A Ceann Comhairle, I welcome the opportunity to present Budget 2023 to this House.
When we gathered in this Chamber for Budget 2022, we were emerging from the worst of the COVID-19 pandemic. We now face a further economic challenge.
If you are an older person, you are having to spend more of your pension on heating your home; if you are looking after a family, you are facing higher grocery bills; if you are running a small business, you are trying to cope with increases in the cost of energy.
That is why Budget 2023, presented by Minister McGrath and I today, is and must be, a “Cost of Living Budget”, focused on helping individuals, families and businesses to deal with rising prices.
As we have seen all too clearly over the past few years - with Brexit, COVID and now the war in Ukraine - unforeseen risks and challenges are becoming more frequent in their occurrence and more severe in their impact. As one of the most open economies in the world, we benefit when things are going well internationally, but when they reverse, we are also one of the most exposed. As such, it is imperative that we are prepared for these shocks.
Our recovery from the pandemic is testimony to the value of that preparation. We faced the pandemic with our finances in good shape and this ensured we could both respond and recover in the aftermath.
Therefore Budget 2023 helps with the challenges of today, but will also ensure that we have sufficient reserves for what the future may yet bring. We must also be aware of the danger of making inflation worse by decisions that we could take.
Macroeconomic Outlook
The onset of the war in Ukraine has sent shockwaves throughout the global economy.
This shock is most clearly evident in energy and commodity markets, where prices surged at the onset of the war and have remained high.
Energy price inflation intensified over the summer as concerns grew regarding a complete shut-down of Russian gas supplies to continental Europe. The wholesale price of natural gas is now around eight times its average level in the years preceding the war in Ukraine.
The inflationary pressures from energy have been further compounded by the imbalance between demand and supply that emerged as the economy reopened at the start of the year. Consumers released substantial pent-up demand as restrictions were eased, while supply chain bottlenecks prevented firms from keeping up with that demand.
As a result of these factors, headline inflation in Ireland, similar to other advanced economies, is now running at highs not seen in many decades. My department is updating its forecasts to headline inflation of 8½ per cent for 2022, and just over 7 per cent for 2023.
Non-energy, or ‘core’ inflation, is also experiencing high levels of growth, suggesting spillover effects from energy and commodities markets to other sectors such as food, consumer goods, and services. My department’s forecasts for ‘core’ inflation has been revised up to 5¼ per cent this year, and just over 4½ per cent next. These developments reflect the increasingly broad-based nature of the inflationary challenge.
The pace of growth in the economy is expected to slow throughout the rest of this year as mounting inflationary pressures reduce spending power.
Tighter financial conditions and heightened economic uncertainty will also see firms hold back on investment. As a result, my department has revised down its forecast for Modified Domestic Demand – the most appropriate measure of our domestic economy – to 1¼ per cent for next year.
Let me acknowledge that these are not just abstract economic figures. The government understands, and I understand, the worries which small business owners, farmers, pensioners, those who work really hard to get by, will feel.
This is why the government will help, and by helping our country will overcome this challenge.
We can do this because our economy has strong foundations. Due to the hard work of the Irish people, the labour market has made a remarkable recovery over the past year, with well over 2½ million people in employment in the second quarter, the highest level on record, and an unemployment rate of 4.3 per cent recorded in August.
Looking ahead, while employment growth is expected to slow in line with the outlook for domestic demand, the unemployment rate is expected to remain at relatively low levels.
While the war in Ukraine poses the most immediate threat to our economy, we must remain vigilant of other risks on the horizon. Notably, Brexit could bring further challenges.
Fiscal Outlook
This is why our public finances matter. They have recovered strongly from the effects of the pandemic. Much of this recovery is due to their careful management over recent years and by undertaking appropriate responses to the unique challenges which we faced.
The recovery in tax receipts is broad based: at the end of August, tax revenues stood at almost €50 billion, up by over €10 billion on 2021. Income tax continues to perform well, and reflects the resilience of our labour market and the success of our employment schemes during the pandemic. The strong performance of VAT receipts confirms the rebound in consumer spending once public health restrictions were lifted.
As a result, I can announce to the House that we will register a General Government surplus of €1 billion, or just under ½ per cent of national income this year, and €6.2 billion or 2¼ per cent next year. To put this recovery in context, last year we recorded a General Government deficit of €7 billion.
While this is extremely welcome news, headline deficit and tax revenue figures do not account for the fact that much of the surge in tax revenue is due to excess corporation tax. These receipts could change significantly in the future, and with little warning. Corporation tax amounted to nearly €12 billion to end-August and my officials expect these receipts to exceed €20 billion this year. I will return to this point shortly.
It is essential that we use our surpluses wisely. We should not spend everything today; this will ensure that we are ready for tomorrow. This is what we did before COVID arrived, it worked and that is what we must do again. Because of this we could help during COVID, because of this we can help again.
