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The Economic Implications of Budget 2025

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Natalie Kollrack

On Tuesday, 1st of October, Minister for Finance Jack Chambers and Minister for Public Expenditure, NDP Delivery and Reform Paschal Donohoe gave speeches to the Dáil Éireann announcing the Budget for 2025. The Budget was announced against a backdrop of record-level employment but unwaveringly high price levels. Advisory groups and economists alike had principal concerns regarding the budget’s size, continued breaches of spending rules and overreliance on corporation tax receipts. 

Macroeconomic Policy

The Department of Finance announced that inflation has remained at or below 2% since March, which they project will improve real wages and thus increase consumer spending. The Department also projects growth in the domestic economy: modified domestic demand will increase by 2.5% in 2024 and 3% in 2025, employment will increase by almost 110,000 by the end of 2025, and unemployment will remain at 4.5%.  

Fiscal Policy

The Department of Finance estimates €105.7 billion in tax revenues. They report that while surpluses are projected (€23.7 billion and €9.7 billion for 2024 and 2025, respectively), underlying deficits (€6.3 billion and €5.7 billion for 2024 and 2025, respectively) are present once subtracting ‘windfall taxes’ (revenues arising from taxation of industries with above average profits) and the one-off revenue from the Court of Justice of the European Union ruling last month, where the company Apple was required to pay €13 billion in unpaid taxes to the Irish state. About €6 billion of this ruling will be transferred to the Future Ireland Fund and the Infrastructure, Climate and Nature Fund. In addition, the Ministers announced €3 billion for infrastructure spending. Finally, Minister Donohoe celebrates his leadership in decreasing the General Government Debt, which has decreased from 110% of national income in 2020 to 69% this year, with a projected 56% in 2030. 

The total budgetary package amounts to €10.5 billion, comprising a total expenditure package of €9.1 billion and a net tax package of €1.4 billion. This is further divided into an expenditure package of €6.9 billion (€5.2 billion in current spending and €1.6 billion in capital spending, rounded) and a cost of living package of €2.2 billion.

Taxation

The Department of Finance announced a personal income tax package of €1.6 billion, increasing the main tax credits and the Standard Rate Cut-Off Point and reducing the Universal Social Charge (USC). All three thresholds for Capital Acquisitions Tax (CAT), colloquially known as the inheritance tax, were also increased. In addition, measures relating to climate, support for businesses, as well as improvements in education and health were introduced and expanded. Regarding housing, Minister Chambers announced an increase in the value of the rent tax credit, an extension in the Help to Buy scheme, and an extension of the reduced VAT rate for gas and energy. In a similar suit to Budget 2024, support for landowners has continued: the Department of Finance has extended relief for pre-letting expenses for landlords, exemptions on the Residential Zoned Land Tax (RZLT), and an extension of the Mortgage Interest Tax Relief.

Package Size

Budgetary packages have been of unprecedented sizes post-pandemic: for example, this budgetary package of €9.1 billion in 2024 is an almost threefold increase from €3.6 billion in 2020. While Minister Chambers argues elevated price levels will be mitigated with the cost of living package, the Irish Fiscal Advisory Council, an independent budgetary watchdog for the Irish Government, finds the increase in prices the large budgetary packages are creating outweighs the stimulus they deliver to people, estimating a €1000 reduction in household purchasing power. In addition, the Fiscal Council finds that only half of the cost of living measures were targeted, arguing that they were not given to those most in need. Finally, the Fiscal Council draws parallels to previous financial crises to highlight the dangers of large packages at full employment. Dr Barra Roantree, Assistant Professor of Economics and Programme Director of the MSc in Economic Policy at Trinity Dublin, also draws attention to the weakened tax base created by large Celtic Tiger budgets.

