Belfast Telegraph

View from Dublin: Brexit looming large over October Budget

Irish finance minister Paschal Donohoe has some big decisions to make
Irish finance minister Paschal Donohoe has some big decisions to make

By Richard Curran

Ireland's finance minister Paschal Donohoe has some tricky decisions to make ahead of next month's Budget. Budget calls are always tricky. This time is different as Brexit looms large. So too does a possible general election in the Republic. There has been a strong feeling that if the direction and nature of Brexit became a little clearer, there would be a need to clear the political air in Ireland too.

So should Mr Donohoe presume the worst and do very little by way of spending increases or tax cuts, or should he try to do something small for everybody with an eye to a more stable economic picture and a possible election?

This should of course be a no-brainer. Regardless of the madness taking place in Westminster (and soon to visit every British town and city with a general election), common sense suggests he should not engage in any kind of meaningful tax cuts.

Equally, government spending has to be kept under control, especially with so much wider international uncertainty. The August exchequer figures put some of these issues in perspective. Ireland has been the fastest growing economy in the eurozone for several years. Benign oil prices, cheap interest rates and a cheap euro fuelled a very solid recovery.

But instead of bagging any of this money for a real rainy day, government spending has been allowed to go up quite dramatically. The state took in €2.6bn (£2.3bn) more in tax in the first eight months of 2019 than it did the previous year.

Yet we still managed to run up an exchequer deficit of €625m (£559m). It isn't a huge deficit by any means, but it shouldn't really be there at all. The cost of running the country through total expenditure in the year to August was €36.4bn (£32.5bn).

Three years ago, expenditure during the same eight months was €32.1bn (£28.7bn). That is equal to €82m (£73.3m) more per week in expenditure than in 2016.

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Yes, the exchequer tax receipts are ahead of profile. Yes, spending has been kept under a level of control relative to profile. But we have yet to see whether there will be another health spending overrun and whether a crash out Brexit will cause serious economic damage.

The growth in tax receipts has been fuelled to a worrying degree by the corporation tax take. So far this year corporation tax receipts amounted to €4.9bn (£4.4bn).

This was €314m (£281m) ahead of profile. That is all well and good depending on what is done with the money. Where would the exchequer finances be if corporation tax receipts had not taken off into the stratosphere as they did a few years ago?

The scope for Budget tax cuts and spending increases is very tight. Take away the increased spending already accounted for and there is just €700m (£626m) left for additional spending increases and tax cuts.

Paschal Donohoe could put the squeeze on by tax-raising measures on excise on booze or cutting tax relief on pension contributions to help fund a more generous income tax cuts package.

But he can only tinker around the edges.

Widening the tax bands by €1,000 (£894m) would cost €216m (£193m). Bringing the self-employed tax credit in line with PAYE workers would cost another €35m (£31m). The economy does not need a consumer stimulus. We have full employment and solid consumer spending. Why throw on more fuel?

The minister has to have something to announce when he takes to his feet next month on Budget day. Having a long list of tiny tinkering measures might not do much for anybody but it has become the norm on Budget day since the recovery began.

Public expenditure is where the government has to be most careful. The government is asking businesses to assume the worst on Brexit. It should do the same.

Belfast Telegraph