Billions of euro in windfall tax receipts will not be enough to cover the cost of an ageing population, with PRSI increases needed to help bridge the gap, Ministers were told on Tuesday.
The Government expects some €65 billion in budget surpluses – much of it consisting of once-off “windfall” corporate tax receipts – between now and 2026, with Minister for Finance Michael McGrath to publish a paper on how to spend the surpluses on Wednesday.
Mr McGrath is planning to bring forward legislation in the coming weeks to establish a long-term savings vehicle, similar to sovereign wealth funds that have operated in Norway, Australia and Japan. However, Ministers were told that drawdowns from such a fund would be insufficient to meet the entire cost of demographic change, which is estimated to cost an extra €7 billion to €8 billion a year by the end of this decade and to continue to climb afterwards.
It is understood that Cabinet was told that under scenarios modelled drawdowns from the fund would not be sufficient to cover the increase in ageing-related costs by the middle of the 2030s, with a need to complement this income with other reforms, such as increases in PRSI.
The paper will outline three options for the surplus – paying off some of the national debt, establishing a State investment fund as outlined above, and boosting Government capital investment in the coming years. A fund would likely be initially capitalised by the €6 billion in the national reserve fund, and is likely to quickly exceed €10 billion.
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The Government could reduce the size of Ireland’s €226 billion national debt by using the surplus to repay some debt as it matures, helping to hold down the cost of servicing the debt as interest rates rise.
It is expected that the paper will acknowledge the merits of using the surpluses to pay down debt but several senior political and official sources played down this possibility, with three people with knowledge of discussions in Government suggesting it was unlikely.
Projects in housing and education could be in line for extra allocations if investment is boosted, but there are also concerns about triggering higher inflation.
The surge in corporation tax income – which has risen by over 450 per cent in the past decade – has flattered the exchequer, turbocharging tax receipts and providing significant sums for once-off cost-of-living measures in Budget 2023. The Government must now balance calls for additional spending already springing up across the entire public sector.
The €65 billion question: how to spend the massive budget surplus
The Government will face competing demands and pressure from the Opposition and civil society – and from within its own ranks – over how to spend the surplus, which is likely to play a large part in the backdrop to budget negotiations in the autumn.
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The leaders of the three Coalition parties are likely to discuss the plans over the coming weeks, with long-term decisions made by the time of the Summer Economic Statement in July. It is expected that this will effectively decide on what to do with the huge budget surpluses projected in the coming years.
Figures published by the Government in recent weeks showed that a €12 billion surplus is expected this year, rising to €16 billion next year, though some of this money is likely to be spent in additional budget spending measures. Department of Finance officials have warned consistently that some of these revenues are “windfall” in nature, and cannot be relied upon to continue at present rates.
Mr McGrath and his ally Minister for Public Expenditure Paschal Donohoe are known to favour saving as much as possible for future needs.
