Tuesday 23 July 2019

Q&A: Tax cuts and carbon taxes are all in the mix - as Brexit remains the great unknown

Charlie McCreevy. Photo: Paul O'Driscoll/Bloomberg News
Charlie McCreevy. Photo: Paul O'Driscoll/Bloomberg News

David Chance

Q: Where are my tax cuts and what about carbon taxes?

A: The Summer Economic Statement sets out only the broad parameters of the fiscal plans for next year. The battles over tax cuts will come in a frenetic lobbying effort on what direction the next Budget should take. Unsurprisingly, business lobby groups like Ibec are calling for tax breaks, mainly on capital gains aimed at helping family businesses and tech start-ups. In addition, there have been calls for the reintroduction of Special Saving Incentive Accounts. Union groups like the Nevin Economic Research Institute have called for tax rises to fund childcare and housing. There appears to be a general agreement that a rise in carbon taxes has to come next year, but it is a political hot potato.

Q: Did Paschal Donohoe heed the calls for budgetary restraint?

A: The main outline was bang in line with the recommendations of the Irish Fiscal Advisory Council, so in that sense yes - and the minister has managed to kick-start infrastructure investment and deliver a budget surplus. There will be some disappointment that there wasn't a bigger acknowledgement of the temporary nature of corporate tax receipts.

That said, Mr Donohoe was right to draw a clear line between his stewardship of the economy and the profligacy of the pre-crash years and Charlie McCreevy's "When I have it, I spend it and when I don't, I don't".

That's notwithstanding overspends on the National Children's Hospital and big questions over the national broadband scheme.

Q: Has the Government got a budget plan for Brexit?

A: Up to a point. It is fair to say that having run a budget surplus, albeit a smaller one than the Irish Fiscal Advisory Council and others have urged, Mr Donohoe does have some wriggle room on Brexit and Ireland can afford to run a government deficit, especially as it can raise money at interest rates below zero. The problem is that making short-term economic forecasts is a mug's game.

Brexit is unprecedented and estimates of the hit to the economy range from three to seven percentage points off growth. A working assumption is that one percentage point off GDP adds 0.5 percentage points to the deficit due to welfare and social payments that would kick in for workers who lost their jobs. Based on the calculation that economic growth of 3.3pc this year will come in at zero in the event of a hard Brexit, that would imply a widening of the budget deficit by 1.65pc for the social payments alone.

The department has pencilled in just 1pc for the welfare payments and industry aid.

Q: Where does this leave the country's massive debt?

A: If there's a hard Brexit, debt to GDP ratios will rise again thanks to higher deficits. But there's way too much fixation on the level of debt. The issue is, can Ireland pay its debts? The key to debt sustainability is economic growth. Also with the European Central Bank looking set to cut interest rates into negative territory, the cost of financing it will get cheaper.

Given the globalised nature of the economy, it is hard for policies to micro-manage it. Mr Donohoe has delivered a surplus and can use those economic levers to stop the economy overheating.

Irish Independent

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