Department of Finance expects €8.6bn budget surplus this year

Thomson Reuters

The State is set to deliver a budget surplus this year of €8.6 billion, or 2.8 per cent of national income, in line with forecasts and allowing most excess cash to be invested in a new wealth fund, the Department of Finance said on Tuesday.

The department estimated that inflation would average 2.1 per cent this year following a sustained slowdown and that the domestic economy would expand by 1.9 per cent in 2024 versus the 2.2 per cent it forecast six months ago.

Ireland is one of the few European economies taking in more revenue than the Government spends each year and it ran budget surpluses of 3.2 per cent and 2.9 per cent of modified gross national income in the last two years, primarily due to a surge in corporate tax paid by its large hub of foreign multinationals.

That spurred the Government to set up a new sovereign wealth fund to help with future costs such as pensions. It hopes to grow the fund to around €100 billion by 2035 thanks to future expected surpluses.

Ministers are due to transfer €4 billion of this year's surplus to the wealth fund, with another €2 billion committed to a smaller infrastructure and climate fund being set up to act as a buffer in any future downturn.

The department forecast a surplus of €9.7 billion, or 3 per cent of modified gross national income, next year, assuming it reinstates its own budget rule of expenditure growth being capped at 5 per cent a year. Similar surpluses are pencilled in for the following two years.

The Government broke the rule in each of its last two annual budgets to help ease the impact of higher inflation. Minister for Finance Michael McGrath said the slowdown in inflation will allow a return to "more normal levels" of spending growth with the precise details to be agreed by July.

Irish inflation peaked at almost 10 per cent in mid-2022 and has fallen steadily over the last 12 months to 2.9 per cent last month. The department expects it to remain steady at an average rate of 2.1 per cent next year and drop a touch to 2 per cent in 2026.

After modified domestic demand – the Government's preferred measure of economic activity – slowed by more than expected to 0.5 per cent last year, the Department of Finance expects it to grow at an average annual rate of 2.25 per cent over the second half of the decade.