Budget 2024: Economic growth forecast sharply cut by ESRI

The Government has received two fresh warnings ahead of next week’s budget, with the Economic and Social Research Institute (ESRI) forecasting on Wednesday that growth will slow sharply, while the latest exchequer figures, published by the Department of Finance on Tuesday, show further weakness in corporation tax.

Corporation tax is now expected to undershoot levels forecast for this year, Minister for Finance Michael McGrath confirmed, with receipts in the third quarter of the year dropping by 23 per cent on last year’s figure.

Mr McGrath said the fall-off in revenues from corporation tax, which have driven the huge surpluses of recent years, was a “timely reminder of need for careful management of our public finances”. This is the second month in a row that corporation tax revenues have undershot expectations.

Meanwhile, in its latest assessment of the state of the Irish economy, the ESRI has said the post-Covid bounce in the economy is over. Gross domestic product (GDP) was set to fall by 1.6 per cent this year, pushing the economy into what was technically a recession, it said.

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The institute’s forecasters said well-known distortions in the GDP figures meant that this overstated what was happening in the real economy. However, with export growth falling and consumers hit by the cost-of-living crisis, they have cut their forecast for the domestic economy to show growth of just 1.8 per cent this year, down from a previous estimate of 3.5 per cent.

[ Post-Covid economic bounce well and truly over ]

The ESRI says a widespread slowdown in growth is now in train and the economy can be expected to return to more “normal” rates of growth in the years ahead, which will have implications for the exchequer.

Tax cuts in the budget should be kept to levels needed to adjust for wage inflation, the ESRI says, and the decision to breach the 5 per cent spending growth rule could be justified only if most of the excess went into boosting investment.

The ESRI’s forecasts are the gloomiest of any of the main forecasting bodies and underline the threat to the economy from slowing international growth, as well as the impact on consumers of higher prices and soaring interest rates.

Slower world growth was also affecting exports, set to grow by just 1 per cent this year, and the impact of this on the profitability of major companies may now be affecting corporation tax, tax experts said.

Elsewhere, tax revenues remained strong and the overall tax take showed receipts of €61.4 billion, up 6 per cent on last year, with income tax continuing to perform strongly. The moderate growth outlook from the ESRI could start to affect revenues moving into next year, however. And a major new report from the Fiscal Advisory Council, the budget watchdog, also published on Wednesday, warns that the exchequer faces costs running into billions of euro each year from lower taxes and higher spending related to the climate transition.

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Preparations for next week’s budget are continuing with a series of sometimes difficult meetings this week between Minister for Public Expenditure Paschal Donohoe and other Ministers seeking spending increases. The health budget, which is expected to breach €25 billion this year, rising to more than €26 billion next year, was a particular focus of concern, sources said.

Following comments by Minister for Health Stephen Donnelly on his way into Tuesday’s Cabinet meeting, when he said the country had to have an “honest conversation” about funding the health service, Mr Donohoe did not deny but played down reports of tensions in advance of the budget.

“Tensions in Government are at a normal level,” he said.