Monday 26 June 2017

Lesson unlearnt: Budget to address the perceived political requirements

Despite Brexit headwinds and a tougher economic outlook, the Government is borrowing to appease as many factions as possible, writes Colm McCarthy

GREAT BRITISH TAKE OFF: The UK Prime Minister Theresa May addressing the Conservative party conference last week where she announced plans to see through Brexit. Photo: Joe Giddens/PA
GREAT BRITISH TAKE OFF: The UK Prime Minister Theresa May addressing the Conservative party conference last week where she announced plans to see through Brexit. Photo: Joe Giddens/PA

The 2017 Budget to be delivered on Tuesday is being fashioned to address perceived political requirements rather than the needs of economic management. Last week's Exchequer returns were spun as a reassuring backdrop to whatever giveaways are to feature, and the background music is unmistakeable: recovery is continuing, tax revenue is doing fine and some spending increases and tax cuts can prudently be afforded.

The evidence does not support this happy conclusion. The tax returns for the third quarter suggest on the contrary that the economy is beginning to slow and recent business surveys point in the same direction. Forecasts of economic activity for 2017 from Irish and international agencies have been revised downwards. Sterling continues to sink, damaging the competitiveness of those trading with Ireland's largest business partner. Brexit has introduced major uncertainties into the economic outlook, and the ECB's low-interest-rate policy, which flatters the Budget accounts, could begin to unravel next year. Given the enormous overhang of public and private debt, every single economic advisory body has urged caution on Tuesday.

Tax revenue has weakened under virtually every heading with the exception of corporation tax. VAT, excise duties and taxes on income softened notably in the third quarter. These taxes are payable with a short lag and so give an almost contemporaneous reflection of economic activity. Corporation tax is more of a lagged indicator, reflecting corporate profits several quarters back. Receipts are also dominated by a small number of multinational companies and have been volatile. The apparent buoyancy of overall tax receipts in the third quarter was due entirely to an increase in this unreliable corporate tax component.

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