Wednesday 12 December 2018

Colm McCarthy: Shadow of Brexit clouds view of Budget priorities

The minister has resisted pressure to slow down the economy as expansion continues but questions remain over its long-term stability, writes Colm McCarthy

Choices: Minister of Finance Paschal Donohoe avoided a listing of planned capital projects in his address. Photo: Collins Dublin, Gareth Chaney
Choices: Minister of Finance Paschal Donohoe avoided a listing of planned capital projects in his address. Photo: Collins Dublin, Gareth Chaney
Colm McCarthy

Colm McCarthy

The fifth straight year of economic expansion, and with labour market conditions already tightening, there was no case for an expansionary budget and every reason to target a modest surplus in 2018.

The Government has chosen to resist the temptations of prudence for another while, ignoring advice to slow things down a little. Government expenditure will increase faster than last year and the figures have been made to add up through an unexpected (which means leaked only late in the day) hike in the stamp duty on commercial property.

There is hidden new revenue from the expected increase in personal incomes - unless allowances and tax bands are improved, rising pay rates are the taxman's friend.

The medium-term outlook will be affected greatly by the final form to be taken by Britain's EU departure, on which Paschal Donohoe can offer no more illumination than anyone else; and by the decisions, yet to be announced, about priorities in capital spending.

There will be relief in several quarters where the axe had been expected to fall. The hotel and hospitality industry has retained its super-concessionary VAT rate despite the sharp improvement in business these last few years. One wonders how big a recovery it would take before the 9pc VAT on dining out and flash hotels is returned to the concessionary 13.5pc imposed on everyday necessities, never mind the standard 23pc rate of VAT.

The help-to-buy scheme for first-time house purchasers is retained and the low 1pc tax on betting survives. Diesel fuel, taxed at a lower rate in Ireland than petrol despite medical concerns that its emissions are more hazardous, has escaped again.

Some journalists, noting that the Budget has spared hoteliers and restaurateurs, house-buyers, bookmakers, truck drivers and all other substantial lobby groups, have smelt an early election, but they are being too cynical. There is a courageous VAT hike for sunbed operators after all.

The sharp increase, from 2pc to 6pc, in stamp duty on commercial property looks like a substitute, in terms of forecast revenue, for the reluctance to restore the VAT rate on hotels and restaurants to the concession level.

But in terms of longer-term budgetary stability, it is a very different animal. Consumption taxes, like VAT, offer more predictable revenues than taxes on transactions, and Opposition deputies queried the plausibility of the projected yield from the stamp duty increase, the Budget's principal taxation measure.

Back in the post-crash budgets when stamp duties on both residential and commercial property sales were cut, one of the motives, recited faithfully in ministerial speeches, was their replacement with more reliable revenue streams from an annual residential property tax and the ill-starred water charges.

Restoring high stamp duty on commercial property re-introduces some unwanted volatility into government revenue.

The minister announced extra financial allocations for the medium-term capital programme in the Budget speech and also some initiatives designed to address problems arising from Brexit. How exactly the capital money will be spent will not be clear until a revised plan is released later in the year and the Brexit measures are unavoidably something of a shot in the dark.

Minister Donohoe avoided a listing of planned capital projects in his speech, alluding instead to the detailed capital investment plan to be published before year's end. He noted that, under the terms of the public spending code, projects must be evaluated first and he will be aware that the Irish record in assessing value-for-money in the capital budget is not encouraging. There has been a feast-or-famine cycle in capital spending and a politicised approach to project selection.

The geographical location of ministerial constituencies has had to be invoked in order to make sense of some puzzling road investment decisions, for example. Since resources will be limited, any preference for poor projects means that better projects without political friends get to be ignored.

There has been persistent lobbying for extra capital expenditure in higher education and in the acute hospitals. The utilisation of the existing capital stock in both sectors is poor. The universities, whose capital assets have cost numerous billions, typically down tools before the end of May, with staff and students drifting back again early in September. Costly operating theatres and diagnostic facilities in acute hospitals close for the weekend.

If other components of the public capital stock, say the air and sea ports, or the motorway network, were unavailable for the entire summer, or every weekend, there would be public outrage and certainly no favourable mentions in the budget speech. There should be no question of extra buildings for any college or hospital until the under-utilisation of the existing capital stock is addressed.

To govern is to choose. With resources insufficient to fund every capital project that happens to be on somebody's wish-list, the green light for one project is a red light for something else.

Nowhere is this more evident than in the transport sector, where congestion problems are beginning to re-emerge. In the Dublin area alone, there are more projects on the wish-list than can possibly be accommodated.

There is an urgent need to do something about peak-hour congestion on the M50, which is no longer a western by-pass but rather the Main Street of the city. Ultimately, there will have to be a true by-pass further out, an orbital motorway connecting the M1 around Drogheda via Navan to the M7 around Naas, a big project costing perhaps €1.5bn and on which preliminary studies have been conducted. But many Dublin politicians, especially on the north side of the city, have been promising Metro North, an underground tram from the city centre to the airport and Swords.

This would cost no less than €2.5bn and is not self-evidently a better project than the orbital motorway. There is already a project called Bus Connects costing up to a billion which would provide three new dedicated busways (including one on the same alignment as Metro North), bus lanes and fleet renewal. Is Metro North affordable given the urgency of other costly improvements in Dublin?

Minister Donohoe has allocated extra funds for promotional agencies to assist in export diversification and a favourable credit scheme for firms affected by Brexit, tentative measures at this stage but the limit of what can usefully be done.

The Government's exasperation with the UK's handling of the Brexit process is hard to conceal and no wonder. Last week, the chancellor of the exchequer, Philip Hammond, supposedly one of the grown-ups in the British cabinet, described the EU-27 as ''the enemy''. There had earlier been calls for his dismissal from Brexiteers on the Tory right, who nonetheless see him as too soft on Europe, and suggestions that he be tried for treason into the bargain.

The foreign secretary Boris Johnson would already have been fired for insubordination by a prime minister with any authority.

The disarray in the Conservative party is not pretty to watch and the outcome of the Brussels negotiations impossible to predict. Most disturbing is the constant insistence of Brexiteers that the UK's departure should be painless and that any difficulties are the malicious creation of the EU-27. A no-deal crash-out gets harder to avoid by the week.

Sunday Independent

Today's news headlines, directly to your inbox every morning.

Don't Miss