Thursday 23 May 2019

Tax cuts and the 'rainy day fund': What do we know about Budget 2019 so far?

Minister for Finance Paschal Donohoe. Photo: Bloomberg
Minister for Finance Paschal Donohoe. Photo: Bloomberg
Kevin Doyle

Kevin Doyle

Finance Minister Paschal Donohoe plans to bring forward "affordable" cuts in a €266m package for next year's Budget.

He will spend the summer working on the package - but what do we know about the Budget 2019 plan so far?

How much money does Paschal Donohoe have for Budget 2019?

In theory the Finance Minister will introduce a budgetary package worth €3.4bn – but a significant portion of this money (€2.6bn) has already been earmarked for spending.

What has it been earmarked for?

The Government has already committed to:

  • €1.5bn in capital expenditure as part of the National Development Plan;
  • €300m carry-over costs associated with measures introduced this year;
  • €400m for public sector pay increases;
  • €400m for demographic costs.

So how much will there be for Budget day announcements?

Based on current forecasts, Mr Donohoe will have €800m to play around with.

This will be split in a 2:1 ratio in favour of spending over any tax cuts.

What sort of tax cuts?

The minister plans to target middle-income earners by raising the threshold at which people start paying the higher 40pc of tax.

Are the experts not recommending against tax cuts?

The Economic and Social Research Institute (ESRI) has warned that there is “little or no scope” for cutting income taxes.

The ESRI is worried that the economy could end up being overheated.

However, Mr Donohoe believes he can introduce limited changes that are “affordable”.

What is the €1.5bn on capital expenditure going to be used for?

It will be added to a larger pot of money that will be invested in infrastructure projects such as schools, hospitals and roads.

In total, nearly €6bn is to be used for capital expenditure, with nearly half of this sum going on housing and transport.

Why is the Government setting up a ‘rainy day fund’?

One of the main reasons is that Fianna Fáil has demanded it under the ‘confidence and supply’ arrangement. There is a commitment to put aside €500m next year “to mitigate future external economic shocks”.

Fine Gael is leading a minority Government.

Has it run these Budget plans past Fianna Fáil?

Fianna Fáil leader Micheál Martin has said he is committed to ensuring a third Budget passes under the confidence and supply arrangement between the two parties.

Many TDs on both sides have privately expressed their doubts that this will be possible. But Mr Donohoe said he was determined to get the Budget through. Rows are inevitable but the talks won’t really get under way in earnest until mid-September.

Why is nobody talking about the 'fiscal space' anymore?

Thankfully the minister is trying to confine the phrase to the economic history books. He said yesterday it was no longer a relevant measure in the current economic environment.

Technically the Government could spend €900m more than planned by Mr Donohoe and still be within EU rules.

He said this would not be prudent as the State would have to borrow the money or raise it through taxes.

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