Through a combination of solid economic growth and a large amount of good fortune, Ireland found itself in the envious position of having a record budget surplus for 2024 as the backdrop for Budget 2025. In the context of an economy at full capacity, the challenge of the government was to manage the inflationary impact of additional government spending while at the same time putting resources to work to close very clear infrastructural deficits in the economy. With a general election imminent, there was also a large political “elephant in the room” that provided an important backdrop to this Budget. All of these issues factors played a role in shaping the measures announced yesterday. Here our chief economist Dermot O’Leary presents the key takeaways from Budget 2025.
Record surplus forms the backdrop for Budget 2025
In contrast to many of its peers, Ireland was in the envious position of having to manage a record budget surplus in Budget 2025. Helped by record corporation tax receipts and the recent ruling by the Court of Justice in relation to Apple (€14.1bn), Ireland will run a surplus of 7.5% of GNI* in 2024, with a surplus of 2.9% of GNI* expected for 2025. Debt levels will continue to fall over the coming years, with gross debt expected to fall to 64% and net debt expected to fall to just 42% of GNI* by the end of next year. The headline statistics suggest that the Irish public finances are in rude health, but the dependence on, and the concentration risks around, corporation tax remain an ongoing source of concern in the context of growing policy and political risks on trade.
Inflationary, structural and political at the same time
Budget 2025 was framed in the context of three important points of reference for the Irish economy; (i) the economy is at full capacity, with further fiscal stimulus risking inflationary pressures; (ii) infrastructure shortages are having real impacts on Ireland’s competitive position and must be addressed, and; (iii) the government was keen to address the preferences of households given the imminence of a general election. The budget measures will influence each of these factors in the coming period.
Spending targets exceeded as “creep” continues
While Ireland continues to run
large budget surpluses, this hides an underlying “spending creep” that has
occurred over recent years. For 2024, spending will grow by 9% yoy, well above
the government’s own spending rule. This rule was put in place to prevent a
repeat of pro-cyclical spending, but it has largely been ignored. While general
government spending is forecast to grow by below 5% in 2025, there is a risk of
a repeat of recent years, where spending targets were missed. This spending
then acts as the base for the growth in the following year.
Welcome focus on infrastructure for Apple monies
The government resisted the urge to spend the windfall gains coming from the Apple judgement. Instead, it focused on a number of “principles” which will guide the spending of these monies. It also identified four Key Investment Pillars - water infrastructure, the electricity grid, transport networks and housing – that will be the focus of capital investment plans in the coming years. Importantly, the government plans to leverage the size of these funds by “crowding-in” private capital. In our view, the monies should be seen as a down-payment on securing Ireland’s future competitiveness, focusing on areas that will ensure ongoing success in attracting FDI into the future.
Read Dermot O'Leary's full Budget 2025 Report here.
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