Ireland’s Budget Conundrum: A Surplus of Opportunities or Missed Chances?

Ireland’s current fiscal landscape presents a unique dilemma: what to do with an enviable budget surplus amidst robust economic growth? With an €8.6 billion surplus and an economy growing five times faster than expected last year, Irish officials are faced with the challenge of managing this surplus wisely. As much as this financial windfall might seem like a dream scenario, the decision-making process has proved more complex than anticipated. The FT recently published a long read on this fascinating situation - available here

A Surplus Not Easily Spent

Ireland’s economic prosperity comes from a boom in corporation tax receipts from global companies, particularly in the tech and pharmaceutical sectors. In 2023, these tax receipts amounted to €23.8 billion, and forecasts suggest a rise to €24.5 billion in 2024. Yet, despite these impressive figures, the Irish government is treading cautiously. Officials stress that much of this tax income is volatile and potentially temporary, leading to the decision to channel over €100 billion into two sovereign wealth funds by 2035, aimed at future-proofing the nation against pension, climate, and infrastructure challenges.

However, some economists argue that the government's caution might be a missed opportunity. With pressing infrastructure needs, such as housing shortages, electricity grid challenges, and public transport deficiencies, there is a strong case for using the surplus to address these issues immediately. Economist David McWilliams points out that the surplus presents a “once-in-a-generation opportunity” to make transformative public investments.

A Balancing Act: Saving for the Future vs. Spending Now

The government has indeed invested some of its surplus in debt repayment and measures related to COVID-19 and the cost of living. However, with inflation concerns easing from 9.2% in 2022 to 1.1%, there is a growing call for more aggressive spending to tackle social problems. Notably, Ireland faces high housing costs, strained public services, and significant societal issues such as loneliness and child poverty. Emma Howard, a lecturer at Technological University Dublin, advocates for a broader view of spending, suggesting that a portion of the surplus could be used to improve social welfare and wellbeing.

Politically, the situation is delicate. With a general election on the horizon, pressure is mounting on the government to deliver a “giveaway budget” that might appeal to voters. The upcoming budget is set to include €6.9 billion in spending and €1.4 billion in tax measures, even if these moves breach the government’s self-imposed spending cap.

Economic Growth and Structural Challenges

Beyond the fiscal surplus, Ireland's economic growth remains strong, with modified domestic demand (MDD)—a metric preferred by the government that excludes the distortions of multinational companies—rising by 2.6% last year. However, the GDP figures are not always reflective of the true economic picture, given the outsized impact of foreign multinationals operating in the country. Many investments are “phantom,” passing through corporate shells without benefiting the real economy.

Despite these nuances, Ireland’s economy is in good shape, boasting one of the lowest unemployment rates in Europe and strong labour market conditions. The government is also pursuing legislative reforms to streamline its planning system, a crucial step to ensure that infrastructure projects can proceed without the long delays currently faced.

Glossary of Key Economic Terms

• Budget Surplus: When a government's revenue exceeds its expenditures during a specific period, resulting in extra funds.
• Corporate Tax: A tax imposed on the profits of corporations, which can be a significant source of government revenue.
• Debt-to-GNI Ratio: A measure of a country's debt compared to its Gross National Income, indicating its ability to repay debt.
• GDP (Gross Domestic Product): The total value of all goods and services produced within a country, often used as a broad measure of economic performance.
• Inflation: The rate at which the general level of prices for goods and services is rising, decreasing purchasing power.
• Modified Domestic Demand (MDD): An economic measure that strips out the effects of multinational corporations to better reflect domestic economic activity.
• Sovereign Wealth Fund: A state-owned investment fund that invests in a variety of assets, often used to manage national savings and stabilize the economy.
• Volatile Revenues: Income streams that are unpredictable and subject to significant fluctuations, such as those from corporate taxes.

Retrieval Questions for A-Level Students

1. What are the main sources of Ireland's budget surplus?
2. Why is the Irish government cautious about spending the surplus?
3. What are some of the infrastructure challenges that Ireland faces?
4. How does Modified Domestic Demand (MDD) differ from GDP?
5. What are the arguments for and against using the surplus for immediate public investments?