Spending Rules

Since 2022, the government has exceeded its limit of increasing spending by 5% each year. The Fiscal Council estimates net spending increases of 9.2% for 2024 and 5.8% for 2025, 8.8% of the €3 billion if the additional capital spending increases are included in the figures. Minister Donohoe defends the breaches in spending as necessary for mitigating the effects of the pandemic, and Minister Chambers defends higher capital spending as needed by a higher population as well as accommodated by expenditure growth. However, the Fiscal Council, siding with the views of economists, predicts that repeated rule breaches will lead to inflation.  The Central Bank also estimates prices are about 2% higher due to the rule breaches. 

In addition, excessive spending and tax reliefs are especially concerning when misplaced. For example, Irish economist and writer David McWilliams argues the tax exemptions for landowners provided by the Residential Zoned Land Tax exacerbate the housing crisis by allowing landowners to hoard land. This contributes to the supply bottlenecks that harm the Irish economy: land is available for building, but bureaucratic practices prevent it from being used. McWilliams also points out the irony of a 47% increase in spending over the last five years coupled with a housing crisis, insufficient infrastructure and a widening wealth gap. In line with this finding, Dr Roantree draws on research from The Economic Social Research Institution (ESRI), which highlights the recent rise in material deprivation and rates of child income poverty, which are insufficiently mitigated by temporary payments that will be withdrawn with a new government and social welfare payments that remain, in real terms, what they were in 2020. 

Finally, Ireland has the highest flat rate of inheritance tax in the EU at 33%, and the implications of raising its threshold are unclear. On one hand, Dr Roantree criticises its raising only benefiting wealthy parents’ children, a small fraction of people. Conversely, McWilliams draws attention to the growing number of cases where children are inheriting houses that they cannot afford to pay the 33% tax on without selling the property. 

Corporation Tax Receipts

Minister Chambers admits the heavy reliance of public finances on corporation tax and stresses it should not be used to fund permanent expenditure measures. Thus, less than half of excess corporation tax receipts were saved. At 12.5%, Ireland has the second lowest corporation tax rate in Europe and one of the lowest in the world. Projected surpluses discussed previously are completely reliant on windfall corporation tax: the Fiscal Council estimates an €80 billion surplus, including excess corporation tax revenues (receipts above what would be explained by domestic economic activity), but a deficit of €50 billion with its exclusion during the 2024-2030 period. In addition, the corporation tax revenues have more than doubled in the last three years, suggesting further exacerbation of the underlying deficit. In addition, corporation tax is incredibly concentrated (only three companies make up 43% of all corporation tax receipts). For these reasons, the Fiscal Council is in favour of more excess corporation tax receipts being saved. 

Conversely, McWilliams argues that more of the corporation tax receipts should be spent, suggesting that the revenue from the Apple ruling could be useful in mitigating the housing crisis and improving the transportation sector. He points out that Ireland, unlike most other European countries, is in a surplus and thus can afford to improve its infrastructure. 

Dr Roantree agrees with the Fiscal Council. He asserts the overreliance on corporation tax receipts means Ireland needs a stable tax base, not almost €2 billion in tax cuts. He criticises the reduction of the USC, which was originally introduced to broaden, not diminish, the tax base and the multitude of reliefs given out. He argues spending should not be increased so fast when revenues could be reversed at any point in time, necessitating a rapid cutback. For example, American multinationals make up more than half of corporation tax receipts; a shift in protectionism arising from a change in government could decrease or reverse revenues. The Fiscal Council also warns against excessive reliance on corporation tax, arguing that an almost €9 billion deficit would emerge if corporation tax receipts were reversed.

Conclusion

Clearly, the Irish Government faces a balancing act. It must take advantage of excess corporation tax receipts while not further exacerbating the underlying deficit. It must take steps to address its problem of rising demand coupled with stagnant supply. Thus, its spending must be prudent to ensure it is directed to the areas that need it most.

Budget 2024: An Economic Analysis

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Natalie Kollrack

In speeches to Dáil Éireann last Tuesday, the 10th of October, Minister of Finance Michael McGrath of Fianna Fáil, and Minister of Public Expenditure, NDP Delivery, and Reform Paschal Donohoe of Fine Gael unveiled the 2024 Budget. Key themes in this year’s budget included supporting Ireland’s current society and augmenting sustainability, while also considering future implications of increasing public expenditure. The total budget package was to the tune of €14 billion, funded in part by €250 million from windfall corporation tax receipts. Interestingly, the government, boasting a budget surplus of €8.8 billion, would have encountered a €2 billion deficit were it not for the windfall corporate tax receipts. This article provides an overview of the primary provisions and delves into the criticisms raised by economists regarding its potential ramifications.

