Latest forecasts suggest lower than expected budget deficit despite war

The Government is still targeting a deficit for this year lower than predicted in the Budget last October, despite the impact of the war in Ukraine, according to updated forecasts to be published on Wednesday.

The impact on the war will require a redrawing of spending predictions for this year, given the cost of housing refugees and the associated increases in the education and welfare budget but the Government hopes most of the cost can be met within existing spending plans, in part by redirecting Covid-19 contingency funds.

However, the latest Stability Programme Update, a key economic and fiscal document which will set out the Government’s medium-term view of the budgetary situation and be submitted to Brussels, will underline the huge uncertainties facing the economic outlook and the risks for the public finances heading into 2023.

Recent exchequer figures have shown taxes are well ahead of target. Last year in the Budget the Government predicted a budget deficit of 3.4 per cent of GDP this year. By the end of last year this looked too pessimistic and it is likely that, despite the war, the SPU will have a lower deficit forecast.

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The new forecasts will say that economic growth will slow this year but that the post Covid recovery will not be completely derailed. Like the Central Bank and ESRI the Department of Finance will revise down its forecasts for the domestic economy due to the impact of higher energy prices and the resulting impact on purchasing power.

The SPU will warn that with the rising cost of state borrowing as longer term interest rates rise means there are limits on the extent to which the Government can absorb the rising cost of living.

The Cabinet is expected to approve the SPU on Wednesday while signing off on further measures to mitigate the rising cost of living .

The temporary reductions in VAT on gas and electricity (but not on petrol, diesel or home heating oil) are intended to offset the scheduled rise in the carbon tax next month, which the Government is determined to proceed with despite calls from the opposition and some of its own TDs to postpone it.

The Cabinet is also likely to approve further targeted supports for those on the fuel allowance, including an additional three weeks’ payment worth €99, paid in one lump sum. This will benefit about 370,000 people, officials said.

The planned temporary reduction of VAT on gas and electricity from 13.5 per cent to 9 per cent will require domestic legislation and be worth about €49 a year on gas and €61 a year on electricity.

Overall, the Government was spending approximately €2 billion on packages designed to help people with cost-of-living increases, Tánaiste Leo Varadkar said while speaking to reporters in Dublin on Tuesday.

“What we want to avoid is the fool’s paradise of using borrowed money to help people with the cost of living, and that is why we can’t go as far as maybe we would like to in an ideal world,” he said.

“If we jack up borrowing to help people with the cost of living now, we would have to take that back off people in a few years’ time, and I don’t think we would be doing anyone any favours if we did that.”

Elsewhere, the Taoiseach said that the Government could not entirely offset the rises in the cost of fuel.

“I’ve been very consistent that we cannot entirely deal with our response 100 per cent to all of the increases that have happened as a result of the pandemic and as a result of war,” he said.

“What we can do is do the very best we can to alleviate pressures on people and we have done that,” Mr Martin said.

A number of judicial appointments are also expected to be approved by the Cabinet.