In one of Leo Varadkar’s recent cabinet meetings, a consensus was reached to unveil proposed legislation created by Finance Minister Michael McGrath. The legislation, which looks to create two funds for future use, is a wise approach given the instability of corporate tax income. However, as it progresses through the Oireachtas, the government will recognise that approximately £6 billion will be set aside from the budget for October, earmarked for future use. This move will result in lesser money being available for tax cuts and expenditures during the final budget preceding the general elections, presuming the government remains in power till then.
Despite the £6 billion deduction projected in the 2023 October budget, the government is forecasted to still have adequate resources for a generous budget. Last budget predictions estimate a surplus of over £14 billion for 2025 and 2026. This provides substantial versatility, although the European Union (EU) borrowing measure doesn’t account for the sum transferred to the funds, since it’s merely shifted within state finances.
This allocation to the funds, nonetheless, decreases the exchequer’s readily available cash and consequently the budget’s flexibility. Incoming revisions in the Department of Finance Stability Programme Update will focus on this reduction, emphasising the constant uncertainty surrounding corporate tax. A considerable chunk of future budget flexibility will be channelled into the two funds. However, the forecast for the total surpluses in the next few years remains substantial.
The update from last year predicted a cumulative surplus of £65 billion for the 2023-2026 period, and there doesn’t seem to be any reason why the 2024-2027 period in the forthcoming update would show any less.
Considering both temporary and permanent motions in effect, the 2024 Budget amounted to a substantial €14 billion on the exchequer’s tab. It’s evident that replicating such an expenditure this coming October may not be viable. The Stability Programme will provide an revised official estimation, illuminating what could potentially be at disposal for Budget 2025.
An important decision needs to be made: will support measures, such as the energy credit, introduced to alleviate the high cost of living continue, or will they be gradually eliminated now that inflation rates are declining despite elevated price levels?
It is crucial to keep in mind that the majority of the financial scope will be consumed by increasing pressure to escalate spending in sectors such as the health industry – paired with the uncertainty that corporate tax will continue to exceed expectations.
In reference to the issues raised at ardfheis, the Fine Gael party is eager to facilitate tax deductions targeted at middle-income earners. Even though Varadkar may no longer be involved in government, the goal of securing a 30% middle-income tax rate still remains, as does the intent initiated by the new Taoiseach to prevent individuals from stepping into the elevated 40% tax bracket with earnings less than €50,000.
The introduction of these funds would limit the options for politicians to use excess corporate tax income over the next few years – using this revenue to buffer daily expenditure could prove hazardous considering their potential instability.
The proposal for the funds materialised amid concerns over the reliability of skyrocketing corporate tax revenues, championed through the cabinet by McGrath.
The Department of Finance projected that nearly half of the entire corporate tax collected within the state could be considered a windfall, implying that it has no direct correlation to our economic activities and is susceptible to decisions made by large enterprises.
The narrow corporate tax framework – with three or four firms contributing more than 40% of all corporate tax – poses a supplementary risk.
The auto-enrolment pension scheme, whilst theoretically sound, begs the question: how will it be executed in practice?
To combat this risk, the Department’s solution was to construct a long-term plan, the Future Ireland Fund, accumulating up to an impressive €100 billion by 2035 based on current estimations.
The interest generated from these funds could bolster the treasury in the forthcoming years, thereby decreasing the necessity for tax hikes to cover long-term costs related to an aging population or the impacts of climate change. The funds will limit politicians’ ability to misuse surplus corporation tax revenues in future years, as such usage could be perilous given their potential instability.
There was some resistance to the notion of setting aside money for an extended duration, as the strategy is to contribute to the fund for 12 years. This is the reason the Government, in addition to the Future Ireland Fund, a long-term entity, introduced a secondary entity, the Infrastructure, Climate and Nature Fund.
This fund is expected to receive contributions until 2030 and is planned to be accessible in case of an economic slump, to guarantee that the State could maintain consistent investments. The cutting of investment expenditure following the financial crisis has had significant repercussions on Ireland’s economy. This fund aims to also finance future climate and nature-focused projects starting 2026.
Establishing such monetary reserves is a constructive step since we are aware that extra expenses are to be expected. From a generational perspective, it’s imperative to take such actions.
Legislation determines contributions to the Future Ireland Fund to be 0.8% of the GDP, presently equating to roughly €4.1 billion. The sitting Finance Minister can reduce this to 0.4% of the GDP if a perceived “deterioration” in the economy occurs and can bring it down to zero under a “significantly deteriorating” economy.
Precise measures for meeting these thresholds can indeed be disputed. It is worth noting that as seen during the financial crisis with the National Pension Reserve Fund, new laws can result in changes – most of that fund was redirected to cover the cost of the bank rescue. Therefore, a future Finance Minister can always propose amendments to the rules.
A sum of approximately €2 billion annually is expected to be dedicated to the Infrastructure, Climate and Nature Fund. This fund can be turned to for aiding government investments, especially during significant economic downturns. An allocated portion of these funds will go towards supporting projects concerning climate conservation, water management, and biodiversity.
While this structure is complex, its implication on the budget is simple; it reduces the funding available for measures to be implemented in the forthcoming years, potentially affecting the final budget of the current government and those of the succeeding one. The effect might not be significant if the influx from corporate tax continues, but any faltering on the taxation front could swiftly limit opportunities.
Stowing away funds is a positive strategy, particularly as we foresee more expenditures in the future. From the viewpoint of different generations, it is indeed appropriate to do so. Otherwise, the younger workforce that is just starting their careers may end up shouldering tax burdens to fund the pensions of older workers. Considering their current disadvantages, particularly in housing, this hardly seems reasonable.
Nevertheless, political scenarios evolve over the years and elections. Hence, the upcoming debates during the committee stage on fund legislation is something intriguing to watch, as is the standpoint of the main opposition parties and the backbenchers of the government. While removing money from the budget might be the right strategy, it will certainly stir interesting political developments.