Housing

Minister McGrath detailed efforts from the government regarding housing – a prevalent issue in contemporary discourse. McGrath announced that homeowners with an outstanding mortgage balance from €80,000 to €500,000 on their house will receive a one-year Mortgage Interest Tax Relief. This will cost about €125 million and will benefit about 165,000 mortgage holders. The Rent Tax Credit has been increased from €500 per year to €750 per year, a temporary tax relief to keep small landlords from leaving the market. Additionally, the Help-To-Buy Scheme, the Vacant Homes Tax, and the Residential Zoned Land Tax are all intended to be extended. Lastly, Minister Donohoe reported that there are plans for 29,000 homes to be constructed by the year’s end, with 21,000 already built.

Finances

Minister McGrath celebrated falling inflation, with an estimated rate of 5.25% for September this year, and predicted a 2.9% inflation rate for 2024. In response to inflationary challenges, McGrath and the Department of Finance have escalated public spending from 5% to 6.1%, even as they anticipate income growth outpacing inflation due to a thriving economy. Their plan is to revert it to 5% as inflation diminishes.

Additionally, the government has also increased personal income tax to support workers and achieve efficiency in the labour market: the cutoff point for the lower income tax bracket has been raised by €2,000 for both single and married individuals. On the wage front, the national minimum wage has been increased by €1.40 to €12.70 per hour.  The Universal Social Charge, or USC, has been decreased for the first time in five years, from 4.5 to 4%, and the threshold for USC will be raised to €25,760. Finally, the government has introduced the Future Ireland Fund, made to support future government expenditure, which will receive a 0.8% investment of GDP annually.

Education & Health

Minister Donohoe has allocated a significant proportion of the budget to the Department of Education. Regarding higher education, he announced a once-off reduction of €1,000 for students qualifying for free fees, as well as payments to help students with secondary education. For the health sector, Minister Donohoe announced additional recruitment to increase healthcare staff, as well as continued investment in public health and vaccinations. To combat smoking, Minister McGrath announced an increased excise duty on tobacco products, raising the price of cigarettes to €16.75, additionally proposing a domestic tax on E-Cigarettes in next year’s budget.

Climate

Minister McGrath has taken steps to address climate change concerns by launching the Infrastructure, Climate, and Nature Fund, which is set to increase to €14 billion by 2030. The fund’s financing includes an annual contribution of €2 million and a share of the windfall from corporate tax receipts. On the public transportation front, Minister Donohoe has introduced funding for cycling, walking, and Greenways infrastructure, with additional fee reductions being introduced to encourage the usage of public transportation. Regarding energy, Minister Donohoe mentioned a target of 80% of electricity coming from renewable electricity in 2030, as households prepare for the cold winter ahead. Additional funding to increase environmental sustainability and to support farmers was also cited. Last but not least, Donohoe announced that approximately half of the income from carbon tax revenues will be reinvested to enhance energy efficiency in homes.

Other

Less prominent but nonetheless important, in the digital sector Minister Donohoe announced funding in the National Broadband scheme, extension of broadband to rural communities, and investment in cybersecurity. Funds have been allocated to the tourism sector, creative arts sector, the Gaeltacht, and sporting infrastructure as well. Support for the justice sector involves investment in Gardaí recruitment, an increase in the Gardaí budget, and investment in the defense sector. Funds have been allocated for foreign aid to developing countries, especially for those struggling with the impact of climate change. Finally, investment has been announced in peace-promoting and other cross-border projects with Northern Ireland.

