An extra €8 billion in public expenditure will be needed every year by the end of the decade just to “stand still” because of changes in the population structure, the Department of Finance has warned.
As part of an analysis of the country’s economic outlook, compiled by the department as part of Budget 2023, the Government warned that the public sector balance sheet was “vulnerable.”
A risk assessment found that an “ageing population will involve significant fiscal costs simply to stand still” and that “by the end of this decade, changes in the population structure will necessitate an additional €8 billion in public expenditure each year simply to maintain existing levels of service”.
The report also warned that the inflation rate was expected to ease only gradually next year and this would continue to erode household purchasing power. “In real terms, household disposable income is projected to decline next year.”
The report also warned that the risk of further energy shocks were high and that “it remains possible that demands on the electricity grid could exceed supplies to the grid, triggering ‘outages’ which would weigh on economic activity”.
Another risk was that if Covid and flu strains circulate in parallel this winter, and if this were to overwhelm the health system, “some form of mobility restrictions could be necessary”.
The assessment also cautioned that geopolitical tensions could escalate further specifically in relation to Ukraine and Taiwan, with the report pointing out that more than 90 per cent of the world’s semiconductors are produced in Taiwan.
The world’s dependence on these semiconductors has placed them at the heart of mounting tensions between the United States and China over Taiwan. They are used in everything from smartphones to aircraft.
The risk assessment also warned of a “disorderly adjustment in China” saying that “the imbalances in the Chinese economy that have built up in recent years are now being corrected, and the side effects could trigger economic difficulties elsewhere”.
There were also warnings about corporation tax with the analysis stating that revenue from this source is expected to be affected as international tax policy changes take effect, and that the actual cost could be higher than the €2 billion by 2025 currently assumed.
The report also said that a higher-than-anticipated number of refugees could significantly increase public expenditure. The Minister for Children, Roderic O’Gorman, revealed this week that he will have to seek a supplementary budget for his department of €850 million to deal with the costs associated with accommodating Ukrainian refugees as well as other pressures in the international protection system.
The risk assessment also listed several “upsides”, including that stronger value added from multinational corporations could boost investment, wages, corporate sector output and GDP.
The Department of Finance said growth would be significantly lower and inflation higher next year than previously expected, and officials acknowledged that Ireland was in danger of slipping into a technical recession, defined as two successive quarters of negative growth.
Minister for Finance Paschal Donohoe said this week the “most likely scenario is still one of growth” for next year but acknowledged that Ireland now faced an “incredibly uncertain environment”. Inflation is now predicted to top 7 per cent next year under gloomier predictions from the Department of Finance.
The Government this week unveiled Budget 2023, which included an €11 billion spending package. The cost-of-living package, which will see once-off payments to families beginning in the coming weeks under a range of headings and a series of tax changes and business supports, will cost €4.1 billion. The core package of recurring spending increases and tax changes will cost €6.9 billion.