Tuesday 24 October 2017

Big budget expectations may end in disappointment

Finance Minister Paschal Donohoe Photo: Tom Burke
Finance Minister Paschal Donohoe Photo: Tom Burke
Kevin Doyle

Kevin Doyle

There was a time not so long ago when families dreaded budget day. For weeks in advance the media would speculate on whether the figures could really be as bad as the doomsday predications.

And when the axe fell, it came crashing down hard on health, education, transport, agriculture and every other department. Nobody escaped.

Back in 2008, Brian Lenihan announced an extra €2bn in taxation and cuts to public spending totalling €1bn. It wasn't enough and an emergency budget full of further slash and burn policies was announced six months later.

The trend continued until 2014 when finally the Fine Gael/Labour coalition found itself in a position to boast that the era of austerity was over.

However, just because the cuts stopped it didn't mean the deep wounds were healing.

People rejected Enda Kenny's 'Keep The Recovery Going' message during last year's election campaign.

But now it seems they are buying into Leo Varadkar and Paschal Donohoe's promise that the best is yet to come.

Even the Anti-Austerity Alliance felt the need to change its name, least it be considered irrelevant.

Mr Donohoe said this week that his "guiding principle" when planning October's Budget will be "reducing the income tax burden for those on low and middle incomes".

And while Mr Varadkar has faced criticism from the left-wings for talking about the need to support people "who get up early in the morning", there is a large section of society who believe he is addressing them.

However, they are at serious risk of overpromising and under-delivering.

For all the talk of tax cuts and priority spending, the Cabinet was told yesterday that there is only in the region of €500m to play around with. That would do little to halt the crisis in the health service, never mind deliver a pay boost for the squeezed middle.

Mr Varadkar has said he will go looking for "hidden fiscal space" by examining expenditure that could be reallocated. This, he believes, could produce an extra €560m to €1bn.

There is logic in ensuring money is well spent but this could end up being a 'robbing Peter to pay Paul' exercise.

Much of the pre-budget focus is set to centre on the much-hated USC. The new Taoiseach has edged away from scrapping the tax, which draws in around €4bn a year. This represents approximately 22pc of income tax revenues, or 10pc of total tax income.

The European Commission yesterday warned that to continue cutting the USC will create a 'trilemma': how to continue to generate revenue and maintain progressivity without imposing distortionary high marginal tax rates.

So while we might have the fastest growing economy in Europe it seems there will be little room for manoeuvre in this budget. And that's the question facing the Taoiseach and Finance Minister. How to spread the message of economic recovery without creating expectation that will ultimately lead to disappointment.

Irish Independent

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