget documents shows that government’s fiscal position would become an annual deficit of €16bn. This is estimate of the structural deficit which the budget documents put at 4.6% of gross national income for 2026. If spending next year deviates from the budget plan, as has been the case recently, then this estimated excess of spending over sustainable revenue could become €20bn.
Now, no one is predicting that there will be a rapid fall-off in corporation tax or that the economy faces a significant employment shock. But the fact that the Government’s own figures show just how exposed we could be, is a worry.
One reason for this vulnerability has been the rapid growth in Government spending in recent years. In the early years of this decade, we saw justified increases in Government spending in response to the covid pandemic and the elevated rate of inflation following the Russian invasion of Ukraine. Neither are factors now.
The gross voted spending envelope of €109bn for 2025 can be compared to the amount originally set out for last year in Budget 2024 which was €96.5bn. This means that spending in 2025 will be €12.5bn or 13% higher than what originally set out for 2024. Such a rate of increase is well beyond anything that could be considered sustainable. And of this, only €3bn was due to the spending increases for 2025 actually set out in Budget 2025. The bulk on the increase was unplanned due to spending overruns across various departments and within-year policy announcements outside of the annual budget process. And, it is possible that ongoing overruns may require that total for 2025 to be revised even higher again.
Although Budget 2026 did deliver a package for next year that is broadly in line with the parameters set out in the Summer Economic Statement and does have a contingency to allow for some overruns next year, poor planning and budgetary management remain a concern. The budget has fiscal forecasts that do not extend beyond the end of next year. Last year’s budget had fiscal forecasts that went out to 2030. This year’s go to 2026.
In the Programme for Government, the Government committed to publishing in the summer a medium-term fiscal plan as required by EU regulations which would provide a five-year path for net public spending. This was not published during the summer as the Programme for Government committed to and was yet again not provided with the budget. There is no fiscal plan, and not even a fiscal framework, for how government services, income supports, and capital projects will be financed beyond the end of next year.
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