While conditions have been favourable to us in recent times, it is important to note that borrowing costs for countries have also changed significantly since the start of the year and are now on a rising trajectory. The yield on 10-year government bonds has increased by over 2 percentage points since January.
While markets continue to view Irish bonds favourably, we know that market sentiment can turn swiftly. The best way to insulate the public finances from the higher cost of debt is to ensure that Ireland’s borrowing remains aligned with other small open EU Member States.
While my department’s economic projections envisage a softening in economic growth next year, the phasing out of exceptional supports and the upward revisions to the Exchequer forecasts place us in a strong position.
If we continue to follow our current strategy we should see a stabilisation of public debt at approximately €225 billion. It is also important to acknowledge that on a per capita basis, public debt amounts to around €44,000, which is among the highest in the world.
However, we will achieve a continued decline in the debt-national income ratio over the coming years by delivering budget surpluses.
By 2025, this ratio is projected at around 73 per cent - this is the lowest level seen since 2009. But this is contingent on maintaining the stance we have shown to date.
We simply do not know what challenges we will face in the future. When we face them, I believe we will prevail. A crucial economic foundation of this is managing our debt safely. It matters.
Budgetary Strategy
Managing the public finances allowed the government to act swiftly and decisively, to provide support to households and businesses, being especially mindful of the fact that the rising cost of living has hit hardest for those on lower incomes.
In drafting Budget 2023 Government has a responsibility to strike a delicate balance between helping with the cost of living pressures but, on the other hand, not making them worse by adding fuel to the inflationary fire.
The Summer Economic Statement set out the parameters for Budget 2023, as well as the medium-term budgetary framework.
In response to the increase in energy and other prices, the government amended its fiscal strategy for 2023 – doubling the size of the tax package and increasing public expenditure in order to protect the real value of public services.
For future years, we will aim to stay within the parameters of the medium-term budgetary strategy set out last year. This will allow us to provide for steady improvements in public services and sustainable reductions in personal taxation while still ensuring that our public finances remain on a positive trajectory.
Budget 2023 Measures
To help families, individuals and businesses deal with the rising cost of living, Minister McGrath and I are today announcing a package of once-off measures worth €4.1 billion. This will be accompanied by budgetary measures for 2023 worth €6.9 billion.
This brings the total size of Budget 2023 to €11 billion. In addition, there will be a further €300 million in public service support measures funded from the Contingency Reserve Fund.
I appreciate that these are very significant figures. However, I also appreciate that needs are also significant. The strength in tax revenues have provided us with the additional means to undertake such a response.
As mentioned a moment ago, at end August, tax revenues were approximately €10 billion ahead of the same period last year. While much of this is due to corporation tax, just under €5 billion was due to income tax and VAT. This growth is reflective of the domestic economy’s strengthening and is what guided the scale of once-off measures for 2022.
Further, given the urgency of the situation, these measures will come into effect this year and will be outlined by Minister McGrath shortly.
VAT and Excise Extensions
On the taxation side, I am extending the current excise reduction of 21 cent per litre in respect of petrol, 16 cent per litre in respect of diesel and 5.4 cent per litre in respect of Marked Gas Oil (MGO), and the 9 per cent VAT rate for electricity and gas until 28 February 2023.
I will be introducing the necessary Financial Resolutions later this evening in order to give effect to these extensions.
Income Tax
As I have stated previously, one of my core objectives in Budget 2023 is to ensure that workers do not find themselves in a position where they pay more income tax solely because of inflation. There are so many people who work hard, but whose earnings push them outside of access to social welfare benefits. We need to help them too, we need to put money back into their pockets.
I am therefore announcing today an income tax package to the value of over €1.1 billion.
Firstly, I am increasing the Standard Rate Cut Off Point by €3,200 to €40,000, with proportionate increases for married couples and civil partners.
Secondly, I am also increasing the main tax credits (Personal, Employee and Earned Income Credit) by €75.
I am also increasing the Home Carer Tax Credit by €100, to support stay at home parents.
Universal Social Charge
Further, I am increasing the second USC rate band (2 per cent rate) from €21,295 to €22,920 in line with the 80 cent per hour increase in the national minimum wage recently agreed by this government. The increase in the USC band will ensure that full-time workers on the minimum wage will remain outside the top rates of USC, while also giving a modest benefit to all workers whose income is above that amount.
In addition, a concession applies to those who have a medical card and earn less than €60,000 per year, such that those individuals pay a reduced rate of USC. Given the broader challenges facing people this year, I confirm the extension of this concession for a further year.
Income Tax - Third Rate
The recent report of the Tax Strategy Group (TSG) examined the impact of introducing an intermediate or third rate of income tax.
