Saturday 21 September 2019

Overspend blows a hole in hopes of Budget surplus, says watchdog

Finance Minister Paschal Donohoe. Photo: Gareth Chaney/Collins
Finance Minister Paschal Donohoe. Photo: Gareth Chaney/Collins
Donal O'Donovan

Donal O'Donovan

The State's finances are in dramatically worse condition than was promised in Budget 2019 and could end this year in deep deficit, despite record levels of tax income, the Fiscal Advisory Council (Ifac) has warned in a report ahead of Budget 2020.

Overspending this year also shrinks the scope for Finance Minister Paschal Donohoe to cut tax or increase investment in next month's Budget.

The spending overrun, dubbed budgetary slippage, "goes well beyond the limits of prudence", Ifac chairman Seamus Coffey, an economist at University College Cork, said last night.

Overspending may be as high as €1.3bn, including unplanned bills for health and special welfare the Irish Fiscal Advisory Council, the State budget watchdog, has calculated.

It includes ongoing overspending by the Department of Health - a continual source of frustration to the State budget watchdog - and a promised Christmas bonus for social welfare recipients set to cost €300m but which Government has so far failed to account for in spending plans.

Ifac warned the international economic outlook has deteriorated in recent months, and a hard Brexit is now the most likely outcome of UK plans to leave the European Union.

As those risks intensify, Ifac said the State's underlying finances appeared to have deteriorated since 2015, masked only by higher than expected corporation tax payments that are volatile and should not be relied on.

This year the "entire surplus could be wiped out by overspending", said Mr Coffey.

That would mark a big deterioration from the forecast 2019 surplus of €600m.

A windfall from corporation taxes in November is the only realistic prospect of returning a balanced budget, Seamus Coffey said.

June and November are the big months for corporation tax payments to Government.

This year's June figures were ahead of expectations but that does not guarantee the same in November.

Economists and tax experts have struggled to explain why the state has collected so much additional corporation taxes since 2015, but it is mainly down to how a handful of multi-nationals report and define their global profits.

'Supernova'

Former Central Bank Governor, Patrick Honohan, warned last Saturday those corporation tax receipts could disappear as quickly as they arrived "like a supernova" and should not be relied on for ongoing spending such as on health sector staff.

Even if there are bumper corporate taxes paid in November, the Government should not rely on that to fund more slippages, Ifac said.

Spending overruns this year also mean less scope to use Budget 2020 to cut taxes or increase spending.

Paschal Donohoe expects to have around €2.8bn for new budgetary measures in 2020 but if the €1.3bn extra spending this year recurs that pot will shrink to as little as €1.5bn.

Much, if not all, of that has already been committed for public sector pay increases, the National Broadband Plan and the Children's Hospital.

Mr Donohoe should proceed with Budget 2020 on the basis a hard Brexit is the most likely scenario facing the country, but should not change his overall spending plans, Mr Coffey said.

"The €2.8bn (Budget package) is appropriate," he said.

In the event of a hard Brexit that budget plan is likely to mean less tax collected and therefore a deficit, and if the economy continues to power ahead it will throw off a surplus, he said. The overall budget can allow for both with possible changes targeting sectors most affected by Brexit, he said.

Irish Independent

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