Speech
Opening remarks by Department of Finance Chief Economist John McCarthy, Department of Finance Annual Conference
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Future-proofing the Public Finances – the Next Steps
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Good afternoon and welcome to this, the department’s seventh annual economic conference.
Let me begin by thanking the Central Bank of Ireland for making this venue available.
The theme of this year’s conference is Future-proofing the Public Finances – the Next Steps.
Short-term, cyclical economic and fiscal developments receive much commentary and debate – rightly so. But it is, of course, important to step back from time-to-time to take stock of longer-term structural developments. This is something that we in the department are keen to socialise and communicate. In particular, it is crucial that there is a credible medium- to longer-term strategy for the public finances and this is what today’s conference is about.
To set the scene for the discussions, let me offer some thoughts on the budgetary situation and outlook.
The department published its spring forecasts in April, in line with the European timetable. Much has been made of the cumulative surplus of €65 billion that is projected between 2023-2026 (ppt – slide 2).
Three issues are of note here.
Firstly, the figure is now slightly different given the re-calibration of budgetary policy announced by Government in the Summer Economic Statement last week.
Secondly, and more importantly, these are forecasts – the money is not ‘in the bag’. As always, the baseline scenario could well be overtaken by events. The experience of the last few years – a sequence of almost unprecedented supply-side shocks to the Irish and global economies – highlights just how rapidly the economic and fiscal situation can change.
Finally, the surpluses largely reflect the revenue stream generated by exceptional increases in corporate profitability over the past decade. These dynamics have been well documented – a five-fold increase in corporate tax receipts in a decade, and a doubling of these receipts since just before the pandemic (ppt – slide 3).
The increase in revenue has gone hand-in-hand with an increase in concentration – data from the Revenue Commissioners show that 10 firms account for €1-in-7 of all tax collected (ppt – slide 4).
A key lesson of the sovereign debt crisis a decade-and-a-half ago is that budgetary policy must be calibrated on permanent, rather than transitory, revenues. Put simply, a key policy objective must be to avoid building up permanent fiscal commitments on the basis of revenues that are potentially transitory.
Accordingly, it is important to ‘smooth through’ these cyclical trends. On this basis, work undertaken in the department suggests that around half – or nearly €12 billion – of these receipts could be considered windfall in nature.
Concentration risk is not limited to corporate tax: 80 per cent of all income tax is paid by just 20 per cent of employees leaving this revenue stream exposed to product-, firm- or sector-specific shocks (ppt – slide 5).
In fact, the correlation between those sectors which generate significant levels of corporation tax and also high levels of income and other pay roll taxes further highlights potential risk to the public finances.
It is also worth stressing important structural changes that will impact on future revenue streams. One such example is the ongoing shift to Electric Vehicles, which will likely dampen excise duty receipts in the years ahead.
Let me now turn to the expenditure side of the fiscal equation where, beyond the near-term, structural change will present major headwinds for the public finances.
Perhaps most notable is the impact of demographic change. The population is aging rapidly and the window of opportunity for policy to address this is closing (ppt – slide 6).
The fiscal costs are enormous: age-related public spending by the end of this decade will be around €7-8 billion per annum higher than at the beginning of the decade. Thereafter, the costs are set to increase exponentially – around €17 billion higher per annum, in real terms, by 2050 than they are currently (ppt – slide 7).
Pipeline expenditure pressures are not confined to demographic change; financing the twin transitions – the climate and digital transitions – are now firmly on the fiscal radar. At this point, we simply do not have accurate estimates of the impacts these phenomena will have on the public finances, but we know that they are likely to be significant.
So this leads us to today’s discussion and the need to reconcile these two key fiscal challenges – how to ensure transitory revenues do not contaminate the expenditure base on the one hand, and the intensification of public expenditure pressures over the medium-term on the other hand.
Reflecting these challenges, Government has recognised that there is a strong economic and fiscal case for establishing a longer-term savings vehicle. In broad terms, the objective is to facilitate an inter-temporal smoothing of age-related and other fiscal costs, by channelling windfall revenues to this savings vehicle. The over-arching aim is to maximise the benefit we derive over the long term from the windfall receipts the Exchequer is currently benefitting from.
Ireland has, of course, relevant experience in this regard, having been a pioneer in establishing the National Pensions Reserve Fund in 2000 (ppt – slide 8), although this was subsequently liquidated during the financial crisis. However, it is not intended that the fund be solely dedicated to the cost pressures associated with an ageing population – the structural challenges which we face are much broader, notably in relation to the costs associated with climate change.
And that is what today’s event is about – exploring the different issues and considerations regarding how we should establish and design any such vehicle, as well as hearing from experts who have experience in these areas.
Put simply, we are at the beginning of this journey and we want to make sure we make the correct decisions now to safeguard our public finances and our economy for future generations.
In conclusion, I would like to thank you all for giving your valuable time to attend today’s conference.
I would especially like to extend my thanks to Mary O’Dea for acting as Chair for the day, and to our speakers, Eddie Casey, Matt Whineray, Gail Le Coz, Peter Kinsella and Tom McDonnell.
With that I now give the floor to Mary to steer us through the discussions for the afternoon.
Thank you.