Reception from Economists

Measures on housing have been met with heavy criticism from economists. David McWilliams, Irish economist and writer, argues these measures have done nothing to make housing more affordable and available. Instead, these measures are contradictory and only help existing homeowners, not first-time renters and buyers. In theory, the rising interest rates Ireland is currently experiencing should increase the cost of borrowing, thus decreasing the amount of money people can borrow, decreasing the size of new mortgages on houses for sale, and decreasing housing prices. Therefore, the government need not introduce any other measures as prices will fall on their own. The tax relief given to mortgage holders simply increases housing prices – the exact opposite of what the government claims to be doing. If the government continues to give a once-off relief every time interest rates increase, housing prices may  continue to increase as well. McWilliams believes the government has not built enough homes, considering net migration to Ireland significantly exceeds predicted levels. He argues that the rental tax credit and the Help to Buy Scheme could have a contradictory effect of putting upward pressure on rents. In final remarks, McWilliams emphasizes the potential drawback of tax credits designed to keep landlords in the market, potentially exceeding a cost of €100 million, especially if they had no intention to exit.

Dr. Barra Roantree, Economics professor at Trinity College Dublin, joins McWilliams in arguing the Help to Buy scheme should not have been extended  as it has demonstrated a propensity to inflate housing prices. While the Mortgage Interest Tax Relief scheme could be helpful to those suffering to pay loans from non-bank lenders hiking interest rates, overall, this policy is mainly helping people who do not need the relief. Additionally, Dr. Roantree notes concerning similarities between this relief scheme and a scheme that caused the Financial Crisis of 2008. Leading up to the financial crisis, people were receiving mortgages higher than they could afford, increasing property prices. When too many mortgages were given to people who normally would not qualify, a housing bubble was created – and every bubble inevitably bursts. Finally, Dr. Roantree criticized the Rental Tax Credit, arguing there is no evidence to show the tax relief is keeping landlords who would have otherwise left. He postulates landlords are not leaving the market due to tax but due to retirement, as many became landlords in the Celtic Tiger era. Thus, a tax relief would not have an impact on their decision.

The Irish Fiscal Council, a watchdog on the government’s procedures, has also given an opinion on the budget. The Fiscal Council approved of the new Future Ireland fund, as it argues it could unburden future taxpayers. However, the council had a host of critics regarding other measures. It is concerned about the increase in core net spending to 5.7% in 2024, which breaks the National Spending Rule of 5%, and argues the predicted break of the Rule to 2026 undermines Ireland’s public finances. The Fiscal Council criticizes the Irish government’s current adherence to procyclical fiscal policy (involving the augmentation of government spending and the reduction of taxation during periods of economic growth and low unemployment) as it has been damaging to Ireland in the past. Additionally, it predicts the larger permanent budget package will increase inflation and keep it at high levels for a longer period. Considering the robust economy, declining prices, and inflation risks, the Fiscal Council discerns minimal rationale for additional ‘one-time’ or transient policies. It specifically points to non-core funding, which was created for exceptional circumstances like Covid-19 and the humanitarian response to the war in Ukraine.

Members of rival political parties were also among the prominent critics of the 2024 Budget. Sinn Féin TD Pearse Doherty declared it a “budget for landlords.” Similarly, Holly Cairns, leader of the Social Democrats, argues the budget supports landlords more than it does tenants or first-time buyers.

Irish Congress of Trade Unions (ICTU) Secretary Owen Reidy argues the tax relief for landlords has made the taxation system more regressive, as opposed to progressive (like the USC). Reidy echoes members of the public arguing that the government has not gone far enough: the minimum wage should have been raised higher, higher education fees should have been decreased further, and more should be done to address the housing crisis and cost of living. There is also general criticism of too many temporary measures, especially the large number of “once-off” taxes. Patrick Leahy of the Irish Times argues that “once-off” taxes have been used so frequently that the phrase has lost its meaning.  Furthermore, he underscores the worrisome failure to address the housing crisis, especially since a significant number of young voters view housing as their primary concern. Finally, there is a prevalent argument that the budget predominantly caters to the middle class – which should not be surprising as Fine Gael prides itself as the party of the “squeezed middle”.