Thursday 17 October 2019

Dan O'Brien: 'If Ireland doesn't dodge US and UK bullets, this rosy and reckless Budget may prove very costly'

Finance Minister Paschal Donohoe. Photo: Brian Lawless/PA Wire
Finance Minister Paschal Donohoe. Photo: Brian Lawless/PA Wire
Dan O'Brien

Dan O'Brien

Will Budget 2020 work? Or, put another way, will the economy and the public finances evolve as the Government expects? These are never easy questions to answer. This year they are especially hard.

If things go the wrong way with Brexit and Donald Trump's trade wars, it is perfectly possible that the Irish economy could be in a deep recession within six months.

That would cause the public finances to plunge into the red. They could go south at a speed that causes the people who lend to governments to get the jitters. We know from bitter experience how fast things can slide out of control when countries are weighed down with debts - and the Irish state remains one of the most indebted in the world by most meaningful metrics.

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It is also possible that the quite incredible momentum in the Irish economy right now could be maintained, particularly if neither of the two big, immediate risks materialises, ie. significant new barriers to trade with the UK and/or the US.

If those bullets are dodged, many if not most people could be enjoying higher incomes by next summer. Businesses would continue to boom. This happy outcome would cause, among other things, black rather than red ink to spill across the Government's accounts.

Given the extent of the uncertainty, the Government has predicated Budget 2020 on economic growth coming to an effective halt next year. That was a wise move. More questionable is how the Government connects what happens in the wider economy with what happens to its own finances.

Despite new spending commitments and the likelihood of even more demands on the public purse in the event of a no- deal Brexit, Budget 2020 is predicated on total spending rising at rates similar to this year and last year. That could happen, but it is unlikely.

Forecasts for the other side of the Budget ledger are also too rosy. Despite the evaporation of economic growth, the Government does not expect its revenues to stop growing, but merely to grow more slowly. It is hard to see such a sudden stop in the economy not leading to a similar halting of revenue growth.

Looking at both the spending and revenue sides together, the Government expects a deterioration in its overall finances, from an expected surplus this year of 0.2pc of GDP to a deficit of 0.6pc of GDP in 2020. You don't have to be an economist to see that this is a small change. You don't need to know much about the history of Ireland's public finances to know that even the mildest downturns, such as the one just after the turn of the century, have always led to much bigger budgetary impacts than the one the Government is now forecasting in the event of a no-deal Brexit.

If that is cause for concern, the inclusion in the Budget documents of the biggest tax increase everyone is facing next year did not attract the level of public concern it deserves. The Government expects a near €1bn increase in customs duties next year - 3.4 times more than this year. The increase is pencilled in because Ireland will have to hit many goods coming from the UK with the same import tax it slaps on goods from countries that have no bilateral trade deal with the EU. That will have a real impact on individuals and businesses.

The EU's common external tariff applies to a wide range of products - from potatoes to cars. It will ultimately be passed on to consumers.

Two further points are worth noting about these tariffs. The good news for consumers is that the British currency is very likely to weaken considerably in the event of a no-deal exit. That will make buying British goods cheaper, offsetting some or even all of the price effects of the new tariffs.

The second point is less positive. EU farm payments, research grants and the rest of Brussels' budget is funded by revenue from the common external tariff. That means that most of the money collected on British imports will not stay in the coffers of the Government, but be passed on to the European Commission. At an estimated €995m in 2020, up from €295m this year, the amounts involved are not small beer.

Another aspect of the Budget worth commenting on is current and future revenue from the taxing of company profits. Despite a great deal of talk about prudence in the managing of the public finances, many decisions taken over the past half-decade have been anything but prudent. The most imprudent of all decisions on the revenue side of the ledger has been in relation to corporation tax.

Last year receipts from this source were 165pc higher than in 2010, surpassing the €10bn threshold for the first time ever. Yet another increase is all but certain this year - in the first nine months of the year receipts from this source rose by another 13pc.

All this money has been spent and never has an Irish government been as dependent on this source of income. The current government is becoming more dependent on this revenue stream by the month, and that is happening despite an analysis published by the Department of Finance on Budget day which warned that more than half of the money collected in corporation tax could dry up.

Just yesterday, this risk was heightened by the publication of a draft proposal for a global accord on the taxing of companies which would be distinctly disadvantageous from an Irish perspective.

Despite these risks, this week's Budget projections are based on another half decade of continued growth in profit tax revenue. Official forecasts put corporation tax receipts going past the €12bn threshold in 2024.

This is the height of folly because as soon as officials forecast increased revenue, politicians will commit to spending it. The Government needs to wean itself off these revenues. If it doesn't, and they evaporate, an austerity-sized hole could be blown in the public finances. There are many things over which the Government has no control. Neglecting to manage a serious risk over which it has a lot of control is an act of recklessness.

Irish Independent

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