By Padraic Halpin and Conor Humphries
DUBLIN (Reuters) -Ireland dipped into one of Europe's few budget surpluses to fund higher-than-usual spending hikes and tax cuts, ease energy costs for firms and consumers and set cash aside in a budget it said was in sharp contrast to neighbouring Britain's economic plans.
Finance Minister Paschal Donohoe said Ireland would still be left with a surplus of 2.25% of national income next year even after delivering what ministers have dubbed two budgets in one - mixing 6.9 billion euros ($6.62 billion) of permanent spending increases and tax cuts with 4.1 billion euros of one-off energy measures.
Conscious that the public finances would still be in deep deficit this year without surging corporate tax receipts paid by a small number of multinational firms, Donohoe said on Tuesday he would put 2 billion euros into a reserve fund this year and set aside another 4 billion euros next year.
"It is a major achievement for our country to be in a position to put additional resources aside in order to prepare for future challenges, and to run a surplus," Donohoe told parliament.
"And let me be clear there are the major challenges which we know are coming, and which we know will be very costly for future generations."
The finance ministry, central bank and fiscal watchdog had all urged the government to start setting some of the windfall corporate taxes aside.
Deputy Prime Minister Leo Varadkar had earlier said that the budget was in contrast to the economic plan outlined by Britain last week that sent shockwaves through financial markets due to the level of borrowing required.
Ireland's plans were being self-financed "because we have a strong economy," he told reporters.
In May, the European Commission forecast that Denmark would be the only country in the European Union to deliver a surplus this year with Sweden, Ireland and Luxembourg joining them in 2023.
Ireland's forecasts on Tuesday included a surplus of 0.4% of national income for 2022.
The finance ministry nevertheless slashed its forecast for modified domestic demand - its preferred measure of economic activity - to 1.25% for 2023 from 3.9% previously and said real income growth is expected to be negative again next year.
That was because it now sees inflation averaging 8.5% this year versus 6.2% previously, and just over 7% in 2023 compared with the 3% expected five months ago.
To help ease the impact of inflation that is running at nearly a 40-year high, the budget included permanent hikes to social welfare rates, cuts in childcare, university and school costs, as well as a previously agreed public sector pay deal.
The amount of money people can earn tax-free before hitting the higher rate of income tax was also increased.
Every household will receive 600 euros off their next three energy bills, with most small- and medium-sized firms eligible for 10,000 euros a month towards their energy costs in the coming months. Allowances aimed at protecting people against fuel poverty were also among the one-off measures.
The Irish Fiscal Advisory Council (IFAC), the country's independent fiscal watchdog, said the measures struck a balance between providing support and avoiding adding excessively to higher inflation.
The government should stand ready to take additional measures if needed should there be significant disruptions to energy supply this winter, it added.
($1 = 1.0424 euros)
(Reporting by Padraic Halpin; Editing by Andrew Heavens, William Maclean, Catherine Evans and Jonathan Oatis)