Budget will test the Government
Budget 2017, which is now six weeks away, is already shaping up to be a significant test for the stability of the minority Government, which is dependent on Fianna Fail support from Opposition. Documents released recently by the Department of Finance suggest that the Government will be able to further reduce the budget deficit while providing for spending increases and tax reliefs.
If the result of the General Election has told us anything, it is that voters prioritise a restoration of services through increased spending over tax cuts. However, that is not to say that people would not like to see more money in their pockets, or that the economy, and therefore society in general, would not benefit from a consequent increased consumer spending. The delicate balance between increased spending and tax reliefs will be difficult for Finance Minister Michael Noonan to negotiate.
Recent forecasts, on which the estimates of the 'fiscal space' are based, assume that economic expansion at a rate of around 4pc is likely to continue more or less indefinitely. However, as Mr Noonan will be only too aware, ever-present threats to such a growth rate continue to exist. If anything, those threats increased this summer following the UK decision to withdraw from the European Union. Eminent economist Colm McCarthy argues in this newspaper today that the Budget in October does not need to give an extra boost to an economy already expanding as well as could be expected. He states that it would be wise to leave some 'fiscal space' unspent given the uncertainties, such as the still unknown consequences of Brexit. Mr Noonan will be cognisant that there is much merit to this argument.
However, the political pressures on Mr Noonan will also be evident. The debate here has already begun to focus on the level of cuts to the Universal Social Charge. The charge, although progressive, remains deeply unpopular as a consequence of the conditions of its imposition. A recent analysis by the Department of Finance states that the charge could be sharply reduced over the next three budgets, but only if all the money allocated for tax cuts is used for this purpose and new cash is raised in other areas. The income tax plan outlines three options for sharp reductions in the USC burden over the next three years, in line with the government commitment. It would cost €300m next year and at least €1.7bn over the three-year period.
Fine Gael is reported to be planning to cut up to one percentage point off the 5.5pc USC rate for middle-income earners in the Budget. The front loading of a one point cut to that rate would increase the take-home pay for somebody earning €70,000 by €620 a year, but it would not benefit those earning less than €18,700.
Lobby groups and political parties will soon return from the holidays and the available 'fiscal space' will be spent many times over before budget day. The USC raises €4bn per annum, a very substantial sum, and any material changes will be costly. In preparation for Budget 2017, the government bywords should remain caution and prudence.