Good afternoon. We thank the committee for the opportunity to engage in advance of October’s budget.
Every day, train commuters across Ireland hear a familiar warning, "Mind the gap." This phrase aptly captures the central challenge facing our public finances. This gap is the underlying budget deficit. While the headline fiscal position has been in surplus, the underlying position has deteriorated, with the gap growing from an estimated €800 million in 2019 to €7.2 billion in 2025. To put this in context, the gap in 2019 was equivalent to about a third of public spending on transport. By 2025, it had grown to equal that year's full spend on transport, plus agriculture, environment, climate and communications. The wider gap reflects Government spending growth of 55% in nominal terms since 2020, a third faster than the euro area in real per capita terms. While corporation tax receipts bridge this gap today, this creates a dangerous dependence on potentially transitory revenue.
Turning to the outlook, the summer economic statement outlines a more modest expenditure path, but with expenditure growth forecast to exceed revenue growth, our reliance on excess corporation tax is expected to increase further. This would see the underlying deficit reach €20 billion by 2030. In a scenario with higher spending growth, like that of the past five years, this gap would reach €26 billion.
Setting aside the durability of these excess receipts, the biggest near-term implication of this gap is the impact on our ability to build fiscal buffers for the future. The Future Ireland Fund and the Infrastructure, Climate and Nature Fund were created to prepare for long-term spending pressures from an ageing population and to finance critical infrastructure investments. When combined, contributions to these funds are projected to surpass €40 billion by 2030.
Under the current Government projections, the State will need to borrow close to €8 billion between 2028 and 2030 to fulfil its commitments to these funds. This is in an environment where the cost of Government borrowing has increased significantly. The ten-year Government bond yield has averaged at 3% in the first half of 2026, up from an average of 0.5% between 2015 and 2021. However, if expenditure growth was constrained to 5% annually, aligned with maintaining the existing levels of public services and delivering the national development plan, the Government would eliminate the need to borrow to save. On the other hand, a higher spending path than outlined in the SES, for example, at the 9% average of the past five years, would require borrowing of almost €19 billion over the same period.
Overall, the Government's projected expenditure path heightens reliance on corporation tax receipts at a time when the evolving geopolitical landscape raises questions about the sustainability of these revenues. The summer economic statement acknowledges this changing risk landscape, noting that a significant proportion of Ireland's corporation tax receipts are potentially transitory in excess of what may be expected to be sustained in the medium to long term. To give a sense of scale, excess corporation tax receipts now represent 15% of Irish tax revenue. This is a similar share to property-related taxes during the mid-2000s property boom and highly concentrated in a handful of multinational firms. There is, however, a difference worth noting. Excess corporation tax is more disconnected from Irish employment and domestic activity than property-related revenue. Construction alone accounted for more than 13% of the workforce at the peak. Nevertheless, a loss of this revenue would still have a material impact on the economy. The most immediate effect would be on the public finances. If these receipts declined significantly, the budget balance would deteriorate sharply.
To the extent that this required corrective action, expenditure reductions or tax increases to preserve the sustainability of the public finances, there would be knock-on negative effects on employment and domestic economic activity. This reinforces the need to broaden the tax base to ensure that the public finances could withstand the impact of a decline in corporation tax in the future, if this occurred.
How can fiscal policy respond? In his July letter to the Minister in July, the Governor of the Central Bank outlined the principles for fiscal policy: growth must be sustainable, linked to underlying revenue capacity; smooth the cycle, not amplify it; be simple and clearly defined; and balance flexibility with discipline. Applying these principles to budget 2027 means limiting net expenditure growth to closer to 5% annually. This will be sufficient to maintain services and deliver the national development plan and will be closer to a neutral fiscal stance, which is appropriate, given the capacity constraints across some sectors. It also protects allocations to the two funds without the need for significant borrowing under current projections.
At a minimum, the spending envelope for budget 2027 as presented in the July SES should be maintained without further expansion and with any additional spending measures offset through revenue-raising or reprioritisation, drawing on the Commission on Taxation and Welfare's 2022 recommendations for broadening the tax base. We should maintain the longer term focus as outlined in the Future Forty report through prioritising capital projects with clear productivity benefits that crowd in private investment. Spending to date this year points to current spending outpacing capital investment, which is tracking 9% behind target.
The Irish economy has performed exceptionally well since the start of the decade, and while external risks have grown sharply, a generally favourable fiscal outlook remains. However, beneath these headline surpluses, a gap has opened up and continues to widen. Mind the gap. Individual budgets will always balance competing priorities, but it is our overarching approach to net spending growth that will determine whether we build the fiscal resilience needed for long-term challenges or leave us vulnerable to sudden, painful adjustments.
I thank the committee members for their attention and we welcome their questions.