Further analysis of the TSG report would give options to Government on additional policy levers in future budgets to make our income tax system more balanced and effective.
It is agreed that this analysis will commence immediately and conclude prior to the publication of next year’s Summer Economic Statement and will take into consideration the overall macroeconomic and fiscal context. This analysis will assist government in arriving at an informed decision in a timely manner.
Were the government to opt for the introduction of a third rate of income tax, it would require considerable change to the systems in both the Revenue Commissioners and payroll providers; changes that will need significant lead-time to implement. We are advised that this could be done for January 2024.
As a result, my department will engage with the Revenue Commissioners on the necessary preparatory work, in advance of a policy decision being made by Government.
The government is also committed to developing a medium-term roadmap for personal tax reform, taking account of the recent Report of the Commission on Taxation and Welfare, and will consider a range of measures across income tax, USC and PRSI together with other related personal taxation issues.
Housing
As everyone in this Chamber is well aware, housing is the central challenge facing the country over the next number of years.
Too many people cannot afford to buy their own home, or are paying too much of their income in rent. Too many people have no home at all. Hundreds of thousands of homes will be required over the next decade across all sectors, social, private and rental.
The government has made unprecedented levels of investment available to-date and we are seeing results:
- some 25,000 new homes were built in the last 12 months
- 28,000 have begun construction, and
- a further 44,000 have been granted planning permission
Despite this progress, it is clear that Government can do more, and will do more.
Help-to-Buy
The Help-to-Buy scheme has been a significant support for first time buyers of new homes. Since its inception in 2017, 35,000 people have benefitted from the scheme.
However, as with any tax expenditure, I will keep the scheme under review. Earlier this year I commissioned an independent review of Help-to-Buy and I am publishing this report today. There are a number of recommendations within that report which the government will consider for future budgets.
In the meantime, I am going to continue the scheme, at current rates, until the end of 2024.
Rental Tax Credit
For those taxpayers who are paying rent on their principal private residence, I am introducing a new rent tax credit valued at €500 per year.
This measure, aimed at those who do not get any other housing supports, will apply for 2023 and subsequent tax years but I am providing that it may also be claimed in respect of rent paid in 2022.
Approximately 400,000 persons are expected to benefit. Further details are contained in the Budget documentation.
Pre-Letting Expenses
I have also decided to enhance the pre-letting expenses regime for landlords by doubling the amount that may be claimed per premises to €10,000 and by reducing the period for which a premises must be vacant from twelve to six months.
Vacant Homes Tax
Maximising the use of existing housing stock is also a key objective of this government.
Accordingly, I am introducing a Vacant Homes Tax to increase the supply of homes for rent or purchase to meet demand.
The tax will apply to residential properties which are occupied for less than 30 days in a twelve month period. There will be a number of exemptions to ensure that owners are not unfairly charged where the property may be vacant for a genuine reason.
The tax will operate on a self-assessment basis and will be administered by the Revenue Commissioners. The tax will be charged at a rate equal to three times the property’s existing basic Local Property Tax rate.
Residential Zoned Land Tax
In Budget 2022 I announced a Residential Zoned Land Tax.
In order to identify zoned land within the scope of the tax, maps are currently being prepared by Local Authorities who will publish their first draft maps on the 1st of November this year. Following the publication of the maps, any person will have the opportunity to apply to their Local Authority to have the zoning status of their land amended as part of a variation process.
In Finance Bill 2022 I will bring forward a number of amendments to streamline the operation of the Residential Zoned Land Tax and ensure it is efficiently administered.
Residential Development Stamp Duty
I also propose to extend the Residential Development Stamp Duty Refund Scheme to the end of 2025.
In place since 2017, this is a scheme whereby a portion of the stamp duty paid on the acquisition of non-residential land is refunded where that land is subsequently developed for residential purposes.
The net minimum stamp duty payable after a refund is 2 per cent, whereas the normal rate for non-residential property is 7½ per cent. To the end of 2021, this scheme had been availed of in respect of projects that have delivered over 15,000 residential units.
Defective Concrete Products Levy
Earlier this year the government agreed a comprehensive redress scheme for those home owners who have been affected by the issue of defective products used in the building of their homes.
This redress scheme comes with a significant cost and therefore, I am bringing forward a levy on concrete blocks, pouring concrete and certain other concrete products.
The levy is expected to raise €80 million annually and will be applied from the 3rd of April 2023 at a rate of 10 per cent.
Climate Change
Ceann Comhairle, I want to turn to one of the other key challenges of our times, climate change, the effects of which are becoming more frequent and more destructive.
Protecting our environment is the responsibility of us all and Government is acting to reduce emissions and support newer cleaner technologies, particularly in energy and transport.
The additional funding needed for measures, such as retrofitting and more sustainable modes of travel, comes in part from carbon taxation and this is appropriate and will continue under this government.
