Thursday 18 January 2018

Noonan's extra €300m giveaway may herald tougher times to come

Political concerns may have driven the Budget 'overspend' but plans for further tax cuts and spending rises may have to be reined in

Conall Mac Coille, chief economist at Davy
Conall Mac Coille, chief economist at Davy

Conall Mac Coille

Budget 2017 contained few surprises with most initiatives well flagged to the media. However, the €1.3bn giveaway exceeded the €1bn originally mooted, triggering another unedifying standoff between the Government and the Fiscal Advisory Council.

The extra €300m may be relatively small, but illustrates that in the context of the minority government, political concerns could increasingly trump caution.

The pace of spending growth is concerning - especially amid the current wave of claims for public sector pay rises.

Ireland has not embraced the medium-term expenditure planning framework intended to be a legacy of the European Union (EU)/International Monetary Fund (IMF) programme. Instead, total gross expenditure is now expected to equal €58bn in 2017, almost €2bn higher than planned just 12 months ago.

Revising spending plans made more sense when tax revenues were beating overly pessimistic forecasts.

This time last year, Michael Noonan set his budget in the knowledge tax revenues were 5.8pc ahead of target.

This year the figure is just 1.5pc, entirely due to volatile corporate taxes.

Given the potential negative impact from Brexit and sterling's depreciation, surely a more prudent approach was warranted.

Expectations for further tax cuts and spending rises may soon have to be reined in.

Inevitably attention has focused on the "Help-to-Buy" scheme with few expecting any significant impact on housing supply.

Buyers will now rush to take advantage of the scheme, intensifying competition for newly built homes.

The scheme is set to expire in 2019, but the Government may find it hard to withdraw subsidies for homebuilding.

The tax measures were relatively modest. The €335m cut to the Universal Social Charge will still leave the marginal rate for those earning below €70,000 at an eye-watering 49pc.

Instead, the focus was on the extra €1bn of spending, broadly split across education, health and social benefits.

Unfortunately, there appears to be no coherent strategy on where the tax benefit system needs to be.

Politicians refuse to grasp the nettle that public services in other European countries are funded by higher taxes on those with low incomes - once again in danger of narrowing the tax base.

The United Kingdom's Office for Budget Responsibility has found Ireland spends more on social transfers to working age people than any other OECD country, yet poverty remains a problem.

The underlying structural issues are low labour force participation, particularly among women, in part driven by the past emigration of those most likely to take-up employment.

However, how best to align our social benefit system to facilitate job creation still receives little attention.

Conall Mac Coille is chief economist at Davy

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